A Hidden Markov Model of Customer Relationship Dynamics

Netzer, Oded, James M. Lattin and V. Srinivasan (2008), “A Hidden Markov Model of Customer Relationship Dynamics”, Marketing Science, 27, March-April, 185-204. http://dx.doi.org/10.1287/mksc.1070.0294

44 Pages Posted: 16 Aug 2005 Last revised: 7 Nov 2016

See all articles by Oded Netzer

Oded Netzer

Columbia Business School - Marketing

James Lattin

Stanford University - Graduate School of Business

V. Seenu Srinivasan

Stanford University - Graduate School of Business

Date Written: June 1, 2007

Abstract

This research models the dynamics of customer relationships using typical transaction data. Our proposed model permits not only capturing the dynamics of customer relationships but also incorporating the effect of the sequence of customer-firm encounters on the dynamics of customer relationships and the subsequent buying behavior. Our approach to modeling relationship dynamics is structurally different from existing approaches. Specifically, we construct and estimate a nonhomogeneous hidden Markov model to model the transitions among latent relationship states and effects on buying behavior. In the proposed model, the transitions between the states are a function of time-varying covariates such as customer-firm encounters that may have an enduring impact by shifting the customer to a different (unobservable) relationship state. The proposed model enables marketers to dynamically segment their customer base and to examine methods by which the firm can alter the long-term buying behavior. We use a hierarchical Bayes approach to capture the unobserved heterogeneity across customers. We calibrate the model in the context of alumni relations using a longitudinal gift-giving dataset. Using the proposed model, we are able to probabilistically classify the alumni base into three relationship states and estimate the effect of alumni-university interactions, such as reunions, on the movement of alumni between these states. Additionally, we demonstrate improved prediction ability on a hold-out sample.

Keywords: Dynamic choice models, direct marketing, customer relationship management, segmentation, hidden Markov models

Suggested Citation

Netzer, Oded and Lattin, James and Srinivasan, V. Seenu, A Hidden Markov Model of Customer Relationship Dynamics (June 1, 2007). Netzer, Oded, James M. Lattin and V. Srinivasan (2008), “A Hidden Markov Model of Customer Relationship Dynamics”, Marketing Science, 27, March-April, 185-204. http://dx.doi.org/10.1287/mksc.1070.0294. Available at SSRN: https://ssrn.com/abstract=776765 or http://dx.doi.org/10.2139/ssrn.776765

Oded Netzer (Contact Author)

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

James Lattin

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

V. Seenu Srinivasan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-8505 (Phone)
650-725-6152 (Fax)

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