Uplift modelling

Uplift modelling, also known as net response modelling or incremental response modelling is a new predictive modelling technique that directly models the incremental impact of targeting marketing activities.

Uplift modelling has applications in customer relationship management for up-sell, cross-sell and retention modelling.

Introduction

Uplift modelling uses a randomized scientific control to not only measure the effectiveness of a marketing action but also to build a predictive model that predicts the incremental response to the marketing action. It is a new data mining technique that has been applied predominantly in the financial services, telecommunications and retail direct marketing industries to up-sell, cross-sell, churn and retention activities.

Measuring uplift

The uplift of a marketing campaign is usually defined as the difference in response rate between a "treated" group and a randomized "control" group. This allows a marketing team to isolate the effect of a marketing action and measure the effectiveness or otherwise of that individual marketing action. Honest marketing teams will only take credit for the incremental effect of their campaign.

The table below shows the details of a campaign showing the number of responses and calculatedresponse rate for a hypothetical marketing campaign. This campaign would be defined as having an uplift of 5%. It has created 50,000 incremental responses (100,000 - 50,000).

Traditional response modelling

Traditional response modelling typically takes a group of "treated" customers and attempts to build a predictive model that separates the likely responders from the non-responders through the use of one of a number of predictive modelling techniques. Typically this would use decision trees or regression analysis.

This model would only use the treated customers to build the model.

Uplift modelling

In contrast uplift modelling uses both the treated and control customers to build a predictive modelthat focuses on the incremental response. To understand this type of model it is proposed that thereis a fundamental segmentation that separates customers into the following groups:

* "The Persuadables" : customers who only respond to the marketing action because they were targeted
* "The Sure Things" : customers who would have responded whether they were targeted or not
* "The Lost Causes" : customers who will not respond irrespective of whether they are targeted
* "The Do Not Disturbs" : customers who are less likely to respond because they targeted

The only segment that provides true incremental responses is the "persuadables".

Uplift modelling provides a scoring technique that can separate customers in to the groups described above.

Traditional response modelling often targets the Sure Things being unable to distinguish them Persuadables.

Return on investment

Because uplift modelling focuses on incremental responses only it provides very strong return on investment cases when applied to traditional demand generation and retention activities. For example by only targeting the persuadable customers in an outbound marketing campaign the contact costs and hence the return per unit spend can be dramatically improved.

Removal of negative effects

One of the most effective uses of uplift modelling is in the removal of negative effects from retention campaigns. Both in the telecommunications and financial services industries often retention campaigns can trigger customers to cancel a contract or policy. Uplift modelling allows these customers, the Do Not Disturbs, to be removed from the campaign.

History of uplift modelling

The first appearance of "true response modelling" appears to be by Radcliffe and Surry [N. J. Radcliffe & P. D. Surry. “Differential response analysis: Modeling true response by isolating the effect of a single action.” Proceedings of Credit Scoring and Credit Control VI. Credit Research Centre, University of Edinburgh Management School (1999)] .

Victor Lo also published on this topic [Lo, V. S. Y.. (2002). “The true lift model”. ACM SIGKDD Explorations Newsletter. Vol. 4 No. 2, 78–86. 1] and more recently Radcliffe again [Radcliffe, N. J. (2007). “Using Control Groups to Target on Predicted Lift: Building and Assessing Uplift Models”, Direct Marketing Analytics Journal, Direct Marketing Association.]

Radcliffe also provides a very useful frequently asked questions section on his web site [ [http://scientificmarketer.com/2007/09/uplift-modelling-faq.html The Scientific Marketer FAQ on Uplift Modelling] ]

Notes and references