How to predict how much a group of customers will spend

· Thomas Wood
How to predict how much a group of customers will spend

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Earlier I wrote another post about predicting the spend of a single known customer. There is a related problem which is predicting the total spend of all your customers, or a sizeable segment of them.

Time series approach: segments of customers

If you don’t need to predict the spend of an individual customer, but you’re happy to predict it for groups of customers, you can bundle customers up into groups. For example rather than needing to predict the future spend of Customer No. 23745993, you may want to predict the average spend of all customers in Socioeconomic Class A at Store 6342.

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In this case the great advantage is that you would not have so many empty values in your past time series. So your time series may look like this:

A time series showing the average spend of all the customers in a store. This is what a customer spend model should predict.

This means you can use a time series library such as Prophet, developed by Facebook.

Here’s what Prophet produces when I give it the data points I showed above, and ask it to produce a prediction for the next few days. You can see that it’s picked up the weekly cycle correctly.

Prediction of a customer spend time series together with true values, produced by Facebook's Prophet library.

This approach would be very useful if you only needed the data for budgeting or stock planning purposes for an individual store and not for individual customers.

However if you had small enough customer segments, you may find that the prediction for a customer’s segment is adequate as a prediction for that customer.

Predicting spend with multilevel models

The next step up in complexity is multilevel models, where you use a different level of model for each region or economic group of customers, and combine them into a single group model.

Combinations of models for predicting customer spend

To get the maximum predictive power you can try ways of combining time series methods with a predictive modelling approach, such as taking the results of a time series prediction for a customer’s segment and using it as input to a predictive model.

Getting started predicting customer spend in your business

If you have a prediction problem in retail, or would like to some help with another problem in data science, I’d love to hear from you. Please contact me via the contact form.

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