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Neural Network in Marketing

Neural Network in Marketing

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Published by Gandolfo Dominici
Wray, B. and Bejou, D. (1994), "An Application of Artificial Neural Networks in Marketing:
Determinants of Customer Loyalty in Buyer-Seller Relationships," Paper presented in the 25th
Annual Meeting of Decision Sciences Institute, Honolulu, Hawaii.
Wray, B. and Bejou, D. (1994), "An Application of Artificial Neural Networks in Marketing:
Determinants of Customer Loyalty in Buyer-Seller Relationships," Paper presented in the 25th
Annual Meeting of Decision Sciences Institute, Honolulu, Hawaii.

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Published by: Gandolfo Dominici on Mar 24, 2012
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APPLICATIONS OF NEURAL NETWORK IN MARKETING DECISION MAKING
 Binshan Lin, Louisiana State University in Shreveport
ABSTRACT
  Neural networks can be viewed as an enabling tool for marketing professionals to work smarter and achieve higher levels of effectiveness. This article reviews applications of neural networks inmarketing decision making and some of the challenges of neural networks in marketingmanagement.
INTRODUCTION
 One of the most exciting developments from the information technology community which hasfound application in business has been the development of neural networks. In recent years,neural network has been moving from research laboratories into the business world and arealready at work in the world of banking and finance and elsewhere (Hawley, Johnson, and Raina1990). Considered by some to be one of the most important technological advances of the lastten years, neural networks are particularly applicable to risk management and forecasting(Huntley 1991), where the ability to identify intricate patterns is crucial to making predictions(Smith 1992). Their significance is underlined by the fact that about eighty percent of theFortune 500 companies have an investment in neural networks (Johnston 1991).The business community's enthusiasm seems to be related to two perspectives. The first is theincreased availability of the necessary computing power and user friendly software which allowsthe simplified development of neural networks by individuals with minimal knowledge of thecomplex processes involved. Rapidly analyzing zillions of past business transactions is actuallykey to many reengineering efforts in today's business environment. Businesses ranging fromairlines to retailers are striving to reorganize based on a better understanding of the customers' buying patterns. Secondly, neural networks promise a breakthrough in areas where traditionalcomputer systems have difficulty. Neural networks represent a radical attempt to break thelogjam by building computers that mimic the way in which humans think.A neural network from a marketing perspective represents a software decision tool which assiststhe decision makers in the selection of an appropriate response to a particular situation. Inessence, neural network, like other information technologies, is shaking up traditional marketingmethods. Because of the dynamic nature of marketing, it would appear that this discipline is well positioned to take advantage of neural networks through a variety of new applications. In thelong run, results from applications of neural networks to the marketing domain will not only leadto a deeper understanding of fundamental marketing decision processes but also enable study of the normative aspects of marketing systems.This paper explores the power of neural networks for marketing decision-making. The generalobjectives of this paper are: (1) to identify neural networks as an enabling tool for marketing professionals to work smarter and achieve higher levels of effectiveness; and (2) to delineatesome of the challenges and reservations of neural networks in marketing management.
OVERVIEW OF NEURAL NETWORKS
 
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The term "neural networks" has been in use for over 40 years, but neural networks have recently been given a formal definition: a neural network is a system of many simple processing elementsthat usually operate in parallel whose function is determined by network structure, connectionstrengths, and the processing performed by the computing elements or nodes (DARPA 1988). Inthis section, a very brief overview of neural networks as it is portrayed by its advocates is given.The section is designed as a primer to these ideas for the decision makers in marketing.The concept of neural networks is based upon the way we understand the human brain isstructured (Wasserman 1989). Neural networks are computer systems linking inputs with outputsin a network structure of nodes and arcs. The neural network approach is also loosely describedas "connectionism" or "parallel distributed processing". They are inspired by replicating portionsof what is known about the way the human brain functions. In the human brain, neurons areconnected by a web of millions of neural connections in a complex network, with activitygenerated by impulses from one neuron to another.The simplest form of neural networks consists solely of two layers of neurons, the input andoutput layers. Each input is potentially linked to each output. An optional number of intermediate layers can be inserted between the input and output layers. In formal terms a neuralnetwork model may be expressed in terms of the interconnection between its neurons. Theseinterconnections can be regarded as weights. For a particular layer above the first input layer wetherefore have each neuron functionally dependent on neurons in the layer immediately below it.In practice, instead of being programmed with explicit instructions, a neural network is trained to perform a task by learning from real-world examples. The system "learns" by adjusting theweights of relative impact of inputs upon output, trying many combinations of weights until agood fit to the training cases is obtained. Thereafter the resulting network can be used to evaluatefuture cases in assisting in classification, function estimation, data compression, and similar tasks.Learning method is the most important distinguishing factor in various neural networks.Learning depends very heavily on the correct selection of training examples. Learning takes place through a statistically based procedure of iteratively adjusting the weights. The types of learning could be either supervised or unsupervised. In supervised learning, the systemdeveloped tells the neural system what the correct answer is and determines weights in such away that once given the input, it would generate the desired output. In unsupervised learning, thesystem receives only the input, and no information on the expected output. Most of the neuralnetworks employ the supervised learning. Neural networks have four learning goals: associating patterns, replicating patterns, classifying patterns, and recognizing patterns (Bayle 1988).1. Associating patterns. When input-output pairs are repeatedly presented during training, thenetwork will learn to output the elements of the pair when presented with the other.2. Replicating patterns. A set of patterns is presented during training. The network will learn tocomplete any pattern that is later presented with some future missing.3. Classification Patterns. The network is presented during training with a predetermined set of 
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classes to which each pattern belongs. When a similar pattern is encountered in the future, thenetwork should correctly classify it.4. Recognizing patterns. In this case there is no training. The system develops its own set of classes that best classifies the input patterns, This is very similar to statistical techniques such ascluster and discriminant analysis.
NEURAL NETWORKS SUPPORTING
 
MARKETING DECISIONS
 Marketing companies use their knowledge of consumer behavior to segment markets, to designmarketing strategies, and to measure marketing performance (Schiffman and Kanuk 1991).Today effective marketing practice requires companies to adopt the marketing concept andeffective marketing segmentation, which encompasses accurate assessment of the needs and preferences of the segment of the market to be reached by the given product, is an essentialelement thereof.Such problems, especially those within the purview of marketing executives, are too complex for formulation as mathematical models. Input data may be fuzzy, trends may be unextrapolablefrom past experience, or crucial factors may be difficult or impossible to quantify.In fact, neural networks have been successfully used to analyze bankruptcy prediction (Odomand Sharda 1990), bond rating (Surkan and Singleton 1990), and going-concern problem analysis(Hansen and Messier 1991). Several firms are exploring the commercial use of neural networksfor predicting detecting credit card fraud (Rathbum 1993), and verifying signatures (Francett,1989). Many firms are beginning to use neural networks to improve accuracy, reduce cost, or  both. Most neural network applications address problems described by one of the following threecategories: (1) pattern classification, (2) market forecasting, and (3) marketing analysis.Examples from each category follow:
1 . Pattern Classification
 Classification has emerged as an important decision making tool, and has been applied to avariety of problems in marketing, including customer classification (Sharma 1994), creditscoring (Capon 1982). Many of these studies have applied the neural network approach to predict the classification of a certain case. Spiegel Inc., a leading direct-mail catalog operation,used a neural network to fine-tune its marketing decisions (Schwartz 1992). Software created by NeuralWare Inc. examined the list of people who had made just one catalog purchase, as well aswhatever demographic information (such as age, income, home ownership, etc.) that Spiegel hadabout the customer in its database. It then compared them to customers who had purchased morethan one.The neural network identified a number of patterns that could be used to single out thosecustomers who were most likely to be repeat purchasers, allowing Spiegel to focus their marketing efforts.
2. Market Forecasting
 Time-series forecasting in demand describes the processes or phenomena by which a statistical
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