Customer lifetime value : an integrated data mining approach

  • Chen XU

Student thesis: MPhil Thesis (Lingnan)


Customer Lifetime Value (CLV) ---which is a measure of the profit generating potential, or value, of a customer---is increasingly being considered a touchstone for customer relationship management. As the guide and benchmark for Customer Relationship Management (CRM) applications, CLV analysis has received increasing attention from both the marketing practitioners and researchers from different domains. Furthermore, the central challenge in predicting CLV is the precise calculation of customer’s length of service (LOS). There are several statistical approaches for this problem and several researchers have used these approaches to perform survival analysis in different domains. However, classical survival analysis techniques like Kaplan-Meier approach which offers a fully non-parametric estimate ignores the covariates completely and assumes stationary of churn behavior along time, which makes it less practical. Further, segments of customers, whose lifetimes and covariate effects can vary widely, are not necessarily easy to detect. Like many other applications, data mining is emerging as a compelling analysis tool for the CLV application recently. Comparatively, data mining methods offer an interesting alternative with the fact that they are less limited than the conventional statistical approaches.

Customer databases contain histories of vital events such as the acquisition and cancellation of products and services. The historical data is used to build predictive models for customer retention, cross-selling, and other database marketing endeavors. In this research project we discuss and investigate the possibility of combining these statistical approaches with data mining methods to improve the performance for the CLV problem in a real business context. Part of the research effort is placed on the precise prediction of LOS of the customers in concentration of a real world business. Using the conventional statistical approaches and data mining methods in tandem, we demonstrate how data mining tools can be apt complements of the classical statistical models ---resulting in a CLV prediction model that is both accurate and understandable. We also evaluate the proposed integrated method to extract interesting business domain knowledge within the scope of CLV problem.

In particular, several data mining methods are discussed and evaluated according to their accuracy of prediction and interpretability of results. The research findings will lead us to a data mining method combined with survival analysis approaches as a robust tool for modeling CLV and for assisting management decision-making. A calling plan strategy is designed based on the predicted survival time and calculated CLV for the telecommunication industry. The calling plan strategy further investigates potential business knowledge assisted by the CLV calculated.
Date of Award2007
Original languageEnglish
Awarding Institution
  • Department of Computing and Decision Sciences
SupervisorMan Leung WONG (Supervisor)

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