04.Modeling churn using customer lifetime value.pdfVIP

European Journal of Operational Research 197 (2009) 402–411Contents lists available at ScienceDirect European Journal of Operational Research journal homepage: www.elsevier .com/locate /e jorInterfaces with Other Disciplines Modeling churn using customer lifetime value Nicolas Glady a,*, Bart Baesens a,b,c, Christophe Croux a a Faculty of Business and Economics, K.U. Leuven, Naamsestraat 69, B-3000 Leuven, Belgium b School of Management, University of Southampton, SO17 1BJ, UK cVlerick Leuven Ghent Management School, Reep 1, B-9000 Ghent, Belgium a r t i c l e i n f o a b s t r a c tArticle history: Received 22 November 2006 Accepted 19 June 2008 Available online 2 July 2008 Keywords: Churn prediction Classification Customer lifetime value Prediction models0377-2217/$ - see front matter  2008 Elsevier B.V. A doi:10.1016/j.ejor.2008.06.027 * Corresponding author. Tel.: +32 E-mail address: Nicolas.Glady@econ.kuleuven.ac.bThe definition and modeling of customer loyalty have been central issues in customer relationship man- agement since many years. Recent papers propose solutions to detect customers that are becoming less loyal, also called churners. The churner status is then defined as a function of the volume of commercial transactions. In the context of a Belgian retail financial service company, our first contribution is to rede- fine the notion of customer loyalty by considering it from a customer-centric viewpoint instead of a prod- uct-centric one. We hereby use the customer lifetime value (CLV) defined as the discounted value of future marginal earnings, based on the customer’s activity. Hence, a churner is defined as someone whose CLV, thus the related marginal profit, is decreasing. As a second contribution, the loss incurred by the CLV decrease is used to appraise the cost to misclassify a customer by introducing a new loss function. In the empirical study, we compare the accuracy of various classification techniques commonly used in the domain o