Joint optimization of customer segmentation and marketing policy to maximize long-term profitability
AbstractWith the advent of one-to-one marketing media, e.g.targeted direct mail or internet marketing, the opportunities todevelop targeted marketing campaigns are enhanced in such a waythat it is now both organizationally and economically feasible toprofitably support a substantially larger number of marketingsegments. However, the problem of what segments to distinguish,and what actions to take towards the different segments increasessubstantially in such an environment. A systematic analyticprocedure optimizing both steps would be very welcome.In this study, we present a joint optimization approach addressingtwo issues: (1) the segmentation of customers into homogeneousgroups of customers, (2) determining the optimal policy (i.e.,what action to take from a set of available actions) towards eachsegment. We implement this joint optimization framework in adirect-mail setting for a charitable organization. Many previousstudies in this area highlighted the importanceof the following variables: R(ecency), F(requency), and M(onetaryvalue). We use these variables to segment customers. In a secondstep, we determine which marketing policy is optimal using markovdecision processes, following similar previous applications.The attractiveness of this stochasticdynamic programming procedure is based on the long-runmaximization of expected average profit. Our contribution lies inthe combination of both steps into one optimization framework toobtain an optimal allocation of marketing expenditures. Moreover,we control segment stability and policy performance by a bootstrapprocedure. Our framework is illustrated by a real-lifeapplication. The results show that the proposed model outperformsa CHAID segmentation.
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Bibliographic InfoPaper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number EI 2002-18.
Date of creation: 17 May 2002
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endogeneity; Econometric models; Direct marketing; Target selection; Sample selection;
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- Jonker, J-J. & Piersma, N. & Potharst, R., 2002. "Direct Mailing Decisions for a Dutch Fundraiser," Research Paper ERS-2002-111-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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