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Basic Guide to Models

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Basic Guide to Models

Types and Uses of Models


Descriptive
Segmentation Profiling

Predictive
Triggers (or Association Rules) Regression Trees Neural Networks Genetic Algorithms

Implementing Models Why Models Fail

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Segmentation

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Segmentation
Segmentation analysis groups variables with like characteristics.
Can be market driven: analyst determines the segments. Can be data driven: data determines the segments (clustering)

Example: Segments Sales by Card type


SALE SEGMENTS HIGH $1,149 MEDIUM $333 LOW $97 12 M INACTIVE $0 0.10% 6.5% $1,021 $0 0.09% 1.2% $1,088 $96 1.63% 24.9% $413 $0 0.69% 0.2% $998 $339 1.05% 6.0% $552 $80 17.20% 42.1% $80 PLATINUM 4.75% 0.2% $1,238 $832 9.83% 7.2% $450 $248 23.18% 39.3% $94 PRIEVILEGE 17.98% 5.6% $596 $561 21.90% 20.5% $178 CLASSIC 1.59% 14.6% $359

Population( %) Attrition Rate (%)


Pre Sales (Oct01Sep02)
Post Sales (Oct02Sep03)

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Profiling

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Profiling
1) Credit Happy Spender Highest number of trades, but relatively lower Utilization High Credit Activity (ATV,ATF) in all trades except Retail Trades Credit Activity 5) High Risk Delinquents Risky 4 times more Charge-Offs than average

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2)High Inc / Established Credit High Income Group ($ 109,000) Lower Number of Trades, but high utilization High Credit Activity in Mortgage & Home Equity 3) Middle Class Average Credit Activity (Number, Balance, Utilization) in all trades Highest Proportion of Credit Union Trades to Total 4) Retail Spenders High Retail Balance(10 times more than average) Highest number / proportion of Balance Active Trades Highest Utilization in Non-Installment Trades

Low Credit Limit 6) Senior Citizens

7 1 6 3 2
* Size of Bubble indicates Relative Proportion of Accounts

60+ Years Age Thick File(112 Months of credit history) Minimum Utilization in All trades 7) Credit Avoiders Least Number of Trades Least Credit Limit/Balance No Recent Credit Inquiries

* Indicative List
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Profiling (simplified)
Owners (%)
94% 92% 92% 90% 88% 86% 84% Client A Client B Client C Client D Client E 0% Client A Client B Client C Client D Client E 92% 10% 89% 89% 87% 15% 14% 13%

Home Market Value > $250K (%)

90%
5% 5% 3%

7%

7%

6% of the customers in the overall portfolio have a missing value

7% of the customers in the overall portfolio have a missing value Overall

Length of Residence < 2 Years (%)


25%

Multiple Families (%)


25% 23% 23% 22% 21% 20%

20% 20%

18%
15% 15% 14% 15%

21%
18%

20%

16%
18%

10% Client A Client B Client C Client D Client E

15% Client A Client B Client C Client D Client E

6% of the customers in the overall portfolio have a missing value

3% of the customers in the overall portfolio have a missing value

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Triggers

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Triggers
What are Triggers?
Triggers are indicators based on Credit Activity or Profile of Customers which can generate higher response / sales to marketing offers Triggers present an opportunity for customized marketing at the right time based on customer need & profile.

What Behavior / Characteristics of customers can be Potential Triggers?


High Credit Activity (Acquisition) Low Liability (Acquisition) Movers (Acquisition, Lifecycle) Purchase Behavior (Retention) Thin Files (Acquisition) Wealth Indicators (Acquisition)

What kind of data can be used for identifying Triggers?


Internal Performance Data Demographic Data Credit Bureau Data

Answers the question, When to Target?


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Triggers
In absence of Models, Triggers can be used to Target Better Customer Segments to meet Marketing Objectives Triggers can be Overlaid on Existing Models to Maximize Gains from Marketing Programs Lifestage Strategy
Prescreen

Types of Triggers
Credit Bureau, Demographic, Internal Performance

Acquisition

Cross-Sell

High Performers (High Sale, High Profit)

Lifecycle

Yield Management Customer Retention

Demographic, Internal Performance

Triggers Present Wider Opportunities for Customer Retention, Yield Management, Loyalty & Cross-Sell
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Internal Performance

Activity Triggers
Build up in Sale over '4 quarters' of a year (Sale Increases quarter over quarter) (High Purchase Likelihood, Personal Loan) Build up in Finance Charge over 4 quarters of a year (High Profit Likelihood, Personal Loan) Months Since Last Sale < 3 months (High Purchase Likelihood, Personal Loan) Sale in at least 10 months of a year (High Purchase Likelihood, Personal Loan) Ratio of Current Balance to highest Balance over Lifetime >= 0.8 (High Purchase / Profit Likelihood, Personal Loan) Sale in At least 3 of the first 9 months of the year and no sale in the last 3 months of the year Attrition Trigger

Credit Need Triggers


Non-Sufficient Funds (Debt Consolidation) Credit Line Denial (HELOC) Accounts with Over limit (HELOC)

* Indicative List
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Demographic Triggers

Activity Triggers
Household Characteristics
Presence of Children - (Retailers) Presence of Adults (TeleShopping) Owner (Home Improvement) Renter (Low Liability Personal Loan)

Credit Need Triggers


Purchase Behavior
Mail Order Buyer Home Improvement Women Apparel (Retailers) Financial Services Bank (Dual Card) Bargain Seekers (PLCC Lifecycle)

Wealth Indicators
Low Income (Personal Loan, Dual Card, PLCC Acquisition) Low Net Worth (Personal Loan, PLCC Acquisition) Low Home Market Value (Personal Loan, PLCC Acquisition)

Hobbies / Interests
Home Furnishing (Home Improvement) Fashion - (Retailers)

Movers
Change of Address in Last 2 years (Home Loan, Personal Loan, Home Improvement)

* Indicative List
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Credit Bureau Triggers

Activity Triggers
Utilization (Personal Loan, Dual Card)
Utilization >= 40% and at least 1 inquiry on Revolving Trade At least 2 Bank Revolving Trades with Utilization > 75% Utilization > 50% and Balance > $5,000 on Personal Finance Trades At least 3 trades with Utilization > 75%

Credit Need Triggers


Trend Variables (Multiple Uses)
Increase in Revolving Trade Inquiries from last 6 to last 3 months (> 0) and Revolving Trade Utilization >= 40% Increase in Open Bank Card Trades from last 6 to last 3 months (> 0) and utilization on Bank Card Trades >= 40% Increase in Bank Card Balance from last 6 to last 3 months > $5000 Increase in Mortgage Inquiries from last 6 to last 3 months (> 0)

Activity (Personal Loan, Dual Card)


At least 5 Active Bank Card Trades At least 4 bank Card Trades with bal > $500 At least 5 Active Bank Revolving Trades Increase in # of trades opened from last 12 to last 6 months > 2

Inquiries (PLCC Acquisition)


# of Inquiries on Revolving Trades>=3 # of Inquiries for Credit in last 6 months >= 2 # of Mortgage Inquiries in last 3 months > 0
* Indicative List
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Regression

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Linear Regression

Uses continuous values to predict continuous value. Explains variation in data using ordinary least squares (OLS). Useful in predicting:
charge-off dollars ~ balance, financial risk profile, demographics amount of claim ~ age, health risk profile, geography dollar balance ~ financial risk profile, action to account, market pressure average profitability ~ financial risk profile, price sensitivity, demographics amount of sale ~ advertising, cost, demographics

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Implementation

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Implementation Challenge

How do we select based on model results?


K-S Chart/ Table Lift Chart / Gains Table

What is the impact to the bottom line?


Control Group Tracking Model Metrics Maintaining Solicitation History

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KS Table and Chart


Decile 1 2 3 4 5 6 7 8 9 0 Cum response rate 1.15% 0.96% 0.85% 0.77% 0.71% 0.65% 0.60% 0.56% 0.52% 0.48% Cumulative % of responders 24.1% 40.3% 53.2% 64.6% 74.64% 82.1% 88.4% 93.1% 97.4% 100.0% KS 14.11 20.41 23.34 24.67 24.75 22.24 18.44 13.14 7.40 0.00

Max KS 24.75 at 5th Decile. 50% Leads capture ~75% responders

100% 90% 80% 70%


70% 80% 90%

100%

Cumulative % of responders captured

60% 50% 40% 30% 20% 10% 0% 10% 20% 30% 40% 50%
10% 20% 30% 40%

60%

50%

60%

70%

80%

90%

100%

Cumulative % of Leads
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Lift Chart
Node ID Leads % (L) Cumul Leads % Resp % (R) Cumul Resp % Cumul Resp % at base node resp rate 18.2% 24.7% 37.5% 41.8% 45.7% 64.8% 67.8% 80.5% 91.4% 100.0% Lift (100*R / L)

x.14/1.2/3 x.14/0 x.14/4 x.14/2.4/0 x.14/3.2/0 x.14/1.2/1 x.14/2.4/1 x.14/1.2/0 x.14/1.2/2 x.14/3.2/1

18.2% 6.5% 12.8% 4.3% 3.9% 19.1% 3.0% 12.7% 10.9% 8.6%

18.2% 24.7% 37.5% 41.8% 45.7% 64.8% 67.8% 80.5% 91.4% 100.0%

38.2% 10.2% 18.7% 3.8% 3.3% 13.1% 1.7% 7.0% 2.8% 1.1%

38.2% 48.4% 67.1% 70.9% 74.2% 87.3% 89.0% 96.1% 98.9% 100.0%
100% 90% 80%

210 155 146 90 84 68 59 55 26 13

Nodes (or Deciles) with Lift greater than 100 are worthwhile marketing Target the top 3 nodes in this example

250 200 150 100 50 0 -50


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cumm Leads (%)

70% 60% 50% 40%

Cumul Resp at base node resp rate Cumul Resp % Lift

30%
20% 10% 0%

Cumm Apps (%)


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Lift

All models are wrong, but some are useful. George Box

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