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Modeling churn using customer lifetime value

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Author Info

  • Glady, Nicolas
  • Baesens, Bart
  • Croux, Christophe
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    Abstract

    The definition and modeling of customer loyalty have been central issues in customer relationship management since many years. Recent papers propose solutions to detect customers that are becoming less loyal, also called churners. The churner status is then defined as a function of the volume of commercial transactions. In the context of a Belgian retail financial service company, our first contribution is to redefine the notion of customer loyalty by considering it from a customer-centric viewpoint instead of a product-centric one. We hereby use the customer lifetime value (CLV) defined as the discounted value of future marginal earnings, based on the customer's activity. Hence, a churner is defined as someone whose CLV, thus the related marginal profit, is decreasing. As a second contribution, the loss incurred by the CLV decrease is used to appraise the cost to misclassify a customer by introducing a new loss function. In the empirical study, we compare the accuracy of various classification techniques commonly used in the domain of churn prediction, including two cost-sensitive classifiers. Our final conclusion is that since profit is what really matters in a commercial environment, standard statistical accuracy measures for prediction need to be revised and a more profit oriented focus may be desirable.

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    File URL: http://www.sciencedirect.com/science/article/B6VCT-4SWN0NJ-1/2/41d115d5bdeab932530af100eab98ef6
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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 197 (2009)
    Issue (Month): 1 (August)
    Pages: 402-411

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    Handle: RePEc:eee:ejores:v:197:y:2009:i:1:p:402-411

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Churn prediction Classification Customer lifetime value Prediction models;

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    Cited by:
    1. Bijmolt, Tammo H.A. & Blömeke, Eva & Clement, Michel, 2010. "Should they stay or should they go? Reactivation and Termination of Low-Tier Customers: Effects on Satisfaction, Word-of-Mouth, and Purchases," Research Report 10008, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    2. K. W. De Bock & D. Van Den Poel, 2012. "Reconciling Performance and Interpretability in Customer Churn Prediction using Ensemble Learning based on Generalized Additive Models," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/805, Ghent University, Faculty of Economics and Business Administration.
    3. K. W. De Bock & D. Van Den Poel, 2011. "An empirical evaluation of rotation-based ensemble classifiers for customer churn prediction," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/717, Ghent University, Faculty of Economics and Business Administration.
    4. Chen, Zhen-Yu & Fan, Zhi-Ping & Sun, Minghe, 2012. "A hierarchical multiple kernel support vector machine for customer churn prediction using longitudinal behavioral data," European Journal of Operational Research, Elsevier, vol. 223(2), pages 461-472.

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