Personalized choice model for forecasting demand under pricing scenarios with observational data—The case of attended home delivery

Abstract

Discrete choice models can forecast market shares and individual choice probabilities with different price and alternative set scenarios. This work introduces a method to personalize choice models involving causal variables, such as price, using rich observational data. The model provides interpretable customer- and context-specific preferences, and price sensitivity, with an estimation procedure that uses orthogonalization. We caution against the naïve use of regularization to deal with the high-dimensional observational data challenge. We experiment with the attended home delivery (AHD) slot choice problem using data from a European online retailer. Our results indicate that while the popular non-personalized multinomial logit (MNL) model does very well at the aggregate (day–slot) level, personalization provides significantly and substantially more accurate predictions at the individual–context level. But the ”naïve” personalization approach using regularization without orthogonalization wrongly predicts that the choice probability will increase if the slot price increases, rendering it unfit for forecasting demand with pricing scenarios. The proposed method avoids this problem. Further, we introduce features based on potential consideration sets in the AHD slot choice context that increase accuracy and allow for more realistic substitution patterns than the proportional substitution implied by MNL.