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Comparison of customer response models

Author

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  • David Olson
  • Qing Cao
  • Ching Gu
  • Donhee Lee

Abstract

Segmentation of customers by likelihood of repeating business is a very important tool in marketing management. A number of approaches have been developed to support this activity. This article reviews basic recency, frequency, and monetary (RFM) methods on a set of data involving the sale of beef products. Variants of RFM are demonstrated. Classical data mining techniques of logistic regression, decision trees, and neural networks are also demonstrated. Results indicate a spectrum of tradeoffs. RFM methods are simpler, but less accurate. Considerations of balancing cell sizes as well as compressing data are examined. Both balancing expected cell densities as well as compressing RFM variables into a value function were found to provide more accurate models. Data mining algorithms were all found to provide a noticeable increase in predictive accuracy. Relative tradeoffs among these data mining algorithms in the context of customer segmentation are discussed. Copyright Springer-Verlag 2009

Suggested Citation

  • David Olson & Qing Cao & Ching Gu & Donhee Lee, 2009. "Comparison of customer response models," Service Business, Springer;Pan-Pacific Business Association, vol. 3(2), pages 117-130, June.
    • Handle: RePEc:spr:svcbiz:v:3:y:2009:i:2:p:117-130
    DOI: 10.1007/s11628-009-0064-8
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    References listed on IDEAS

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    1. McCarty, John A. & Hastak, Manoj, 2007. "Segmentation approaches in data-mining: A comparison of RFM, CHAID, and logistic regression," Journal of Business Research, Elsevier, vol. 60(6), pages 656-662, June.
    2. Crone, Sven F. & Lessmann, Stefan & Stahlbock, Robert, 2006. "The impact of preprocessing on data mining: An evaluation of classifier sensitivity in direct marketing," European Journal of Operational Research, Elsevier, vol. 173(3), pages 781-800, September.
    3. Baesens, Bart & Viaene, Stijn & Van den Poel, Dirk & Vanthienen, Jan & Dedene, Guido, 2002. "Bayesian neural network learning for repeat purchase modelling in direct marketing," European Journal of Operational Research, Elsevier, vol. 138(1), pages 191-211, April.
    4. Geng Cui & Man Leung Wong & Hon-Kwong Lui, 2006. "Machine Learning for Direct Marketing Response Models: Bayesian Networks with Evolutionary Programming," Management Science, INFORMS, vol. 52(4), pages 597-612, April.
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    Cited by:

    1. Halil Nadiri, 2011. "Customers’ zone of tolerance for retail stores," Service Business, Springer;Pan-Pacific Business Association, vol. 5(2), pages 113-137, June.
    2. Banica Logica & Stefan Liviu Cristian & Jurian Mariana, 2014. "Business Intelligence For Educational Purpose," Balkan Region Conference on Engineering and Business Education, Sciendo, vol. 1(1), pages 333-338, August.
    3. Gitae Kim & Bongsug Chae & David Olson, 2013. "A support vector machine (SVM) approach to imbalanced datasets of customer responses: comparison with other customer response models," Service Business, Springer;Pan-Pacific Business Association, vol. 7(1), pages 167-182, March.
    4. Vera L. Miguéis & Ana S. Camanho & José Borges, 2017. "Predicting direct marketing response in banking: comparison of class imbalance methods," Service Business, Springer;Pan-Pacific Business Association, vol. 11(4), pages 831-849, December.
    5. Duncan Simester & Artem Timoshenko & Spyros I. Zoumpoulis, 2020. "Targeting Prospective Customers: Robustness of Machine-Learning Methods to Typical Data Challenges," Management Science, INFORMS, vol. 66(6), pages 2495-2522, June.
    6. Pei-Ju Wu, 2023. "O2O switching determinants and successful drivers in omnichannel retailing services," Service Business, Springer;Pan-Pacific Business Association, vol. 17(3), pages 771-788, September.

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