Beruflich Dokumente
Kultur Dokumente
Department of Information Engineering, Kun Shan University, 949 Dawan Rd., Yongkang Dist., Tainan City, Taiwan
Department of Business Administration, Chaoyang University of Technology, 168, Jifeng E. Rd., Wufeng District, Taichung, 41349, Taiwan
c
Department of Information Management, Tamkang University, 151 Yngzhuan Rd., Tamsui Dist., New Taipei City, Taiwan
b
KEYWORDS
Customer lifetime value;
Auto repair and
maintenance industry;
Data mining;
Markov chain;
Decision tree;
Neural networks.
Abstract The present study attempts to establish a framework for computing customer lifetime values
for a company in the auto repair and maintenance industry. The customer lifetime value defined in
this study consists of the current and future values of a customer, which involve an estimation of
lifetime length, future purchasing behavior and the profit associated with each behavior of the customer.
The proposed framework contains three groups of techniques to obtain these estimates from historical
customer transactions. The first group includes a logistic regression model and a decision tree model to
estimate the churn probability of a customer and to, further, predict the lifetime length of the customer.
The second group comprises a regression analysis to identify the critical variables that affect a customers
purchasing behavior, and a Markov chain to model the transition probabilities of behavior change. Finally,
the third group contains two neural networks to predict the profits contributed by a customer under
various purchasing behaviors. The proposed framework is demonstrated with the historical customer
transactions of an auto repair and maintenance company in Taiwan.
2012 Sharif University of Technology. Production and hosting by Elsevier B.V.
Open access under CC BY license.
1. Introduction
The automobile industry in Taiwan used to be protected under a high tariff imposed on imported cars by the government,
before 2002. After joining the World Trade Organization (WTO)
in year 2002, and opening the market to foreign automobiles,
Taiwans auto industry has encountered the impact of declining sales. In 2005, 445,000 vehicles produced by local makers
were sold, but the number dropped to 234,000 in 2009 [1]. Together with economic decline and high fuel prices during past
years, the entire auto industry of Taiwan is pessimistic about
the future sales of new cars.
In Taiwan, car dealers also operate auto repair and maintenance factories (referred to as the original brand maintenance
factory), providing major services to cars of their own brand.
As the demand of new cars is weak, repair and maintenance
services have become the major source of profit for car dealers. However, these factories still need to face competition from
more than 8600 garages that provide the same services with
lower prices. In general, when a car is within its warranty period, the owner will return to the dealers factory for maintenance, but when the warranty is expired, 42% of the owners
would choose different garages [2]. Such high customer defection has a great impact on the profitability of companies in this
industry. On the other hand, a study by Reichheld and Sasser [3]
pointed out that, in the auto service industry, reducing customer defection by 5% would boost profits by 30%. Thus, it is
important for an auto repair and maintenance company to take
action to retain customers.
1026-3098 2012 Sharif University of Technology. Production and hosting by Elsevier B.V. Open access under CC BY license.
doi:10.1016/j.scient.2011.11.045
850
C.-J. Cheng et al. / Scientia Iranica, Transactions E: Industrial Engineering 19 (2012) 849855
(t )
t =0
(1 + r )t
(1)
(2)
t =m
k (t )
(1 + r (d)),
(3)
d=t
C.-J. Cheng et al. / Scientia Iranica, Transactions E: Industrial Engineering 19 (2012) 849855
nk
Ik P t k (t ),
(4)
t =1
where:
nk : the expected length of service periods of the kth customer,
i.e. lifetime length;
Ik : the initial state vector of the kth customer, and the elements
in the vector represent whether a state occurs or not:
T
s1
s2
Ik =
.. ,
.
sL
in which sj , j = 1, . . . , L, and sj {0, 1} and
j=1 sj = 1,
meaning that only one state can occur at a time; sj = 1 means
that state j occurs, and 0 otherwise.
P: the state transition probability matrix, and:
..
pL1
..
pL2
...
..
pLL
851
k,1 (t )
(
t
)
k,2
k (t ) =
.. ,
.
k,L (t )
in which k,j (t ) denotes the profit contributed by the kth
852
C.-J. Cheng et al. / Scientia Iranica, Transactions E: Industrial Engineering 19 (2012) 849855
Table 1: Original data tables in databases.
Panel A: (Customer
database)
Customer data table
Customer code
Customer name
Gender
Contact address
Permanent address
Zip code
Home phone
Company phone
VAT number
Panel B: (Transaction
database)
Purchase record table
Panel C: (Transaction
database)
Repair and
maintenance record
table
Customer code
Car model
Price
Year of production
Customer code
Customer name
License tag number
Car model
Year of production
Engine displacement
Date of visit
Parts
Labor hours
Amount
the companys service every year over the past three years.
The training examples compiled from the database are used
to construct the churn/not-churn customer classification model
by logistic regression or decision tree, and the churn probability
of a customer is estimated from the output of the model by
feeding this customers attribute values into the model.
The expected lifetime of a customer is then computed,
based on the estimated churn probability. Let pck denote the
probability that the kth customer will leave the company, i.e. a
churn probability or churn rate. Furthermore, let y be the length
of time before a customer churn, then, y follows a geometric
distribution [6]. That is:
Prob{y = n} = pck (1 pck )n1 .
(5)
(6)
(7)
C.-J. Cheng et al. / Scientia Iranica, Transactions E: Industrial Engineering 19 (2012) 849855
i
,
x!
i x
i =
v=0
qv,i,t +1 v
v=0
(9)
qv,i,t +1
0.279
0.270
0.175
0.132
0.220
0.068
(8)
Variable
i = 0, . . . , 4,
0.333
0.252
0.127
P =
0.148
0.087
0.283
0.270
0.172
0.213
0.260
0.211
0.032
0.110
0.189
0.217
0.127
.
0.229
0.452
The element (0.144) in the first row and column in the above
P matrix is the probability of the transition from state 0 to
state 0, which is obtained by calculating f (0) in Eq. (8) with
0 = 1.938696 from Table 3, while the element (0.279) in
the first row and second column, denoting the probability of
moving from state 0 to state 1, is obtained by calculating f (1)
with 0, and is the probability that the customer will visit the
company one time in the coming year, given that he did not visit
the company in the previous year. The remaining elements are
obtained in the same manner.
853
Constant (a)
Gender (g)
Frequency (f )
Engine
displacement ( )
Age of car (y)
Standard
error
t-value
p-value
2117.935
167.467
252.191
0.775
650.118
397.538
51.201
0.197
3.258
0.421
4.925
3.933
0.001
0.674
0.000
0.000
384.502
37.069
10.373
0.000
Table 3: Estimates of i .
i
0
1.938696
1
1.513721
2
1.909567
3
2.437809
4
3.445738
854
C.-J. Cheng et al. / Scientia Iranica, Transactions E: Industrial Engineering 19 (2012) 849855
4. Empirical study
(1) = 7226
10840
14453
0
3547
(2) = 7093
10640
14186
Age of car
Number of
customers
Percentage
(%)
(1, 2]
(2, 3]
(3, 4]
(4, 5]
(5, 6]
(6, 7]
(7, 8]
(8, 9]
10
441
623
555
475
359
301
215
138
86
46
13.62
19.23
17.13
14.67
11.08
9.29
6.64
4.26
2.66
1.42
Total
3239
100.00
Cumulative
percentage (%)
13.62
32.85
49.98
64.65
75.73
85.02
91.66
95.92
98.58
100.00
Number of
customers
Percentage
(%)
Cumulative
percentage (%)
02000
224
6.92
6.92
20014000
721
22.26
29.18
40016000
1008
31.12
60.30
60018000
665
20.53
80.83
800110000
282
8.71
89.54
1000112000
151
4.66
94.20
1200114000
75
2.32
96.52
1400116000
36
1.11
97.63
1600118000
26
0.80
98.43
1800120000
13
0.40
98.83
38
1.17
100.00
3239
100.00
0
3682
(3) = 7364
11047
14729
0
3605
(4) = 7210 .
10814
14419
and
5. Concluding remarks
This study has presented a framework for an auto repair
and maintenance company to compute the lifetime values of
C.-J. Cheng et al. / Scientia Iranica, Transactions E: Industrial Engineering 19 (2012) 849855
Table 6: Profits contributed by the customer and bank interest rate of
previous years.
Year
Profit
Interest rate (%)
5
7 929
5
4
24 552
2.5
3
1 662
1.875
2
0
1.4
1
10 707
1.525
855
[8] Shin, H.W. and Sohn, S.Y. Segmentation of stock trading customers
according to potential value, Expert Systems with Applications, 27,
pp. 2733 (2004).
[9] Shih, Y.-Y. and Liu, D.-R. Product recommendation approaches: collaborative filtering via customer lifetime value and customer demands, Expert
Systems with Applications, 35, pp. 350360 (2008).
[10] Chan, S.L., Ip, W.H. and Cho, V. A model for predicting customer value from
perspectives of product attractiveness and marketing strategy, Expert
Systems with Applications, 37, pp. 12071215 (2010).
[11] Chan, C.C.H. Intelligent value-based customer segmentation method
for campaign management: a case study of automobile retailer, Expert
Systems with Applications, 34, pp. 27542762 (2008).
[12] Berger, P.D. and Nasr, N.I. Customer lifetime value: marketing models and
applications, Journal of Interactive Marketing, 12, pp. 1730 (1998).
[13] Bayon, T., Gutsche, J. and Bauer, H. Customer equity marketing: touching
the intangible, European Management Journal, 20, pp. 213222 (2002).
[14] Gupta, S. and Lehmann, D.R. Customers as assets, Journal of Interactive
Marketing, 17, pp. 924 (2003).
[15] Colombo, R. and Jiang, W. A stochastic RFM model, Journal of Interactive
Marketing, 13, pp. 212 (1999).
[16] Quinlan, J.R. C5.0 online tutorial, http://www.rulequest.com (accessed
2010).
[17] Xia, G.-E. and Jin, W.-D. Model of customer churn prediction on support
vector machine, Systems Engineering Theory & Practice, 28, pp. 7177
(2008).
[18] Tsai, C.-F. and Chen, M.-Y. Variable selection by association rules for
customer churn prediction of multimedia on demand, Expert Systems with
Applications, 37, pp. 20062015 (2010).
Chao-Jung Cheng received his B.A. and M.S. Degrees in Mechanical Engineering
from Sun Yat-Sen University, Taiwan, in 1991 and 1993, respectively, and
a Ph.D. Degree in from Department of Engineering Science at Cheng-Kung
University, Taiwan, in 2005. He has been Assistant Professor in the Department
of Information Engineering of Kun-Shan University, Taiwan, since 2005. His
research interests include: neural networks, data mining, nonlinear dynamics,
automatic control, chaos synchronization and image processing. He has
(co)authored numerous papers in these areas in international journals.
Singa Wang Chiu received her M.S. Degree in Computer & Information Science
from New Jersey Institute of Technology, USA, in 1988, and a Ph.D. Degree
in Industrial Engineering and Management from the Chung-Yuan Christian
University, Taiwan, in 2004. Professor Chius research interests include:
operations research, production and quality management, and manufacturing
systems. Her papers have been published in numerous international journals
including European Journal of Operational Research, Japan Journal of Industrial
and Applied Mathematics, Computers & Operations Research, Intl Journal
of Machine Tools & Manufacture, Mathematical and Computer Modeling,
Applied Stochastic Models in Business and Industry, Mathematical & Computer
Modeling-Dynamical Systems, Communications in Numerical Methods in
Engineering, International J. of Advanced Manufacturing Technology, Journal
of Manufacturing Science and Engineering, Journal of Scientific & Industrial
Research, etc.
Jiun-Yi Wu earned his B.S. Degree in Information Management from Shih Hsin
University, Taiwan, in 2008, and his M.S. Degree from Tamkang University,
Taiwan, in 2010. His research interests include: data mining, soft computing,
and customer relationship management.