Customer Profitability

Name

Customer Profitability

Description

Without knowing the value of one's customers, it is hard to determine what the optimal marketing efforts would be. Data mining can be used to predict customer profitability under a variety of different marketing campaigns. Profitability in turn can be analyzed under different angles. First, there is the profitability which is associated with a particular product or service, and the risks, which may arise during the lifetime of this particular product or service. And second, one may consider the profitability and risks of the customer life cycle. Approval or risk models are unique to certain industries that assume the potential for loss when offering a product or service. The most well-known types of risk occur in the banking and insurance industries. Banks assume a financial risk when they grant loans. In general, these risk models attempt to predict the probability that a prospect will default or fail to pay back the borrowed amount. For the insurance industry, the risk is that of a customer filing a claim. The risk of fraud is another area of concern. Fraud detection models are assisting banks for example in reducing losses by learning the typical spending behavior of their customers. If a customer's spending habits change drastically, the approval process is halted or monitored until the situation can be evaluated. Net present value models and lifetime value models attempt to predict the overall profitability of a product or customer. i.e. a person or a business, for a predetermined length of time. The values are often calculated over a certain number of years and discounted to today's value. Since market shares vary over time, companies are looking for opportunities to profit more from their existing customer base. As a result, many companies are expanding their product and service offerings in order to cross-sell or up-sell their existing customers. This approach is exactly creating the need for models which go beyond the net present value to the lifetime value of a customer.