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Deriving Target Selection Rules from Endogenously Selected Samples

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Author Info
Donkers, A.C.D.
Jonker, J-J.
Franses, Ph.H.B.F.
Paap, R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)

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Abstract

One of the aims of direct marketing in practice is to target the most profitable customers in the database at hand. This selection is often done based on observed behavior in the past. As a consequence, databases arising from the responses to direct mailings are not a random sample from all potential respondents. When not all heterogeneity is observed, part of the target selection rule will be based on the unobserved heterogeneity, so selection is endogenous. Treating an endogenously selected sample as a random sample results in inconsistent parameter estimates, which in general also harms the predictive performance of the model. We develop an adjustment to the likelihood of the model that corrects for the endogenous sample selection. We apply this technique to the selection of mail targets for a charitable organization. In the application we also show that, based on a model for the response rate and the amount donated simultaneously, we can create a target selection rule that maximizes expected revenues. Such a selection rule outperforms selection rules based on response rates or donated amount only. The traditional approach of maximizing response is therefore not the optimal approach to target selection.

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Paper provided by 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 University Rotterdam. in its series Research Paper with number ERS-2001-68-MKT Revision_Date: 2009-11-06.

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Date of creation: 01 Jan 2001
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Handle: RePEc:dgr:eureri:2001128

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Related research
Keywords: direct marketing; econometric models; sample selection; endogeneity; target selection;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Demetrios Vakratsas & Frank M. Bass, 2002. "A segment-level hazard approach to studying household purchase timing decisions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(1), pages 49-59. [Downloadable!]
  2. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc. [Downloadable!]
  3. Jain, Dipak C & Vilcassim, Naufel J & Chintagunta, Pradeep K, 1994. "A Random-Coefficients Logit Brand-Choice Model Applied to Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 317-28, July.
  4. ter Horst, Jenke R. & Nijman, Theo E. & Verbeek, Marno, 2001. "Eliminating look-ahead bias in evaluating persistence in mutual fund performance," Journal of Empirical Finance, Elsevier, vol. 8(4), pages 345-373, September. [Downloadable!] (restricted)
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  1. J.J. Jonker & N. Piersma & D. Van den Poel, 2002. "Joint optimization of customer segmentation and marketing policy to maximize long-term profitability," Econometric Institute Report 271, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
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