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Next-Purchase Prediction Using Projections of Discounted Purchasing Sequences

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Abstract

A primary task of customer relationship management (CRM) is the transformation of customer data into business value related to customer binding and development, for instance, by offering additional products that meet customers’ needs. A customer’s purchasing history (or sequence) is a promising feature to better anticipate customer needs, such as the next purchase intention. To operationalize this feature, sequences need to be aggregated before applying supervised prediction. That is because numerous sequences might exist with little support (number of observations) per unique sequence, discouraging inferences from past observations at the individual sequence level. In this paper the authors propose mechanisms to aggregate sequences to generalized purchasing types. The mechanisms group sequences according to their similarity but allow for giving higher weights to more recent purchases. The observed conversion rate per purchasing type can then be used to predict a customer’s probability of a next purchase and target the customers most prone to purchasing a particular product. The bias–variance trade-off when applying the models to target customers with respect to the lift criterion are discussed. The mechanisms are tested on empirical data in the realm of cross-selling campaigns. Results show that the expected bias–variance behavior well predicts the lift achieved with the mechanisms. Results also show a superior performance of the proposed methods compared to commonly used segmentation-based approaches, different similarity measures, and popular class predictors. While the authors tested the approaches for CRM campaigns, their parameterization can be adjusted to operationalize sequential features of high cardinality also in other domains or business functions.

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Notes

  1. The company operates on the US and European markets of telecommunication services. The company achieved annual revenues in the double-digit billion Euro range. The product portfolio ranges from basic starter-products like Internet domains, to various hosting solutions up to professional server solutions for large-scale businesses, mobile telephony, as well as access products such as digital subscriber lines.

  2. Such approaches are often used within a broader category of methods such as the Sequence Alignment Method (SAM; Kruskal 1983).

  3. Geometrically descending weights are widely-used techniques to model a discounted importance of observations, such as in time series forecasting (Brown 2004).

  4. This is very different from tasks such as class prediction, where a classifier is typically assessed by the total accuracy or its (potentially weighted) confusion matrix computed over all test data instances. The discrepancy of the business-oriented objective of lift and the traditional accuracy measures as well as its implications are extensively discussed in Baumann et al. (2015).

  5. Evaluations with higher and lower parameter values delivered clearly worse results and are not further considered in this article.

  6. This results in 48 dimensional binary vector encoding 9 + 9 potential products for the first two purchases, and 10 + 10 + 10 potential products when including \(P_0\) for the three prior purchases.

  7. We apply \(\lambda _{Box-Cox}=0.26\), as in our dataset we observe approximately white noise error structures with this value.

  8. We used Wilcoxon test as a more conservative approach but a t-test has also been conducted on Box–Cox transformed values, also confirming the significance in lift difference.

  9. Note, that loss in lift and normalized out-of-sample lift sum up to 1.

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Correspondence to Katerina Shapoval.

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Accepted after two revisions by Prof. Dr. Suhl.

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Shapoval, K., Setzer, T. Next-Purchase Prediction Using Projections of Discounted Purchasing Sequences. Bus Inf Syst Eng 60, 151–166 (2018). https://doi.org/10.1007/s12599-017-0485-1

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