2022 International Conference on Machine Learning, Big Data, Cloud and Parallel Computing (COM-IT-CON), 26-27 May 2022

A review on Churn Prediction and Customer

2022 International Conference on Machine Learning, Big Data, Cloud and Parallel Computing (COM-IT-CON) | 978-1-6654-9602-5/22/$31.00 ©2022 IEEE | DOI: 10.1109/COM-IT-CON54601.2022.9850924

Segmentation using Machine Learning

Ankita Zadoo, Tanmay Jagtap, Nikhil Khule, Ashutosh Kedari, Shilpa Khedkar
Department of Computer Engineering,
Modern Education Society’s College of Engineering,
Pune, Maharashtra, India
1
ankitazadoo2@gmail.com
2
tanmayjagtap27@gmail.com
3
nikhil.akhule1903@gmail.com
4
kedariashutosh89@gmail.com
5
shilpa.khedkar@mescoepune.org

Abstract— Telecom companies have a huge amount of
customer data generated every data. Since acquiring new
customers is a difficult task this data can be used to explain the
customers’ behaviour with the company and help companies
plan the retaining strategies. Customer segmentation, a
technique of dividing the customer base into multiple groups of
customers with similar behavior, helps in getting an idea about
the company’s customers. First the data will be cleaned,
analyzed, and prepared for model training. Data preparation is
important in this problem since the machine learning algorithms
used for these tasks perform poorly when given unprepared data.
For this, feature selection techniques such as Principal
Component Analysis (PCA), information gain and correlation
attribute ranking filters, Linear Discriminant Analysis (LDA)
can be used. Churn prediction is a supervised binary
classification task and customer segmentation is an unsupervised
clustering task. This study focuses on some of the churn
prediction and customer segmentation techniques. With the help
of these techniques, a churn prediction model to predict churn
and a model to generate customer segments can be built.
Keywords—Churn Prediction, Customer Segmentation, Clustering,
Feature Selection, Machine Learning, Telecom.
I. INTRODUCTION
The increasing demand for internet services has made the
telecom market more competitive than ever. The cost of
acquisition of new customers is much more than retaining the
existing customers. Thus, Customer Relationship
Management (CRM) analysers and business analysts need to
know the behaviour of the customers and the reasons for a
particular behaviour. Attracting new customers is no longer
suitable for businesses. Acquiring new customers is much
more expensive than retaining existing customers. This makes
a big difference because of the volatile nature of the telecom
customer base. The companies have huge volumes of data
generated as the customers use their services. This data can be
used to make informed decisions to retain existing customers.
Churn management is an important aspect of customer
relationship management. Churn prediction and customer
segmentation can help companies understand the effects of
current business strategies on the customers' business with the
company. Predicting the churn of customers can help plan
retention strategies for those customers. The business of the
customers left from one telecom service provider can give an
edge to the competitors. This is why the churn of customers is
an important factor in Customer Relationship Management.
Dividing the customer base into groups or clusters with
similar behaviour is called customer segmentation. Customers
in one group or cluster have similar behaviour.
The telecom companies need not only customer churn
prediction but also the factor analysis to understand the
reasons of churn. It is beneficial to telecom companies to use
their resources on high-value customers. Churn prediction and
customer segmentation techniques will help in identifying
these potentially high value customers.
The number of people using internet services is increasing
day by day and innovations in the telecom sector are making
the internet more accessible than ever. This ever-increasing
need for internet service is helping the competition in the
telecommunications sector to grow. The companies are
finding ways to retain the existing customers as the cost of
retaining is much less than that of acquiring new ones. The
data generated by the customers can be used to company’s
benefit using machine learning techniques. Identifying
churning customers and customer segments can help the
companies plan their strategies for high-value customers. This
way, companies will be able to spend their time and resources
on their high value customers which will keep them from
churning. Identifying the needs of newly joined customers can
also be help retain these customers since newly joined
customers are most likely to churn. The problem is to predict
the probability of churn of a customer and identify which
group of customers the customer belongs to.
II. LITERATURE SURVEY
A lot of pre-existing work uses many machine learning
techniques as well as some deep learning techniques. The
review focuses on some of the techniques used in the domain.
The literature survey is divided into two parts: churn
prediction and customer segmentation.

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A. Churn Prediction
Ullah et al. in [1] use a real-world dataset of Call Details
Records (CDR) of a South Asian telecom company [1]. While
picking an algorithm, the study suggests using multiple
algorithms on the dataset and choosing the one which performs
the best. Performance of tree-based algorithms such as decision
tree, random forest, the random tree was better than other
classification algorithms such as Multilayer Perceptron (MLP),
Logistic Regression. These classification algorithms perform
better when high-value features are given to the algorithm. For
this, feature selection is done using information gain and
correlation attributes ranking filter and then selecting high-
ranking features.
Caigny et al. in [2] proposed an approach to model churn
prediction which combines decision trees and logistic
regression algorithms called the Logit Leaf Model (LLM).
Decision trees suffer to handle linear relationships between the
variables and logistic regression has difficulties with
interaction effects between variables [2]. In the logit leaf
model, a decision tree is created on the dataset which generates
homogeneous segments of customers, and then logistic
regressions is then applied to these segments. Logistic
regressions in (LLM) deploy a forward selection mechanism
which gives an inbuilt feature selection mechanism to the
algorithm. The proposed logit leaf model performs on par with
ensemble methods like the random forest.
The research done by Ahn et al. [3] compiles many
techniques used for churn prediction in various domains such
as insurance, games, internet services, and management. It also
describes terms related to churn such as Customer Acquisition
Value (CAC), Customer Lifetime Value (CLV). The study
starts by giving a brief definition of churn and explains
contractual and non-contractual churn. It defines the churn
period as a section that can restore a customer’s trust. The
RFM (Recency, Frequency, Monetary) method for evaluating
loyal, high-value customers are also discussed. The study also
addresses data preparation techniques to be used for some
machine learning algorithms to improve performance like one-
hot encoding, bucketing, normalization, feature embedding.
Churn prediction algorithms perform well on balanced datasets
than imbalanced datasets. In practice, the data may not be
enough for a machine learning algorithm. To solve this
problem, oversampling and undersampling methods such as
Synthetic Minority Oversampling Technique (SMOTE),
Adaptive Synthetic Sampling (ADASYN), Majority Weighted
Minority Oversampling Technique (MWMOTE) can be used
to balance the dataset.
The study done by Adhikary and Gupta in [4] applies over
100 classifiers of different families for churn prediction. These
algorithms are classified as discriminant analysis, Bayesian
approach, neural network classifiers, decision trees, boosting,
bagging, random forest, Support Vector Machine (SVM),
logistic regression, and others. The highest results were
achieved with random forest family classifiers. The
performance of these models is then compared using metrics
such as precision, recall, F-measure, MCC, and Area Under the
Curve of Receiver Characteristic Operator (AUC-ROC).
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Yadav et al. [5] studied various machine learning
techniques for churn prediction in the banking, telecom, and IT
sector. Churn for each sector and Features responsible for
churn in those domains are discussed. The performance of four
algorithms was compared for these three sectors. Random
forest performed best on the banking dataset, whereas in the IT
sector and telecom, logistic regression and XGBoost
algorithms outperformed other algorithms respectively. This
showed that for each sector, churn prediction techniques can be
different.
Ahmad et al. in [6] mainly focus on the real-world
application of the system. Hortonwokrs Data Platform (HDP) -
an open-source big data platform, is used in the study. First, the
data is gathered from all resources and stored in HDFS, and
Spark is used to process the stored data. Spark is also used for
feature engineering. The volume of data under study was
around 70 terabytes. The data was also found to be imbalanced
since the primary class occupied around 95\% of the data. The
problem of imbalance in the dataset was solved by
undersampling the primary class. Tree class algorithms such as
decision tree, gradient boosting machine etc. were used for
classification.
The research done by Jain et al. in [7] logit boost and
logistic regression models for churn prediction. Within CRM,
churn management has received much attention since customer
acquisition is more expensive than customer retention. Logit
boost model is an additive logistic regression model. Results of
these algorithms are compared using metrics such as AUC-
ROC, F-measure, precision, recall. Both models gave an
accuracy of around 85\%.
B. Customer Segmentation
In the study done by Christy et al. in [8], the RFM ranking
technique is discussed which is used to evaluate customers'
value to the company. RFM stands for Recency, Frequency,
and Monetary [8]. Recency is defined as the number of days a
customer has taken between two purchases. Frequency is the
number of purchases or interactions done by the customer in a
specific time period. Monetary is the amount of money spent
by the customer during a specific period. RFM values are
calculated after the data preprocessing phase. This data is then
used for clustering by 3 algorithms, namely, K-means, Fuzzy
C-means, and Repetitive median (RM) K-means clustering [8].
K-means clustering assumes that a data point belongs to only
one cluster. Fuzzy C-means permits the data to be in more than
one cluster. Random selection of the initial centroids makes the
K-means algorithm less effective. Hence, repetitive median K-
means is used which reduces the time complexity of the
algorithm by choosing medians of the variables as initial
centroids. RM K-means performed significantly better than K-
means and Fuzzy C-means.
In another study done by Alkhayrat et al. in [9], deep
learning techniques and PCA were used for dimensionality
reduction of the dataset and removal of irrelevant features.
Autoencoders are a special type of neural network used for
unsupervised tasks. An autoencoder consists of three main
components: encoder, code, and decoder. The encoder
compresses the input into lower-dimensional code and the
decoder reconstruct the input from the code [9]. Here, the
autoencoder can learn to compress the input for dimensionality
reduction. Three datasets were prepared: the original dataset,
PCA-transformed dataset, and autoencoder-transformed
dataset. K-means clustering algorithm is then applied to every
dataset to compare the effect of dimensionality reduction.
Silhouette coefficients of the generated clusters were used for
comparison. PCA performed poorer than the original dataset
and autoencoder-transformed dataset. The autoencoder was
implemented using Keras and TensorFlow libraries in Python.
The study shows that the autoencoder’s learning ability of non-
linear relations makes it useful for feature selection.
Pantula et al. in [10] proposed a neural network approach
for the implementation of the fuzzy c-means clustering
technique. The fuzzy C-means algorithm allows a data point to
be a member of more than one clusters using a membership
function. The authors implement this algorithm with deep
learning because of the flexibility of neural networks. The
neural network performed significantly better than the
traditional fuzzy c-means algorithm.
Tavakoli et al. in [11] used a modified version of the RFM
model for customer valuation for customer segmentation. The
authors separated R (Recency) from F (Frequency) and M
(Monetary) since the frequency and monetary together
represent the loyalty of the customer. The proposed model was
evaluated based on real data from a large-scale E-commerce
company - Digikala. The authors also applied different
definitions for RFM since every domain may have different
definitions of these variables. For clustering, the K-means
algorithm was used. Retention strategies for each cluster were
also discussed.
Customer acquisition cost is much larger than the cost of
customer retention. Losing customers to competing
organizations affects the enterprise value of the company.
Customer segmentation can divide the customer base into
groups with similar behavior. The analysis of the clusters
generated and churn prediction results can be used for
planning retention strategies for customers. Many complex
problems such as image processing, natural language
processing tasks are being solved by machine learning
methods on relevant data. Methods discussed in this research
are new and can be used to gain insights into the customer
base. The system proposed in this research has many machine
learning and statistical methods with different characteristics.
Feature selection methods can be used to the attributes which
lead to a certain behavior of customers. The analysis of churn
and the customer segments will take telecom companies ahead
of their competition. The companies can work on their
products and services to suit the needs of customers.
III. PROPOSED METHOD
A. Data Collection
Data collection is the process of collecting data from various
resources. This data can be structured, semi-structured, or
unstructured. In our case, the data is structured but may be
spread out in multiple resources. In this phase, the data is
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collected from the company’s data stores or customer data
platforms (CDP) where data of all customers is stored. The
data stored may be of multiple products of a company. The
emphasis of the system is on getting useful insights into the
existing customers of the company. In this case, the datasets in
use will be Cell2Cell [12] dataset and churn prediction
competition from Kaggle [13] and a sample dataset from IBM
[14].
Fig. 1 System Architecture
B. Data Cleaning
This is the process to identify and correct the errors in the
dataset that may affect the machine learning model. It is found
that cleaned data improves a model’s performance. Unclean
data may contain incomplete, irrelevant, or sometimes
duplicate items. These can be removed from the dataset
altogether, or if the dataset is small then the missing values
can be computed using statistical techniques. Python supports
many libraries which can be used to clean the data.
C. Data Analysis
In this phase, the cleaned data is analyzed to get some
insights into the behavior of features. The analysis is done to
make sense of the data and understand each feature before
training the model. The analysis will help in understanding
features and their relationships better before training the
model.
D. Data Preparation
This is the last step before the training phase of the system.
In this phase, the dataset is made ready for model training. A
machine learning algorithm may be sensitive to some
irregularity in the data. For example, the decision tree
algorithm struggles to handle linear relationships between the
features. Logistic regression is an algorithm that has
difficulties with interactions between the variables. Thus,
preparing the dataset to suit the algorithm helps the model’s
performance. Many algorithms tend to favor the dominant
class in an imbalanced dataset. To overcome this,
undersampling and oversampling techniques are used. In
undersampling, some of the data points from the dominant
class are omitted. In oversampling, the data points of less-
frequently occurring classes are repeated to overcome the
imbalance. There are many variants of undersampling and
oversampling techniques. But the core principle remains the
same. In clustering, algorithms like k-means clustering
algorithm do not perform well with high-dimensional data. A
dataset with ‘n’ features has n-dimensional problem space but
in reality, not all problem space is used by the dataset. Thus,
feature selection techniques are used to transform the n-
dimensional space into a lower-dimensional space. Some
techniques used in feature selection are PCA, information gain
ranking filters. Autoencoder is a deep learning approach for
dimensionality reduction. These neural networks can be used
to reduce the effect of redundant features in the dataset.
IV. MACHINE LEARNING MODELS
Churn prediction is a binary classification task, whereas
customer segmentation is a clustering task.
A. Churn Prediction
Popular classification algorithms such as logistic
regression, decision tree, random forest, multi-layer perceptron
can be used to predict the churn of the customer. In our
proposed system, a series of churn prediction models will be
fed the prepared data. The results of the classifiers will then be
compared to see which approach performed the best.
Logistic regression is a binary classification algorithm. It is
based on the sigmoid function whose range is from 0 to 1. It is
given as follows [5]:
The model takes the inputs and predicts the probability of
input belonging to class '0' in this case 'not churn'.
Multi-layer perceptron neural network is a feed forward
neural network which can be used to predict the churn. Neural
networks in general have a very good fault tolerance. They
can model complex relationships between independent
variables.
Fig. 2 Sigmoid Function
MLP consists of at least 3 layers of nodes called neurons -
input, hidden and output layer. These neurons symbolize the
neurons in human brain. The nodes in consecutive layers are
connected to each other Each neuron takes input from previous
layers. This is given as follows:
The neuron also has a bias associated with it. Output of
neuron is a weighted sum of the weight matrix and the input
vector and bias. This output is then given to an activation
function. Value of activation function is given to the neurons in
the next layer.
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Fig. 3 Multilayer Perceptron Neural Network
Activation functions are used to produce a non-linearity in
the output. Non-linear functions such as sigmoid (1), tanh,
ReLU are used as activation functions. For classification tasks,
sigmoid function is generally used as the activation function.
Random forest is an tree-based ensemble algorithm. Ouputs of
multiple decision trees are combined and output is given. The
Random Forest (RF) algorithm can be used for binary or
multiple classification tasks as well as regression tasks. Each
decision tree is formed by choosing a subset of the initial
features. This algorithm is used because of its stable nature
and accurate results. Random forest algorithm is less prone to
overfitting. Drawback of random forest is its poor
explainability.
B. Churn Segmentation
Customer segmentation is an unsupervised clustering task.
Popular algorithms used for clustering are K-means,
DBSCAN, fuzzy c-means. Here, feature selection techniques
will be used to reduce the dimensions of the dataset. The
reduced dataset will have high-value features which will help
the performance of the clustering algorithms. K-means is a
simple clustering algorithm which assigns each data point to
one of the k centroids which is nearest to the given point. This
algorithm assumes that every data point belongs to a single
cluster. The algorithm measures Euclidean distance from the
centroid and the data point. The process is repeated until the
sum of intra-cluster distances cannot be minimized further.
Fuzzy C-means applies a different approach to clustering. It
allows data points to be a member of more than one clusters.
Instead of measuring the distance from the centroid, it
measures the likelihood of the data point belonging to that
cluster. This gives much more information about the
data points.
V. EVALUATION AND VISUALIZATION OF THE RESULTS
For churn prediction, metrics such as precision, recall, F-
measure, AUC-ROC curve can be used. These metrics are
calculated from the confusion matrix of the models. These
metrics are explained in [1] and [7]. For evaluation of
clustering algorithms, the elbow method for optimal number of
clusters and silhouette coefficient can be used. After studying
the results, retaining strategies for each cluster can be
designed. Factor analysis of churn data can be used to find the
causes of churn.
VI. CONCLUSIONS
Considering the volatile nature of customers in the telco
market, the companies will be benefitted by proposing
retention strategies for the churning customers. Companies
can on update their services according to the retention
strategies. In this paper, a system for churn prediction and
customer segmentation has been proposed. The system will
help companies find out potentially churning customers and
strategies to retain them.
VII. FUTURE SCOPE
The proposed model can be used by customer relationship
managers (CRM) to predict potential churning customers and
to identify clusters in the customer base. The results of these
models can be used by marketers to implement retention
strategies for churning customers. Knowing which cluster
does the customer belong to will surely help in choosing
appropriate retention strategies. In the future, the researchers
can consider using other machine learning models which can
explain the factors of churn along with the churn probability.
Researchers can also work on the imbalance in the datasets
and improve the performance of existing models. Other
businesses can implement this system to make crucial
business decisions to help them grow. This system with some
domain-specific modifications can also help identify the
churning customers in other industries.
ACKNOWLEDGMENT
We would like to thank the Department of Computer
Engineering, Modern Education Society's College of
Engineering (Wadia Campus), Pune for all the support
provided for this research. We would like to show our gratitude
to Mrs. S. A. Sapkal for sharing their pearls of wisdom during
the research.
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