Create a Python App to Measure Customer Lifetime Value (CLV)

This article was published as a part of the Data Science Blogathon

“IF YOU ARE NOT TAKING CARE OF YOUR CUSTOMERS, YOUR COMPETITOR WILL”     – Bob Hooey

Overview:

Customer Lifetime Value is the profit that a business will make from a specific customer over the period of their association with the business. Every industry has its own set of metrics that are tracked and measured to help businesses target the right customer and forecast their customer base for the future. The CLV enables various departments in marketing, sales, etc to plan their strategies and offer specific products or customized services to the most valuable customers. It also provides insights to customer service teams with a framework for knowing the effort that needs to be put into nurturing and retaining customers. 

The CLV is most effective and adds immense value when it is applied along with other tools such as customer segmentation, pricing & marketing strategy meaning it tells us who are our most profitable customers but it doesn’t tell us which product needs to be sold at what price and quantity. Hence, CLV should be applied judiciously and shouldn’t be the sole criteria for making business decisions. The CLV may change depending on the business model and its objective which means the definition and calculation need to be revisited regularly. 

Here is how various industries use CLV:

Insurance: The marketing team would be interested in knowing which customers are most likely to pay high premiums and not claim which in turn helps them acquire new customers and also grows their business.

Telecom: The predicted CLV is used to understand the probability of current customers’ loyalty and the likelihood of them continuing with plans or subscriptions.

Benefits of CLV:

• Cost of Acquisition: Helps in determining the acceptable cost of acquisition and where to put the marketing effort
• Potential Customers: Helps in identifying the future value of current customers and potential new customers
• Customer Relationship: Enables in building stronger and effective relations with customers
• Brand Loyalty: Good relation fosters in building brand loyalty

Objective:

Getting Started:

We will be using a retail dataset(CSV) from UCI machine learning repository to build the python app. The attribute description can be found in the above URL.

Let us load our dataset and take a look at the data.

data = pd.read_excel("./data/Online_Retail.xlsx")
data.head(10)

data.info()

Data columns (total 8 columns):
 #   Column       Non-Null Count  Dtype         
---  ------       --------------  -----         
 0   InvoiceNo    40 non-null     int64         
 1   StockCode    40 non-null     object        
 2   Description  40 non-null     object        
 3   Quantity     40 non-null     int64         
 4   InvoiceDate  40 non-null     datetime64[ns]
 5   UnitPrice    40 non-null     float64       
 6   CustomerID   40 non-null     int64         
 7   Country      40 non-null     object        
dtypes: datetime64[ns](1), float64(1), int64(3), object(3)

Data pre-processing:

Let us clean the data and also create new features that we will need in later stages for calculating the CLV.

1. Data cleaning: Remove duplicate records
2. Quantity: We will consider only positive quantities. Any negative value indicates that the product was returned for some reason.
3. Total Purchase: This will be a product of UnitPrice x Quantity
4.  Aggregation: As the data is at the transaction level, let’s aggregate data by CustomerID and Country. We will do this by using a group by function.
5. Avg order value:  This will be a ratio of money spent to the number of transactions
6. Purchase Frequency: This is the ratio of the sum of transactions to the total number of transactions. It is the average number of orders from each customer.
7. Churn Rate: This is the percentage of customers who have not ordered again.
8. CLTV: (Average Order Value x Purchase Frequency) / Churn Rate)
9. Also, let’s rename some of the column names to make them easy to track.

The data would look as below after completing the above steps. We will process this further as we go along.

Complete code can be accessed from pre-processing.py

App Development with Plotly Dash:

We’ll develop our app with Plotly Dash, which is a python framework for building data applications. Let us create a file by name app.py and start with loading libraries.

Step 1: Loading Libraries

import pandas as pd
import matplotlib.pyplot as plt 
import seaborn as sns
import datetime as dt
import numpy as np
import dash
import dash_table
import dash_core_components as dcc
import dash_html_components as html
from dash.dependencies import Input, Output, State

Step 2: Designing the Layout (UI)

Cards: All the 4 KPI’s that we are tracking will be at the top of the page. The aesthetics like font size and color are defined. Also, a unique ID for each of the card which will be used later to populate the values.

html.H2('Total Customers', style={
	'font-weight': 'normal'}),
html.H2(id='id_total_customer', style = {'color': 'DarkSlateGray'}),
], className='box_emissions'),
html.Div([
	html.H2('Total Transactions', style={
		'font-weight': 'normal'}),
	html.H2(id='id_total_transactions', style = {'color': 'DarkSlateGray'}),
], className='box_emissions'),
html.Div([
	html.H2('Total Sales($)', style={
		'font-weight': 'normal'}),
	html.H2(id='id_total_sales', style = {'color': 'DarkSlateGray'}),
], className='box_emissions'),
html.Div([
	html.H2('Avg Order Value($)', style={
		'font-weight': 'normal'}),
	html.H2(id='id_order_value', style = {'color': 'DarkSlateGray'}),
], className='box_emissions'),

Plots: We have 2 plots, one bar chart showcasing the top-selling products and the second with purchase trends for countries.

Barchart:

df_plot_bar = pp.filtered_data.groupby('Description').agg({'TotalPurchase':'sum'}).sort_values(by = 'TotalPurchase', ascending=False).reset_index().head(5)
df_plot_bar['percent'] = round((df_plot_bar['TotalPurchase'] / df_plot_bar['TotalPurchase'].sum()) * 100,2).apply(lambda x : "{:,}".format(x))
fir_plotbar = px.bar(df_plot_bar, y='percent', x='Description', title='TOP SELLING PRODUCTS', text='percent', color='percent',)
fir_plotbar.update_traces(texttemplate='%{text:.2s}', textposition='inside')
fir_plotbar.update_layout(uniformtext_minsize=8, uniformtext_mode='hide', showlegend=False)

Scatter Plot:

df_plot = df.groupby(['Country','Description','UnitPrice','Quantity']).agg({'TotalPurchase': 'sum'},{'Quantity':'sum'}).reset_index()
fig_UnitPriceVsQuantity = px.scatter(df_plot[:25000], x="UnitPrice", y="Quantity", color = 'Country', 
        size='TotalPurchase',  size_max=20, log_y= True, log_x= True, title= "PURCHASE TREND ACROSS COUNTRIES")

Note: Similar to the cards and the plots, the rest of the UI components like the sidebar, the table for displaying the results are designed. Please access the completed layout.py code from Github

Step 3: Defining Interactivity (callback)

We define a function update_output_All() which takes the values from the controls as inputs, executes the logic, meaning generated the visuals and the data table, which will be populated on the UI. The interactivity is denied at 2 levels –

1. App load: All the cards, plots, KPI’s and the table will have numbers from all the countries.
2. User selection: Once the user selects a particular country, all the cards, plots, and tables will have data specific to the selected country.

def update_output_All(country_selected):
    try:
        if (country_selected != 'All' and country_selected != None):
            df_selectedCountry = pp.filtered_data.loc[pp.filtered_data['Country'] == country_selected]
            df_selectedCountry_p = pp.filtered_data_group.loc[pp.filtered_data_group['Country'] == country_selected]
            cnt_transactions = df_selectedCountry.Country.shape[0]
            cnt_customers = len(df_selectedCountry.CustomerID.unique())
            cnt_sales = round(df_selectedCountry.groupby('Country').agg({'TotalPurchase':'sum'})['TotalPurchase'].sum(),2)
            .........
            return [cnt_customers, cnt_transactions, cnt_sales, cnt_avgsales,  df_selectedCountry_p.drop(['num_days','num_units'], axis = 1).to_dict('records'),
                    fig_UnitPriceVsQuantity_country, fir_plotbar]
        else:
            cnt_transactions = pp.filtered_data.shape[0]
            cnt_customers = len(pp.filtered_data.CustomerID.unique())
            cnt_sales = round(pp.filtered_data.groupby('Country').agg({'TotalPurchase':'sum'})['TotalPurchase'].sum(),2)
            cnt_avgsales = round(pp.filtered_data_group.groupby('Country').agg({'avg_order_value': 'mean'})['avg_order_value'].mean())
            ........
            return [cnt_customers, cnt_transactions, cnt_sales,cnt_avgsales,  pp.filtered_data_group.drop(['num_days','num_units'], axis = 1).to_dict('records'),
                    pp.fig_UnitPriceVsQuantity, fir_plotbar]
    except Exception as e:
        logging.exception('Something went wrong with interaction logic:', e)

Complete code can be accessed from app.py

Closing Note:

Hope you liked the blog. Happy Learnings !!!!

You can connect with me – Linkedin

You can find the code for reference – Github

Reference:

https://dash.plotly.com/

https://unsplash.com/

Amit Kulkarni

28 Aug 2021