Integrating customer value considerations into predictive modeling

Abstract

The success of prediction models for business purposes should not be measured by their accuracy only. Their evaluation should also take into account the higher importance of precise prediction for "valuable" customers. We illustrate this idea through the example of churn modelling in telecommunications, where it is obviously much more important to identify potential churn among valuable customers. We discuss, both theoretically and empirically, the optimal use of "customer value" data in the model training, model evaluation and scoring stages. Our main conclusion is that a nontrivial approach of using "decayed" value-weights for training is usually preferable to the two obvious approaches of either using nondecayed customer values as weights or ignoring them.

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