Response Transformation and Profit Decomposition for Revenue Uplift Modeling

European Journal of Operational Research, Forthcoming

53 Pages Posted: 5 Dec 2019

See all articles by Robin M. Gubela

Robin M. Gubela

School of Business and Economics, Humboldt-University of Berlin

Stefan Lessmann

School of Business and Economics, Humboldt-University of Berlin

Szymon Jaroszewicz

affiliation not provided to SSRN

Date Written: November 20, 2019

Abstract

Uplift models support decision-making in marketing campaign planning. Estimating the causal effect of a marketing treatment, an uplift model facilitates targeting communication to responsive customers and efficient allocation of marketing budgets. Research into uplift models focuses on conversion models to maximize incremental sales. The paper introduces uplift modeling strategies for maximizing incremental revenues. If customers differ in their spending behavior, revenue maximization is a more plausible business objective compared to maximizing conversions. The proposed methodology entails a transformation of the prediction target, customer-level revenues, that facilitates implementing a causal uplift model using standard machine learning algorithms. The distribution of campaign revenues is typically zero-inflated because of many non-buyers. Remedies to this modeling challenge are incorporated in the proposed revenue uplift strategies in the form of two-stage models. Empirical experiments using real-world e-commerce data confirm the merits of the proposed revenue uplift strategy over relevant alternatives including uplift models for conversion and recently developed causal machine learning algorithms. To quantify the degree to which improved targeting decisions raise return on marketing, the paper develops a decomposition of campaign profit. Applying the decomposition to a digital coupon targeting campaign, the paper provides evidence that revenue uplift modeling, as well as causal machine learning, can improve campaign profit substantially.

Keywords: OR in Marketing, Profit Analytics, Uplift Model, Causal Machine Learning

JEL Classification: M31, C44, C45, C54, C55

Suggested Citation

Gubela, Robin M. and Lessmann, Stefan and Jaroszewicz, Szymon, Response Transformation and Profit Decomposition for Revenue Uplift Modeling (November 20, 2019). European Journal of Operational Research, Forthcoming , Available at SSRN: https://ssrn.com/abstract=3490438 or http://dx.doi.org/10.2139/ssrn.3490438

Robin M. Gubela

School of Business and Economics, Humboldt-University of Berlin ( email )

Spandauer Str. 1
Berlin, Berlin 10178
Germany

Stefan Lessmann (Contact Author)

School of Business and Economics, Humboldt-University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

Szymon Jaroszewicz

affiliation not provided to SSRN

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