04a. Business Analytics For Decision Support Part II

Business Analytics
for Decision Support Part II

Dr. Panagiotis Sarantopoulos
p.sarantopoulos@aueb.gr
Agenda
• Modelling Multinomial Choices
• Tablet Case
• Choice-based Conjoint Analysis
• Managing Customers as Investments

• Telco Case
• Customer Lifetime Value (CLV)
2
Modelling Multinomial Choices
Prize motivation:
“Development of theory
and methods for analyzing
https://en.wikipedia.org/wiki/Daniel_McFadden
discrete choice”
Consumer Choice Behaviour
• Consumers decide on:
• Whether to buy (purchase incidence) Binomial or binary choices (dichotomous):
• Whether to buy again (loyalty/churn) 2 available alternatives (previous lecture)
• What to buy (brand consideration and choice) Multinomial choices (polytomous):

3 or more available alternatives
• Where to buy (channel choice) (this lecture)
• Marketers learn about consumers through:

• What they do (revealed choice)
• What they say (stated choice)
5
Example: Product Design Choice-Based-Conjoint (CBC)
Brand
Walking distance to
Location 10-minute ride to destination 30-minute ride to destination
destination
Restaurant within walking Restaurant Restaurant in None – I

Restaurant
distance within 5-minute car ride hotel would not
choose
Partner gym any of
Gym No gym On-site gym
within 5 minutes these.
Wireless Internet connection Wireless “hot spots” in the
Wireless No wireless access
throughout the hotel hotel, but not in the room
Earn Standard Rewards

Rewards Earn Double Rewards Points Earn Triple Rewards Points
Points
Price 200 euros 225 euros 150 euros
Choice one A B C D 6
Example: Scanner-Panel Data Nielsen Homescan
By scanning the items you

purchase (from cereal at
the store to a candy bar in a
snack machine) retailers
see where you shop, what
you buy, …
7
Sample Scanner-Panel Data
Customer Regular
Date Store ID Brand Quantity Discount Display Feature
ID Price
1001 01/03/2024 2345 Tide 1.5 L 3.55 0.43 No No
1001 29/02/2024 5678 Tide 2.0 L 3.99 0.54 Yes Yes
1001 25/04/2024 2345 Tide 1.5 L 3.55 0.45 No No
1001 28/05/2024 5678 Persil 1.5 L 2.99 0.50 Yes No
1001 27/06/2024 2345 Tide 1.5 L 3.60 0.45 No No
1001 22/07/2024 5678 Tide 1.5 L 3.60 0.20 No No
1001 29/08/2024 2345 Persil 2.0 L 3.15 0.60 Yes Yes
1001 24/09/2024 5678 Tide 1.5 L 3.65 0.42 No No
1001 28/10/2024 2345 Persil 1.5 L 4.99 1.00 Yes Yes
1001 25/11/2024 5678 Tide 1.5 L 3.99 0.50 No No
8
Choice-Based Conjoint Study on Tablets
• When choosing a tablet:
• How do consumers trade-off between the tablet attributes/features?
• How much are consumers willing to pay for:

• One brand relative to another?
• A product feature (7hrs vs. 9hrs battery)?
• Can we predict the market share for a new tablet?
9
Tablet Conjoint Study Design
Attribute Levels
Brand iPad, Galaxy, Kindle, Surface, Nexus
Screen size (inch) 7, 8, 9, 10
Hard drive (GB) 16, 32, 76, 128
RAM size (GB) 1, 2, 4
Battery life (hours) 7, 8, 9
Price ($) 169, 199, 299, 399, 499
A tablet can be described by picking one level from each attribute:

5 x 4 x 4 x 3 x 3 x 5 = 3,600 combinations!
10
Example Conjoint Choice Task
Which tablet would you choose?
Each consumer
Brand was presented
15 choice tasks
Screen size 9 inch 10 inch 9 inch
Hard drive 64 GB 128 GB 32 GB
RAM size 4 GB 4 GB 2 GB
Battery life 8h 7h 9h
Price $399 $399 $199
Alternative 1 2 3 11
Excerpt from the Conjoint Data
There are 137 consumers in the dataset
ConsumerId ChoiceSetId AlternativeIdInSet Choice Brand Size Storage Ram Battery Price
1 1 1 1 iPad sz7inch st32gb r4gb b7h p499
1 1 2 0 Surface sz10inch st64gb r2gb b9h p399
1 1 3 0 Kindle sz9inch st16gb r2gb b8h p499
1 2 3 0 Nexus sz7inch st64gb r1gb b9h p199
12
Excerpt from the Conjoint Data
There are 137 consumers in the dataset
1 1 3 0 Kindle sz9inch st16gb r2gb b8h p499
1 2 3 0 Nexus sz7inch st64gb r1gb b9h p199
13
Utility
• The multinomial logit model assumes the consumer has a utility
for each Tablet
• Utility is a function of product attributes

• It is a measure of tablet attractiveness
• Faced with a choice set, the consumer selects the tablet that
has the maximum utility
14
Sub-Utility
• For example, each brand is worth
• Galaxy: βGal
• iPad: βiPad
• Kindle: βKind
• Surface: βSurf
• Nexus: 0 (reference value)
• The betas (β) are parameters to be estimated from the data
15
Consumer Utility for a Tablet
Vj = βGalGalj + βiPadiPadj + βKindKindj + βSurfSurfj ß Brand value
+ β10”10inchj + β9”9inchj + β8”8inchj ß Screen size value
+ β128gbhd128j + β32gbhd32j + β64gbhd64j ß Hard drive value
+ βram4ram2gbj + βram2ram4gbj ß RAM value
+ βbatt9hbatt8hrsj + βbatt8hbatt9hrsj ß Battery life value
+ βpricePricej ß Price value
Except Price, all the variables are binary (0/1) variables to

indicate the attribute levels of tablet j 16
Utility of Tablet 1 in Choice Task Example
Brand βiPad
V1 = βiPad + β9” + β64gb

Screen
9 inch β9”
size + βram4 + βbatt8 + βprice$399
Hard
64 GB β64gb
drive
RAM
4 GB βram4
size
Battery
8h βbatt8
life
Price $399 βprice$399
17
Brand βSurf
V2 = βSurf + β10” + β128gb

Screen
10 inch β10”
Hard
128 GB β128gb
drive
RAM
4 GB βram4
size
Battery
7h βbatt7
life
18
Brand 0
V3 = 0 + β9” + β32gb
Screen
9 inch β9”
Hard
32 GB β32gb
drive
RAM
2 GB βram2
size
Battery
9h βbatt9
life
19
Choice Probabilities
exp(𝑉! )
𝑝1 =
exp 𝑉! + exp 𝑉" + exp(𝑉# )
exp(𝑉" )
𝑝2 =
exp 𝑉! + exp 𝑉" + exp(𝑉# )
exp(𝑉# )
𝑝3 =
exp 𝑉 + exp 𝑉" + exp(𝑉)
0 < 𝑝𝑗 ≤ 1, ∀ 𝑗
𝑝1 + 𝑝2 + 𝑝3 = 1
20
Results and Interpretation
Estimation Results
Estimate Std. Error z-value Pr(>|z|)
BrandGalaxy 0.3378857 0.0925056 3.6525962 0.0002596
BrandiPad 0.9780287 0.0937336 10.4341362 0.0000000
BrandKindle 0.2630105 0.0996254 2.6399948 0.0082907
BrandSurface 0.1450365 0.0938521 1.5453733 0.1222560
Sizesz10inch 0.3240632 0.0841953 3.8489489 0.0001186
Sizesz8inch 0.1890775 0.0829232 2.2801508 0.0225987
Sizesz9inch 0.4355415 0.0808408 5.3876444 0.0000001
Storagest128gb 0.5897703 0.0870533 6.7748219 0.0000000
Storagest32gb 0.2168719 0.0829213 2.6153951 0.0089124
Storagest64gb 0.5782183 0.0808259 7.1538766 0.0000000
Ramr2gb 0.3189348 0.0672579 4.7419705 0.0000021
Ramr4gb 0.6357438 0.0645225 9.8530525 0.0000000
Batteryb8h 0.1299599 0.0651501 1.9947771 0.0460672
Batteryb9h 0.1253824 0.0650588 1.9272156 0.0539528
Price -0.0050888 0.0002752 -18.4886259 0.0000000
22
Estimation Results
Estimate Std. Error z-value Pr(>|z|)
BrandGalaxy 0.3378857 0.0925056 3.6525962 0.0002596
BrandiPad 0.9780287 0.0937336 10.4341362 0.0000000
BrandKindle 0.2630105 0.0996254 2.6399948 0.0082907
BrandSurface 0.1450365 0.0938521 1.5453733 0.1222560
Sizesz10inch 0.3240632 0.0841953 3.8489489 0.0001186
Sizesz8inch 0.1890775 0.0829232 2.2801508 0.0225987
Sizesz9inch 0.4355415 0.0808408 5.3876444 0.0000001
Storagest128gb 0.5897703 0.0870533 6.7748219 0.0000000
Storagest32gb 0.2168719 0.0829213 2.6153951 0.0089124
Storagest64gb 0.5782183 0.0808259 7.1538766 0.0000000
Ramr2gb 0.3189348 0.0672579 4.7419705 0.0000021
Ramr4gb 0.6357438 0.0645225 9.8530525 0.0000000
Batteryb8h 0.1299599 0.0651501 1.9947771 0.0460672
Batteryb9h 0.1253824 0.0650588 1.9272156 0.0539528
Price -0.0050888 0.0002752 -18.4886259 0.0000000
23
Tablet Conjoint Sub-Utilities
Attributes Levels Utilities
Brand iPad 0.9780287
Galaxy 0.3378857 Reference levels are
Kindle 0.2630105
Surface 0.1450365 marked in grey
Nexus 0
Screen 9inch 0.4355415
Size 10inch 0.3240632
8inch 0.1890775
7 inch 0
Hard 128gb 0.5897703
drive 64gb 0.5782183
32gb 0.2168719
16gb 0
RAM 4gb 0.6357438
2gb 0.3189348
1gb 0
Battery 8h 0.1299599
9h 0.1253824
7h 0
24
Price -0.0050888
Relative Importance of Attributes
Brand iPad 0.9780287
Galaxy 0.3378857
Kindle 0.2630105
Surface 0.1450365 Range of attribute
Screen
Nexus
9inch 0.4355415
0
= Maximum Partworth–
Size 10inch 0.3240632 Minimum Partworth
8inch 0.1890775
7 inch 0
Hard 128gb 0.5897703
drive 64gb 0.5782183
32gb 0.2168719 Relative Importance
16gb 0
RAM 4gb 0.6357438 = Range /(Sum of Ranges
2gb
1gb
0.3189348
0
across all attributes)
9h 0.1253824
7h 0
25
Price -0.0050888
Calculating Attribute Importances
Brand iPad 0.9780287 Range of attribute
Galaxy 0.3378857 = Maximum Partworth–Minimum
Kindle 0.2630105 Partworth
Surface 0.1450365
Nexus 0 Relative Importance
Screen 9inch 0.4355415 = Range /(Sum of Ranges across all
Size 10inch 0.3240632 attributes)
8inch 0.1890775
7 inch 0
Hard 128gb 0.5897703
Attributes Range Importance
drive 64gb 0.5782183
Brand 0.98 0.35
32gb 0.2168719
Screen Size 0.44 0.16
16gb 0
Hard drive 0.59 0.22
RAM 4gb 0.6357438
RAM 0.64 0.23
2gb 0.3189348
Battery 0.13 0.05
1gb 0
9h 0.1253824
7h 0
26
Price -0.0050888
Attribute Importance Weights
27
Model Fit
• Estimate a “null” or “constrained” model (Brand-only effects)
• Likelihood-ratio test assesses the goodness of fit of two competing
statistical models (the Brand-only and the Brand + Attributes)
28
Hit Rate: Choice Prediction Accuracy
Predicted Total number of observations is:

Selected 1 2 3 2,055 (= 15 tasks × 137 consumers)
1 362 164 136
2 158 449 160
Accuracy = (362 + 449 + 347) / 2055 =
3 130 149 347
56.4% vs. 33.3% (random prediction)
29
Predicted Market Share
Suppose these are the three tablets in the market:
1 1 1 V1 1 iPad sz7inch st32gb r4gb b7h p499
1 1 2 V2 0 Surface sz10inch st64gb r2gb b9h p399
1 1 3 V3 0 Kindle sz9inch st16gb r2gb b8h p499
Alternative 1 Alternative 2 Alternative 3

Predicted share 0.3717263 0.4405521 0.1877216
30
Conjoint Simulator
What is the impact of a 2GB RAM upgrade on Galaxy market share?
Hypothetical market scenario
Suppose Galaxy improves its RAM by 2 GB
31
Utility Exchange Rate
• The price coefficient indicates that a $1 increase in price leads
to a utility decrease by 0.005088 “utiles”
• Thus each “utile” is worth $196.54 (= $1 / 0.005088)
32
Brand Value of iPad Relative to Galaxy
An average consumer would be indifferent

• 𝛽iPad − 𝛽Galaxy ≈ 0.6401
between getting a Galaxy tablet vs. paying
$125.80 more and getting an iPad.
• iPad Value= 0.6401 × $196.54 = $125.80
Similar techniques are often used in

litigation, e.g., Samsung vs. Apple.
33
Willingness to Pay for an Attribute Upgrade
• 𝛽Ramr4gb ≈ 0.6357
• 𝛽Ramr1gb = 0
• 4GB Ram Value = 0.6357 × $196.54 = $124.94
An average consumer would be willing to

pay up to $124.94 to upgrade from 1gb to
4gb RAM, holding all other attributes fixed.
34
Key Takeaways
• Conjoint is the most popular marketing analytics tool in the
industry
• Conjoint is of different types

• Ratings based –Easy to perform, but does not mimic actual choice
conditions
• Choice Based Conjoint:
• Most used in the industry
• Can incorporate no choice alternatives to better capture demand
35
Managing
Customers as Investments
“Success is getting the
right customers… and
keeping them”
https://www.nytimes.com/2015/11/25/business/
charles-m-cawley-founder-of-mbna-corp-dies-
at-75.html
37
Customer and Firm Value
Firm Value
Domain of Finance
Profits Linking Customer and

Cash Flow Firm Value
Value of a
Customer
Domain of Marketing
Customer Customer Customer

Acquisition Retention Expansion
38
What is Customer Lifetime Value (CLV)
• Customer Lifetime Value is the net present value of all future
streams of profits that a customer generates over the life of the
relationship with the firm
39
Measuring CLV
!$#$ ×('.$$) $#' ×($.+$) $,- ×($..,)

𝐶𝐿𝑉 = + + +⋯
('*$.')! ('*$.')" ('*$.')#
40
Measuring CLV
• Constant annual margin (𝑚)
• Constant annual retention rate (𝑟)
• Discount rate (𝑖)
• Acquisition cost (𝐴𝐶)
𝑚×𝑟 𝑚 × 𝑟/
𝐶𝐿𝑉 = −𝐴𝐶 + + /
+⋯⇒
1+𝑖 1+𝑖
𝑟
𝐶𝐿𝑉 = 𝑚 − 𝐴𝐶
1+𝑖−𝑟
41
Margin Multiple (Constant Margins)
• CLV = Profit Margin × Margin Multiple
𝑟
• Margin Multiple
1+𝑖−𝑟
Margin Multiple
Retention Discount Rate (𝑖)
Rate (𝑟) 10% 12% 14% 16%
60% 1.20 1.15 1.11 1.07
70% 1.75 1.67 1.59 1.52
80% 2.67 2.50 2.35 2.20
90% 4.50 4.09 3.75 3.46
42
Increasing CLV Strategies
• Customer acquisition
• Customer expansion
• Customer retention
𝑟
𝐶𝐿𝑉 = 𝑚 − 𝐴𝐶
1+𝑖−𝑟
43
Customer Acquisition Example
• 140 customer-accounts of a company use 2,285 units
per month
• Price is $12.50 and variable cost is $4.25
• Retention rate = 0.90, discount rate = 12%

• What is the maximum the company should be willing to spend to
acquire a new account?
• What is the maximum that company should be willing to spend to

increase retention rate to 0.95?
44
Customer Acquisition Example
• Annual margin 𝑚 per customer:
• m = (2,285 × 12/140) × (12.50 – 4.25) = $1,616
• CLV formula:
• margin multiple = 0.9/ (1 + 0.12 – 0.9) = 4.09
• CLV = m × margin multiple = $1,616 × 4.09 = $6,609
• Maximum company should spend to increase 𝑟:

• new margin multiple = 0.95/ (1 + 0.12 – 0.95) = 5.59
• new CLV = m × new margin multiple = $1,616 × 5.59 = $9,630
• Maximum company should spend is $9,630 – $6,609 = $3,021
45
Customer Acquisition Strategies
• Advertising/ Communications
• Affiliations
• Amazon
• EBay partner network
• Acquisitions
• In the last 30+ years, the FAMGA tech giants — Facebook, Amazon,
Microsoft, Google, and Apple — have collectively made over
800 acquisitions
46
https://www.cbinsights.com/research/tech-giants-billion-dollar-acquisitions-infographic/
Customer Acquisition Costs
• Decrease cost per acquisition (Example)
Cost per New Cost per

Activity
Customer Solicitation
Personal selling $500 $100.00
Direct mail $115 $1.50
Telemarketing $85 $3.30
Website/ email $30 $0.06
48
Customer Acquisition Strategies
• Scale up volume
• Spend more on existing channels
• Develop new acquisition channels
• Improve performance
• Decrease cost per acquisition
• Shift mix towards high-value customers
49
Managing Customer Expansion
• Increase usage
• Upsell (switch customers to higher priced product or service)
• Bundling/ cross-selling
• Reduce cost
50
Impact of Bundling on Churn
Average Monthly Customer Churn
2.8%
2.3% 2.3%
1.85%
1.25%
TV only TV & Broadband Broadband & Mobile Broadband & TV Broadband & TV
& Mobile
51
Customer Recommendation Systems
• Recommender systems are popular in ecommerce
and digital content settings
• Useful in context involving a large number of users

facing a large number of products
• Users unaware or uncertain about products
• Considerable heterogeneity in user preferences for

attributes
52
Predicting the User Ratings
• Think about the Netflix streaming service, when predicting user
ratings, what data could be useful?
• There are two types of data we could use:

• For every movie in Netflix's database, we have a ranking from all users
who have ranked that movie
• Facts about the movie itself (actors, director, genre classifications,

release year)
53
Using Other Users’ Rankings
• Example:
• Users: Amy, Bob, Carl, Dan
• Movies: Men in Black, Apollo 13, Top Gun, Terminator
• Ratings: 1 (lowest) to 5 (highest) scale; blank entries: not rates
Men in Black Apollo 13 Top Gun Terminator

Amy 5 4 5 3
Bob 3 2 5
Carl 5 4 2
Dan 4 2
54
Using Other Users’ Rankings
• Suggesting to Carl that he watches Men in Black
• Amy rated it highly
• Carl and Amy seem to have similar preferences
• This technique is called Collaborative Filtering

• Not using any information about the movie itself
• Only the similarity between users
55
Using Movie Information
• Amy liked Men In Black • Recommending to Amy
(gave it a rating of five)
• Directed by Barry Sonnenfeld • Barry Sonnenfeld’s movie
Get Shorty
• Classified in the genres of
Action, Adventure, Sci-Fi and • Jurassic Park (Action,
Comedy Adventure, Sci-Fi)
• Stars actor Will Smith • Will Smith’s movie Hitch
• This technique is called Content Filtering

• Not using any ratings of other users
• Only information about the movies
56
Strengths and Weaknesses
• Collaborative Filtering
• Can accurately suggest complex items without understanding the
nature of the items
• Requires a lot of data about the user to make accurate
recommendations
• With millions of items, it needs a lot of computing power to compute the
user similarities
• Content Filtering
• Requires very little data to get started
• Can be limited in scope
• You're recommending similar things to what the user has already liked
• Recommendations are often not surprising or particularly insightful
57
Hybrid Recommendation Systems
• Use both Collaborative and Content Filtering
• Use a collaborative filtering to determine that Amy and Carl have

similar preferences
• Then do content filtering, where we would find that Terminator, which

both Amy and Carl liked, is classified in almost the same set of genres
as Starship Troopers
• Recommend Starship Troopers to both Amy and Carl, even though

neither of them have seen it before
58
Recommendation Systems
Most top digital business provide recommendations to their users
• Social networking sites • Retailers
• Facebook/ Instagram • Amazon
• LinkedIn • eBay
• Tiktok • AliExpress
• Streaming platforns
• Spotify
• Netflix
• YouTube
59
Customer Churn: Leaky Bucket
• Telecommunication companies suffer from considerable
customer churn
• Average monthly churn rates: Approximately 1% to 2.5%
60
Causes of Churn
• Company
• Structural (poor ongoing customer experience)
• Event-based (a specific incident causes serious customer
dissatisfaction)
• Competition
• Promotion (switching)
• Product/Service (superior value proposition)
• Customer
• Customer’s needs change
• Location
61
Impact of Retention on Market Share
Case-1 Case-2 Case-3

time 2 time 2 time 2
A B A B A B
A 0.8 0.2 A 0.9 0.1 A 0.95 0.05

B 0.2 0.8 B 0.2 0.8 B 0.2 0.8
62

retention time 2 time 2 time 2
rates A B A B A B
A 0.8 0.2 A 0.9 0.1 A 0.95 0.05

B 0.2 0.8 B 0.2 0.8 B 0.2 0.8
63

defection
rates
rates A B A B A B
A 0.8 0.2 A 0.9 0.1 A 0.95 0.05

B 0.2 0.8 B 0.2 0.8 B 0.2 0.8
64

defection
rates
rates A B A B A B
A 0.8 0.2 A 0.9 0.1 A 0.95 0.05

B 0.2 0.8 B 0.2 0.8 B 0.2 0.8
Long-run market share of A in the three cases:

50% 67% 80% 65
Impact of Retention in the Long-Run
66
Impact of Retention on Firm Value
67
What Drives Retention and Loyalty?
CUSTOMER RETENTION & LOYALTY
Loyalty
Experience Cross-selling
Programs …
68
Key Takeaways
• Customers are assets
𝑟
• Lifetime value of a customer is 𝐶𝐿𝑉 = 𝑚 − 𝐴𝐶
1+𝑖−𝑟
• Three key levers of growth
• Customer acquisition (𝐴𝐶)
• Customer expansion (𝑚)
• Customer retention (𝑟)
• “Success is getting the right customers… and keeping them”
69
Workbook
Workbook Question 4 of 4 (5% of course marks)
• Question(s):
• Reflect on how might your organization, or an organization of your
choice, adapt its current practices to better leverage the concept of
customer lifetime value? Provide examples on strategies that your
organization can implement to optimize customer acquisition (AC),
expansion (m), and retention (r) efforts (one example for each) to
maximize Customer Lifetime Value (CLV).
• Instruction(s):
• Length 200 words (± 20%, i.e., no less than 160, no more than 240!)
• Use MS Word
• Upload the file with your response on the course page on eclass (BA Workbook
Question 4 of 4)
• Upload by Wednesday 8 May, 21:00
71

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Business Analytics

for Decision Support Part II

• Managing Customers as Investments

• What to buy (brand consideration and choice) Multinomial choices (polytomous):

• Marketers learn about consumers through:

Restaurant within walking Restaurant Restaurant in None – I

Earn Standard Rewards

Price 200 euros 225 euros 150 euros

By scanning the items you

• How much are consumers willing to pay for:

• Can we predict the market share for a new tablet?

A tablet can be described by picking one level from each attribute:

Hard drive 64 GB 128 GB 32 GB

Price $399 $399 $199

• Utility is a function of product attributes

• The betas (β) are parameters to be estimated from the data

+ β128gbhd128j + β32gbhd32j + β64gbhd64j ß Hard drive value

+ βram4ram2gbj + βram2ram4gbj ß RAM value

+ βbatt9hbatt8hrsj + βbatt8hbatt9hrsj ß Battery life value

+ βpricePricej ß Price value

Except Price, all the variables are binary (0/1) variables to

V1 = βiPad + β9” + β64gb

V2 = βSurf + β10” + β128gb

Predicted Total number of observations is:

Suppose these are the three tablets in the market:

Alternative 1 Alternative 2 Alternative 3

Suppose Galaxy improves its RAM by 2 GB

• Thus each “utile” is worth $196.54 (= $1 / 0.005088)

An average consumer would be indifferent

• iPad Value= 0.6401 × $196.54 = $125.80

Similar techniques are often used in

• 4GB Ram Value = 0.6357 × $196.54 = $124.94

An average consumer would be willing to

• Conjoint is of different types

Profits Linking Customer and

Customer Customer Customer

!$#$ ×('.$$) $#' ×($.+$) $,- ×($..,)

• Price is $12.50 and variable cost is $4.25

• Retention rate = 0.90, discount rate = 12%

• What is the maximum that company should be willing to spend to

• Maximum company should spend to increase 𝑟:

Cost per New Cost per

• Useful in context involving a large number of users

• Users unaware or uncertain about products

• Considerable heterogeneity in user preferences for

• There are two types of data we could use:

• Facts about the movie itself (actors, director, genre classifications,

Men in Black Apollo 13 Top Gun Terminator

• This technique is called Collaborative Filtering

• This technique is called Content Filtering

• Use a collaborative filtering to determine that Amy and Carl have

• Then do content filtering, where we would find that Terminator, which

• Recommend Starship Troopers to both Amy and Carl, even though

• Average monthly churn rates: Approximately 1% to 2.5%

Case-1 Case-2 Case-3

A 0.8 0.2 A 0.9 0.1 A 0.95 0.05

Case-1 Case-2 Case-3

A 0.8 0.2 A 0.9 0.1 A 0.95 0.05

Case-1 Case-2 Case-3

A 0.8 0.2 A 0.9 0.1 A 0.95 0.05

Case-1 Case-2 Case-3

A 0.8 0.2 A 0.9 0.1 A 0.95 0.05

Long-run market share of A in the three cases: