Modeling the Evolution of Customers' Service Portfolios

Abstract:     
Understanding how customers' service portfolios evolve over the course of their relationship can provide multi-service firms, such as telecommunication and financial service providers, with useful guidance for managerial issues such as customer valuation and targeting. Complicating matters, however, is the fact that ownership of individual services may be related to each other. Additionally, customers may be heterogeneous in terms of the portfolios they choose and the sequence of adoption/retention decisions they make over time. In this research, we propose an integrated multivariate choice and duration model that nests extant single-product models to capture co-purchasing behavior and underlying choice dynamics.

Using a hidden Markov model, we uncover latent relationship states through which customers may pass during their relationship with the firm, allowing us to understand how subscription patterns evolve over a customer's tenure. The proposed model provides a framework within which multi-service providers can assess the value of their customers. We also demonstrate how the proposed modeling framework leverages information from the full sequence of subscription decisions to identify those customers who are most at risk for terminating their relationship both in the next time period and at the time of their next portfolio change.

Keywords: Bayesian Modeling, Choice Models, Customer Relationship Management, Hidden Markov Models

Working Paper Series