Data Mining

Techniques for CRM

Paul J.C. Chang

Eneida Lau
Ximena Salazar
Lester Arellano
José-Pablo González
Edith Quispe
 Data Mining in CRM ...

“ ...through data mining – the extraction of hidden

predictive information from large databases –
organizations can identify valuable customers, predict
future behaviors, and enable firms to make proactive,
knowledge-driven decisions.”
 Agenda
 Introduction, Definition: Paul

 The Evolution & Apps. of Data Mining: Eneida

 Internal Considerations & Data mining techniques: Ximena

 Data mining and CRM – relationship & customer privacy: Lester

 Case Studies (Neural Networks, CHAID): JPG

 CHAID vs neural nets; Conclusions: Edith

 Introduction
 Product-oriented view VS. Customer-oriented view
 Design-build-sell VS. sell-build-redesign
 One-on-one marketing VS. mass marketing
 Goal of revolution: Establish a long term
relationship with each customer
 The advent of the Internet and technological tools
accelerate modern CRM revolution
 CRM is important for B2C or C2B, and even more
crucial in B2B environments
 Why Data Mining?
 Between businesses and customers…
 Collecting customer demographics and behavior data
makes precision targeting possible
 Helps to devise an effective promotion plan when
new products developed
 Creates and solidifies close customer relationships
Between businesses…
 Helps to smooth transactions, communications and
collaboration
 Simplifies and improves logistics and procurement
process
 What is Data Mining?
 “…a sophisticated data search capability that uses
statistical algorithms to discover patterns and correlations
in data.”
 “…another way to find meaning in data.”
 Data mining is part of a larger process called knowledge
discovery
 What Data Mining is ~NOT~
• Data mining software does not eliminate the
need to know the business, understand the
data, or be aware of general statistical
methods.
• DM does not find patterns or knowledge
without verification
• DM helps to generate hypotheses, but it does
not validate the hypotheses
 Evolutionary Stages of Data Mining

Data Data Data Data

Collection Access Navigation Mining

(1960’s) (1980’s) (1990’s) (2000’s)

•Retrospective, •Retrospective, •Retrospective, •Retrospective,
static data delivery dynamic data delivery dynamic data delivery Proactive information
at record level at multiple level delivery
•Summations or •Branch sales at •Global view or drill •Online analytic tools,
averages specific period of time down feedback and
information exchange
•Computers, tapes, •RDBMS, SQL, ODBC •OLAP,
disks multidimensional •Adv. Algorithms,
•Oracle, Sybase, databases, data multiprocessor,
Informix, IBM, warehouses computers, massive
•IBM, CDC Microsoft databases
•Pilot, IRI, Arbor,
Redbrick •Lockheed, IBM, SGI
Breakdown of Data Mining from a Process
Orientation
Data Mining

Discovery Predictive Forensic

Modeling Analysis

•Conditional
Logic •Outcome •Deviation
Prediction Detection
•Affinities and
Associations •Forecasting •Link Analysis

•Trends and
Variations
 Applications of Data Mining
Retail Banking Telecommunications

1. Performing 1. Card marketing 1. Call detail record

basket analysis analysis
2. Cardholder
2. Sales forecasting pricing and 2. Customer loyalty
3. Database profitability
marketing 3. Fraud detection
4. Merchandise 4. Predictive life-
planning and cycle
allocation management
 OTHER APPLICATIONS
Customer
Segmentation

Manufacturing
Discrete
segments by
adding variables Customize Warranties
Products.
Predict features Frequent flier
incentives
No. clients who
will ask for claims
Identify groups
who can receive
incentives
 INTERNAL CONSIDERATIONS
Data mining Decision-making process
Skillsets and technologies must be available to integrate them

• Sell to and service customers

Knowledge
• Manage inventory
gained
through DM • Supervise employees
• Work to correct and prevent loss
-An algorithm for scoring
-A score for particular customer,
employee
-An action associated with a customer,
employee or transaction
 DATA MINING TECHNIQUES
Nearest
Neighbor
Data Retained
Case-Based
Reasoning

DM
Numeric and
Approaches Logical
Non-numeric

Cross Non-numeric
Data distilled Tabulational Data

Numeric
They are applied to tasks of predictive modeling
Equational
Data
and forensic analysis
They extract patterns and then use for various purposes
 CUSTOMER RELATION MANAGEMENT
CRM: Development
of the offer
• Know
Definition • Target
• Sell
• Service 3 Which’s

1 - From product to customer orientation

- Market Strategy from outside-in
2 Stage
Concept
2 -Push the development of customer orientation
-Innovating value proposition
Components of CRM
Internal •Billing
Customer Records
Customer Data •Surveys
Information Customer
Outside
Data •Web logs,
•External
Credit Card
Source Data data sources
records
Data Current
Warehouse Historical Address, Web
Data page viewing
profiles.

Analyze the
Data Mining Techniques +
Data
Customer Oriented
Interactions between
Campaign
MKT, information,
Execution &
Tech and sales
Tracking
channels
 Data Mining & CRM
• The Relationship
– Customer Life
Cycle
• Prospects
• Respondents Inputs
• Active Customers What
• Former Customers information is
available
Data
Mining Output
What is likely
to be
interested
 Data Mining & CRM
• Inputs
– Prospects Data Warehouse in other industries
– Click Stream Information
• Market Data Intelligence
– DM can predict behavior of customer (CLC) and match it with
any market event (a,i. I pod nano)
• Data Mining and Customer Privacy
– Privacy Bill of Rights, Independent verification of security
policies.
– Create an anonymous architecture for handling customer info.
 Case Studies

Neural Networks vs. CHAID

 Case #1

Neural Networks
Neural Networks
• The exact way in which
the brain enables
thought is one of the
great mysteries of
science
Neurons
 NeoVistas Solutions’ Decision Series

• For retail, insurance, telecommunications, and

healthcare.
• Includes discovery tools based on neural networks,
clustering, genetic algorithms, and association rules
 The problem

• Large retailer
• Over $1 billion in sales
• Overstocked on slow-moving products
• Under-stocked on most popular items at
critical selling periods.
 Solution

• With Clustering and and NN:

– Review point-of-sale history and equate store
groupings to sales patterns.
– Forecast stocking requirements on a store-by-
store basis.
 Results

• Management is able to forecast seasonal

trends at the store-item level.
• The Decision Series tools showed that
clustering similar items into actionable groups
streamlined the ordering process.
• Revenues increased by 11.6%
Case #2

CHAID
 Applied Metrix

• Uses a combination of CHAID segmentation

and logistic regression response probability
modeling to establish predictive models that
are deployed over a proprietary Internet
system
 The problem

• Home equity marketer that extended home

equity lines of credit at the national level.
• The client’s goal was to increase the
efficiency of targeting current mortgage
customers who might be interested in the
client’s service.
 The Solution
• CHAID identified 16
distinct market
segments.
• In particular, one
particular segment
accounted for 65% of
responses to the
mailing.
 Results
• The highest-rated group from the predictive model
had by far the highest response rate to the equity
line of credit campaign—85% above average for the
direct mailing,
• The goal of the program was a 10% increase in
response rate, but the actual response rate
increased 30%.
• The firm was able to increase profits by over one
million dollars in the first year after implementation.
CHAID vs. Neural Networks
Clarity and explicability
- CHAID model is understandable as a set of rules
- Neural Network is obscure

Implementation/integration
- The CHAID model is much easier to be implemented
that a Neural Network.
- The risk of missing code by an IT department is slim
for a CHAID model and higher for a Neural Network.
Data Requirements
- The data for both techniques requires some pre-
processing.
- Neural Network require the data be transformed into
binary format.

Accuracy of model
- Neural Networks provide more accurate models,
especially for complex problems.
Construction of model
- CHAID is easier and quicker to construct.
- Neural Networks have many parameters that must
be set and require more skilled manipulation.

Cost
- Building a Neural Network is more costly then
building a CHAID model.
Aplications
- CHAID and Neural Networks can create predictive
models.

- Neural Networks can handle both categorical and

continuous independent variables, but these have to
be transformed to 0/1 input variables.

- When all or most of the independent variables are

continuous, neural networks should perform better
than CHAID.
Aplications
- The Neural Networks and CHAID can be used to
solve sequence prediction problems.

- Neural Networks can be used to solve estimation

problems.

- CHAID provides good solutions to classification

problems, can be used for exploratory analysis and
can provide descriptive rules.

- An interesting development is the combination of

these two techniques to create “neural trees”.
 CONCLUSIONS
- The choice among different options
is not as the choice to use data
mining technologies in a CRM
initiative.

- Data Mining represents the link

from the data stored over many
years through various interactions
with customers in diverse
situations, and the knowledge
necessary to be successful in
relationship marketing concepts.
 CONCLUSIONS
- Through the full implementation of a CRM program,
which must include data mining, organizations foster
improved loyalty, increase the value of their
customers, and attract the right customers.

- As customers and businesses interact more

frequently, businesses will have to leverage on CRM
and related technologies to capture and analyze
massive amounts of customer information.
 CONCLUSIONS
- CRM solutions focus
primarily on analyzing
consumer information for
economic benefits, and
very little touches on
ensuring privacy.