Chapter 4

Data Mining Applications in

Marketing and Customer
Relationship Management
2
Business Context for DM
Although the technical aspects of DM are
interesting and exciting (at least to geeks!), they
must be utilized in a business context to be of
value.
Business topics addressed in this chapter are
roughly in ascending order of complexity of the
customer relationship, starting:
Communication with prospects (little knowledge of
them)
On-going customer relationships involving multiple:
Products
Communication channels/methods
Increasingly individualized interactions
3
Prospecting
Prospect
Noun someone/something with possibilities
Verb to explore
> 6B people worldwide
Relatively few are prospects for a company
Exclusion based on geography, age, ability to pay,
need for product/service, etc.
Data mining can help in prospecting:
Identifying good prospects
Choosing appropriate communication channels
Picking suitable messages
4
Data Mining & Advertising
Who fits the profile for this nationwide
publication?
Reader-
ship
YES
Score
NO
Score Mike Nancy
Mike
Score
Nancy
Score
BS or > 58% 0.58 0.42 Yes No 0.58 0.42
Prof/Exec 46% 0.46 0.54 Yes No 0.46 0.54
$ > $75k 21% 0.21 0.79 Yes No 0.21 0.79
$ > $100k 7% 0.07 0.93 No No 0.93 0.93
Total 2.18 2.68
5
Data Mining & Advertising
Butthat might be a bit nave; compare readership to
US population, then score Mike and Nancy
Mikes score: 8.42 (2.86 + 2.40 + 2.21 + 0.95)
Nancys score: 3.02 (0.53 + 0.67 + 0.87 + 0.95)
Reader-
ship
YES
US
Pop
Index
Reader-
ship
NO
US
Pop
Index
BS or > 58% 20.3% 2.86* 42% 79.7% 0.53*
Prof/Exec 46% 19.2% 2.40 54% 80.8% 0.67
$ > $75k 21% 9.5% 2.21 79% 90.5% 0.87
$ > $100k 7% 2.4% 2.92 93% 97.6% 0.95
* 58% / 20.3%
* 42% / 79.7%
6
TIP
When comparing customer profiles (Mike
and Nancy), it is important to keep in mind
the profile of the population as a whole.
For this reason, using indexes (table #2) is
often better than using raw values (table
#1)
Review Census Tract example on pages
94-95
7
Census Tract Example
8
Data Mining and Direct Marketing Campaigns
Typical mailing of 100,000 pieces costs
about $100,000 ($1/piece)
Typical response rates < 10%
Any list of prospects/customers that can
be ranked by likelihood of response is
good
Campaign focused at top of list to increase
response rate %
9
Consider the following
1,000,000 prospects
Budget = $300,000
Mailing to 300,000 prospects
Rank order list (model) vs no rank order:
0%
0% 100%
100%
30%
30%
R
E
S
P
O
N
D
E
R
S
List Penetration
66%
Benefit (66/30=2.17)
No Model
Model
The ratio of
concentration to
penetration is the
lift (2.17) (= model
performance
against no model).
10
Consider the following
ROC chart / curve
The false positive rate
is plotted on the X-
axis and one minus
the false negative
rate is plotted on the
Y-axis.
The area under the ROC curve is a measure of the models ability to
differentiate between two outcomes. This measure is called
discrimination. A perfect test has discrimination of 1 and a useless test
for two outcomes has discrimination 0.5 since that is the area under the
diagonal line that represents no model.
11
Consider the following
Is the benefit worth the cost?
Often, smaller, better-targeted campaign can be
more profitable than a larger and more
expensive one
Be sure to consider real revenue (for example,
10 people buy = $100 revenue; 20 people buy =
$200 revenue)
Campaign profitability depends on many
variables that can only be estimated, hence the
need for an actual market test
12
Marketing Campaign
Goal is to change behavior (to help drive
revenue)
How do we know if we did?
Control Group randomly receives mailing
Test Group model selected to get mailing
Holdout Group model selected not get
mailing
Compare responses of the groups
13
Differential Response Analysis
How do we know if the responders actually responded because
of our campaign or would have anyway?
Answer: Differential Response Analysis (DRA)
reaching prospects who are more likely to make purchases because of
having been contacted
DRA starts with Control & Treated groups
Control group = no mailing
Treated group = receive mailing
Compare resultssee if there is any uplift
Control Group Treated Group
Young Old Young Old
Women 0.8% 0.4% 4.1% 4.6%
Men 2.8% 3.3% 6.2% 5.2%
14
Differential Response Analysis
15
DM meets CRM*
Matching campaigns to customers
Segmenting the customer base
Reducing exposure to credit risk
Determining customer value
Cross-selling and Up-selling
Retention and Churn ([in]voluntary attrition)
Different kinds of churn models predicting who
will leave; predicting how long one will stay
* Customer Relationship Management
16
RapidMiner Practice
To see:
Training Videos\01 - Ralf Klinkenberg
RapidMinerResources\...
1 - Introduction -2- GUI Advanced.mp4
3 - Data Visualisation & Exploration -1-
Introduction.mp4
3 - Data Visualisation & Exploration -4- Meta Data.mp4
To practice:
Do the exercises presented in the movies using
the files Iris.arff / Iris.ioo (RapidMiner data file)
and Labor-Negociations.ioo.