Modeling churn using customer lifetime value
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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- Buckinx, Wouter & Van den Poel, Dirk, 2005.
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"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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- Ma, Ming & Li, Zehui & Chen, Jinyuan, 2008. "Phase-type distribution of customer relationship with Markovian response and marketing expenditure decision on the customer lifetime value," European Journal of Operational Research, Elsevier, vol. 187(1), pages 313-326, May.
- Viaene, Stijn & Dedene, Guido, 2005. "Cost-sensitive learning and decision making revisited," European Journal of Operational Research, Elsevier, vol. 166(1), pages 212-220, October.
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