A First-Passage Time Model for Predicting Inactivity in a Contractual Setting

34 Pages Posted: 5 Jul 2007 Last revised: 4 Apr 2012

See all articles by Andre Bonfrer

Andre Bonfrer

Deakin University; Australian National University (ANU)

George Knox

Tilburg University

J. Eliashberg

University of Pennsylvania - Marketing Department

Jeongwen Chiang

Hong Kong University of Science & Technology (HKUST) - Department of Marketing

Date Written: November 17, 2010

Abstract

A central focus of database marketing is on predicting customer defection (churn). We argue this focus would be better placed on predicting when customers become inactive, which often precedes the time at which the customer terminates the contract, and represents a behavioral regularity found across several contractual markets. We model customers' usage (consumption) paths, and whether customers become inactive, as realizations from a single continuous-time stochastic process with an absorbing state. Our context is usage of a cellphone service. In addition to robust predictions, the model has two managerially important parameters, drift and volatility, and offers several advantages over existing methods. First, it can be calibrated at the individual level and before is observed. Second, based on these parameters, the model provides unique insights into who managers should intervene with to prevent customer churn. An appealing feature of our model for managers is that it is also easily implementable in a platform such as Excel. These features make the proposed model useful as an early warning system for a service provider to guide policy on customer retention.

Keywords: defection, churn, stochastic models, brownian motion, first hitting time

Suggested Citation

Bonfrer, Andre and Knox, George and Eliashberg, Jehoshua (Josh) and Chiang, Jeongwen, A First-Passage Time Model for Predicting Inactivity in a Contractual Setting (November 17, 2010). Available at SSRN: https://ssrn.com/abstract=997810 or http://dx.doi.org/10.2139/ssrn.997810

Andre Bonfrer

Deakin University ( email )

Australia

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

George Knox (Contact Author)

Tilburg University ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands
+31 13 466 8778 (Phone)
+31 13 466 3219 (Fax)

HOME PAGE: http://www.tilburguniversity.edu/webwijs/show/?uid=g.knox

Jehoshua (Josh) Eliashberg

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States

Jeongwen Chiang

Hong Kong University of Science & Technology (HKUST) - Department of Marketing ( email )

Department of Marketing
Clear Water Bay, Kowloon
Hong Kong

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