Modeling customer loyalty using customer lifetime value
AbstractThe 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 will be to redefine the notion of customer's loyalty by considering it from a customer-centric point-of-view instead of a product-centric point-of-view. We will 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 will be defined as someone whose CLV, thus the related marginal profit, is decreasing. As a second contribution, the loss incurred by the CLV decrease will be used to appraise the cost to misclassify a customer by introducing a new loss function. In the empirical study, we will compare the accuracy of various classification techniques commonly used in the domain of churn prediction, including two cost-sensitive classirfiers. Our final conclusion is that since profit is what really matters in a commercial environment, standard statistical accuracy measures or prediction need to be revised and a more profit oriented focus may be desirable.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/120983.
Date of creation: 2006
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Web page: http://www.kuleuven.be
Churn prediction; Classification; Customer lifetime value; Prediction models;
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- Van den Poel, Dirk & Lariviere, Bart, 2004.
"Customer attrition analysis for financial services using proportional hazard models,"
European Journal of Operational Research,
Elsevier, vol. 157(1), pages 196-217, August.
- D. Van Den Poel & B. Larivière, 2003. "Customer Attrition Analysis For Financial Services Using Proportional Hazard Models," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/164, Ghent University, Faculty of Economics and Business Administration.
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