Download The Data

Database Marketing
Dr. Ron Rymon
Marketing Communications Program
IDC, Herzliya
Overview
 Goal: describe the framework, and touch on the
current trends and buzzwords
 Outline:





Uses of the marketing database
The Data
Implementation technologies
Analysis techniques
Modeling techniques
Uses of the Marketing Database
The Marketing Database
• Comprehensive collection of interrelated data ...
• Arranged around each customer ...
• Allow timely and accurate retrieval ...
• Support analytical, predictive, operational needs ...
• Serving multiple applications …
Active Database:
An Integrated Business Resource
Marketing
Customer
Service
Finance
Database
Research
Sales
Distribution
Information is Power:
Active databases drive the business…
• Identify your best customers
– profitability analysis, clustering
• Develop new customers and cross-sell
– similar to current, identify competitors’ customers
• Improve delivery of sales promotion
– response modeling / targeting
• Personalize message
– based on purchase patterns, volume
• Use as a research tool across the organization
– customer, product, market research
Key Building Blocks
• Data
– a database is only as powerful as its data
• Implementation technologies
– hardware, networking, warehouses
• Analysis techniques
– RFM, LTV, OLAP, Segmentation, Visualization
• Modeling
– Regressions, Artificial Intelligence, Data Mining
The Data
A database is only as powerful as the
data it houses.
Customer-centric Database
• Every database is a collection of records
• Each record is a collection of fields
• Here, one record per customer and/or prospect
– unique identifier
– general customer/account information
• including demographic, psychographic, socio-economic
– our offers+communications to the customer
– customer’s actions: response, purchase, payment
What Data To Hold
• Too often, data is collected based on availability,
and not based on projected need
• Should accumulate internally
– data that can be used to support current and future
strategies (mktg and otherwise, e.g., operations)
– …. data that may be valuable to other organizations
• Should source external data
– unavailable internally
– too expensive to maintain/update
What’s in YOUR database?
Data Requirements
Marketing + other
Applications
Basic Demo
Targeting
Retention
Usage
upgrading
Usage
Payment
Data Sources : Internal
• Operations / Sales
– past usage/purchase, e.g., amount, variability
• Finance
– payments, e.g., timeliness, amounts
• Customer service
– e.g., inquiries, complaints
• Other data collection methods:
– sales/orders, promotions/drawings, inquiries, surveys,
warranty cards, research panels...
Data Sources: Distribution Channels
• Many companies use distributors, retailers
• Problem: lack of direct communications with endcustomer, no “relationship”
• Part-solution 1: keep tabs on channel + aggregate
statistics on customers
• More aggressive solution: special marketing
programs to reach customers
Data Sources : External Lists
• 50% of U.S. DMers sell their lists
• Use to enlarge universe : new names
– can buy segments by specific features (model)
• Enhance data : cross information
enhance data
– U.S. census data
– Credit bureau
– Various marketers of related products
– List compilers / maintainers / sellers
enlarge
universe
John Smith
Eric Cohen
Jack Marshal
60
35
20
10.2
1.3
0
Other Data Sources
• Mass-advertised offers
– TV call-ins, direct response
• Joint offers with other merchants
– take-one brochures in banks, restaurants
– drawings
• Trade shows, happenings, community activity
• Referrals!
Data Management
• Many sources:
– conversions, transformations, cleaning, merge-purge
• Many “clients”
– marketing, sales, product managers, operations
• Temporal issues
– updates, audits, archives/deltas
• Quantities: huge databases
– Storage, access, processing, communications
• Resolution, Enhancement
Merge-Purge : Example
• Palmer, Robert and Mary, 123 Sun Avenue, Apt 7,
Key West, FL 31250
• Dr. Robert C. Palmer, Custom Engineers LLC,
123 Sun Avenue, 7th Floor, Key West, FL 31250
• Rob Charles Palmer, CE Inc., 123 Sun Ave #7,
Key West FL 31250
• Bob Palmer Jr., 123 Sun #7, Key West, FL 31252
• Maria Palmer, 123 Sun Avenue, Suite 7, Key
West, FL 31250
Other Issues
• Legal
–
–
–
–
Privacy Act
Anti-discrimination
Advertising Code
Telephone Consumer Protection Act
• Consumer groups
– Right to be omitted (just write to DMA)
– Environmental issues
• DMA invests in education:
– Dmers: best practice
– Customers: better image
Implementation Technologies
Computing Platforms
• Issues / Needs:
–
–
–
–
Information sources + integration
Storage/access, maintenance, completeness, update
Computation: process queries, algorithms
Analyses and reports, feed to operations, customer/user interaction
• Trends:
–
–
–
–
–
Traditionally, all DMers used mainframes
Today, some migration to mid-range (UNIX)
PC-based computers gaining power (NT)
Client/Server architectures
Everything networked
Database Management
• Database is a foundational software
• Must support variety of applications:
– transaction processing
– analyses
– on-line interaction
• Trends:
– Relational databases
– Data warehouses
– Data redundancy/multiplicity
Applications
Database
O.S.
Relational Database
Tables
ID
Cust Name Address …
1234 John Brown 123 Main St ….
ID
Product
Supplier …..
A703 Levis Jeans S7003 ….
ID
Date
98765 3.5.98
98766 4.5.98
98767 4.5.98
Cust
1234
1234
1235
Product Quant. Price
A703
5 150.00
A707
2 240.00
A703
1 30.00
Reports (SQL Queries)
Transactions for John Brown
3.5.98 5 Levis Jeans $150
4.5.98 2 CK Jacket $120
Purchases of Levis Jeans
3.5.98 John Brown 5 $150
4.5.98 Jane Doe
1 $30
Data Warehouse
• Stores data for informational and analytical processing
– Separate from operations
Operational
Data Warehouse
– Subject-oriented
– Integrated
savings
customer
– Historical
product
loans
credit card
investments
Example: Computer-by-Mail Inc.
House Files
operations
Mktg
Executive
mail
Analyst
Data
Warehouse
Client --- Server
Telemarketers
Analysis Techniques
Data Limitations
• Important: The data is a limited encoding of reality
• Many potholes:
– Omission
– Errors, noise
– Representation
– Sampling bias
• Cannot be too careful !
Exploratory data analysis :
Single-variable
• Descriptive statistics
– Mean, Median
– Variance
• Histograms
– Shows distribution
40%
35%
30%
25%
20%
15%
10%
5%
0%
0-20
20-30
30-40
40+
Exploratory data analysis:
Multi-variable
• Examine relationship between two or more variables
–
–
–
–
Cross tabs
Correlation
Scatter plots
Clustered histograms
45%
40%
Buyer
NoBuy
35%
30%
25%
20%
15%
10%
5%
0%
0-20
20-30
30-40
40+
RFM Analysis
• RFM score
– Recency: how close is the last purchase
– Frequency: number of recent purchases
– Monetary: dollars spent recently
• Example:
– Recency: 10 pts if within 3 mos, 1 pt lower per
additional month, to 1
– Frequency: 1 pt for each purchase within 12 months
– Monetary: 1pt for each $100 in past year, to 10
– Score=R*F*M, the higher the better
Life-Time Value of Customers
• LTV Goal:
– recognize each customer’s contribution
• Method:
– calculate the “expected” net revenue
– discounted:
• risk of attrition
• probability of sales
• rate of money
• Typically computed per 1000, if possible by segment
OLAP Tools
• OLAP : On-Line Analytical Processing
• Goal: A database-driven system that provides
– Fast
– Analysis
• common business reports, statistics
– of Shared
• same information available to many users
– Multi-dimensional
• every piece of information is multiply categorized
“The OLAP Report”
– Information
OLAP Tools
• Data represented internally as multi-dimensional cube
– e.g., customer’s attributes, purchases, payments, etc.
• User chooses presenting two dimensions at a time
– e.g., show $-sales, by geographic region and income
• Heavy use of hierarchical variables, with drilling capabilities:
– time: year, quarter, month, week, day, hour
– product: hardware, printers, small printers, PX-1000
– dollars: by ranges 0-1000, 1000-5000, 5000-25000, etc.
• Analyses, highlights of interesting cases, etc.
OLAP Tools: Example Screen
Data Visualization Tools
• Many relationships are best communicated visually:
– histograms, pie-charts, scatter plots, graphs
– use color/texture, shapes
– temporal animations
• Visualization software allows
–
–
–
–
single-variable over time
one variable as a function of another
interaction detection
segmentation
Modeling Techniques
Modeling Behavior
• Target variable
– a.k.a. dependent/modeled/explained variable
– typically, whether bought/responded or not
• Goal:
– Use other variables in a model to classify/predict
– other variables: a.k.a. independent, observable, explaining
– model: formula, algorithm
• Success criterion: future performance
Modeling and Validation Framework
• Data flow:
–
–
–
–
–
–
Historical data
Modeling software
Training Set
Constructs model
Tested on more historical data
Repeat until satisfied
Use model to predict
Output
Model
Production
or Test Set
Critical Success Factors
• Choice of data
– scope: same/similar period, audience, offer, communication
– explaining variables: available, useful, well-represented
• Choice of modeling technique
– appropriate for the goal
– powerful: good fitting power
• Careful and “pessimistic” testing and validation
Validation
• NEVER test on same data set
– avoid “memorizing” the data, overfitting
• Out-of-sample methods
– separate training set and test set
– cross-validation, a.k.a. jack-knifing
– remember temporal aspect
• Evaluate the model’s robustness
– estimate chance probability, bootstrapping
Classification v. Prediction Systems
• Classification systems:
– distinguish few types of customers, e.g., responded or not
– technically, target variable is discrete/categorical
– validation through “hit rate”
• Prediction systems
– predict probability of purchase, or purchase dollars
– technically, target variable is continuous
– validation through “closeness” measures
Linear Scoring Systems
• Use linear regression
Score  a  Income  b  PastPurchase  c  Age  d
•
•
•
•
Coefficients evaluated using historical data
Higher score interpreted as greater likelihood of responding
Every coefficient measures “independent” contribution
Classification variant: discriminant analysis
– e.g., predict response if score is above 0.3
Logistic Regressions
• Logistic regression (logit)
ea  Income b PastPurchasec Aged
Probabilit y 
1  ea  Income b PastPurchasec Aged
• Target variable
– historical data: 0 or 1
– future application: used as probability
• Independent variables: continuous or categorical
• Probit: variation that relies on normal distribution
Presenting and Evaluating Results
• Lift table
Top Scoring % Respond %Non-Respond
5%
26.8%
4.9%
10%
41.2%
9.8%
15%
52.4%
14.8%
20%
62.6%
19.8%
50%
75%
87.9%
96.5%
49.7%
74.8%
Presenting and Evaluating Results
• Lift curve (a.k.a. Receiver Operating Characteristic curve)
1
0.9
0.8
%Responders
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
0.1
0.2
0.3
0.4
0.5
0.6
% Non-Responders
0.7
0.8
0.9
1
Presenting and Evaluating Results
• Confusion Matrix (given a specific threshold)
Predicted
Respond
Predicted
Non-Respond
Actual Respond
Pr,r
Pn,r
Actual
Non-Respond
Pr,n
Pn,n
• Accuracy=(Pr,r+Pn,n)/Total
• Detection=Pr,r/(Pr,r+Pr,n)
• Two error types: Pr,n and Pn,r
Break-even Analysis
• Issue: how much to mail?
• Solution: find break-even point
• e.g.:
%mail %respond Income
5%
10%
15%
20%
25%
30%
35%
25%
21%
16%
11%
6%
3%
2%
$1,250
$1,050
$800
$550
$300
$150
$100
• Caution: use held-out data!
Cost of
product
$750
$630
$480
$330
$180
$90
$60
Cost of
mail
$50
$50
$50
$50
$50
$50
$50
Marginal
Profit
$450
$370
$270
$170
$70
$10
-$10
Non-Linear Systems
• In regressions, a change in one independent variables
always affects in same direction
– e.g., if age affects positively, then the older the better, always
• One solution: transformations
– e.g., if U-shaped relation, use quadratic form
• Or, use non-linear techniques:
– Neural networks
– Decision trees
– Other: rule-based systems, genetic algorithms, Bayesian nets
Neural Networks
• Motivated by biological nervous system
• Perceptron = a model of a neuron
activation 
w1
w2
x1
x2
w3
w4
x3
W iXi

e
W iXi

1 e
w5
x4
x5
Classical Neural Net
• Multi-layer network of perceptrons
• Proper weights are “discovered” from random
– forward propagation of training set
– compare output to actual target variable
– back propagation of error to adapt weights
Decision Trees
AB
0 0
0 1
1 0
1 1
1 1
C D Resp.
1 0 Buy
1 1 Buy
1 0 No
0 0 Buy
1 1 No
• Partition the data based on one attribute...
50
Induction of Decision Trees
A=0
0 0 1 0 Buy
0 1 1 1 Buy
 Recursively,
AB
0 0
0 1
1 0
1 1
1 1
C D Resp.
1 0 Buy
1 1 Buy
1 0 No
0 0 Buy
1 1 No
A=1
1 0 1 0 No
1 1 0 0 Buy
1 1 1 1 No
partition each of the nodes
51
Induction of Decision Trees
A=0
0 0 1 0 Buy
0 1 1 1 Buy
A B C D Resp.
0 0 1 0 Buy
0 1 1 1 Buy
1 0 1 0 No
1 1 0 0 Buy
1 1 1 1 No
C=0
A=1
1 0 1 0 No
1 1 0 0 Buy
1 1 1 1 No
1 1 0 0 Buy
 …until
the node is homogeneous
C=1
1 0 1 0 No
1 1 1 1 No
52
Classification
(A=1,B=0,C=0,D=1)
A=0
A=1
Buy
C=0
Buy
C=1
No
• Go down a matching path...
53
Classification
(A=1,B=0,C=0,D=1)
A=0
Buy
A=1
C=0
Buy
C=1
No
 Continue...
54
Classification
(A=1,B=0,C=0,D=1)
A=0
Buy
 …until
reaching a leaf
 Use the leaf’s probability
A=1
C=0
Buy
C=1
No
55
Set of Rules, or Market Segments
A=0
Buy
A=1
C=0
Buy
C=1
A=0 => Buy
A=1 and C=0 => Buy
A=1 and C=1 => No
No
• Each rule represents a market segment
56
Which Modeling Technique?
• Decision trees (ChAID, CART, C4.5)
– symbolic: model is interpretable as set of rules
– essentially is a segmentation
– useful when few “classes”, e.g., based on action (send/not,
or few offer types)
• Regressions, neural nets
– numeric: allows fine-tuning, e.g., for prediction or ranking
– model is hard to interpret and used as “black-box”
– useful when target is continuous
Data Mining
• Knowledge Discovery in Databases (KDD)
• KDD is the process of identifying valid, novel,
potentially useful, and ultimately understandable
patterns in data
• Includes all steps of data preparation + management
• Data mining step uses statistical techniques, decision
trees, neural nets, etc.
Summary
• Customer data can be leveraged to better understand
and manage current customers, and target new ones
• Data analysis and visualization
– insights about our customers
– business economics
• Modeling
– “mined” insights
– classify/predict behavior