Modelling Customer Relationships as Hidden Markov Chains

Edesiri Bridget Nkemnole,Ekene Nwaokoro

doi:10.22178/pos.64-9

Abstract

Models in behavioural relationship marketing suggest that relations between the customer and the company change over time as a result of the continuous encounter. Some theoretical models have been put forward concerning relationship marketing, both from the standpoints of consumer behaviour and empirical modelling. In addition to these, this study proposes the hidden Markov model (HMM) as a potential tool for assessing customer relationships. Specifically, the HMM is submitted via the framework of a Markov chain model to classify customers relationship dynamics of a telecommunication service company by using an experimental data set. We develop and estimate an HMM to relate the unobservable relationship states to the observed buying behaviour of the customers giving an appropriate classification of the customers into the relationship states. By merely accounting for the functional and unobserved heterogeneity with a two-state hidden Markov model and taking estimation into account via an optimal estimation method, the empirical results not only demonstrate the value of the proposed model in assessing the dynamics of a customer relationship over time but also gives the optimal marketing-mixed strategies in different customer state.

Highlights

In interactive marketing, the lifetime value of a customer is very vital and useful, especially given the fact that we are in the age of relationship marketing [27]
In an interest in finding patterns in customer relationships and discovering hidden relationship states, this study focuses on the use of the hidden Markov model (HMM) to capture the correct dynamic buying behaviour of customers to services provided by a telecommunication company in Nigeria, proceeding to find their relationship state over some time
This study is based on modelling customer relationships as hidden Markov chains

Summary

Introduction

The lifetime value of a customer is very vital and useful, especially given the fact that we are in the age of relationship marketing [27]. Customer relationship management (CRM) is a set of process and enabling systems supporting a business strategy to build long term, profitable relationship with the customers [23]. For [6] CRM is a customer-focused business strategy that creates and adds value to the company and its customers. Author [19] avers that its use helps firms to achieve a strategic competitive advantage. It had developed as an approach based on maintaining positive relationships with customers, increasing customer loyalty and expanding customer lifetime value [2]

Methods

Results

Conclusion