XYZ PROFITABILITY ANALYSIS

Creating a Profitable Direct Marketing Promotion using

CHAID Segmentation
Alex Tallo
Database Modeling & Management
Professor Perry Drake
Spring 2011
EXECUTIVE SUMMARY
 Background: Company XYZ, a private collections firm
specializing in the high-risk sector has developed a
profitable direct marketing list strategy to capture owed
money from delinquent accounts who failed to pay
previous collectors.
 Main Business Objectives: Maximize XYZ’s 90%
profit rate and achieve a sound Return on Investment in
roll-out
 Analysis Objective: Using the CHAID segmentation
decision model, identify only the most profitable
segments for roll-out based on our low-cost, high-value
financial objectives.
ANALYSIS SAMPLE SPECIFICS
 Size: 10,000 names
 XYZ conducted a response test to 5,849 workable names

 The file was appended and frozen to reflect responders at a point-in-time

 XYZ appended enhancement data to the frozen test file

Variables available from ACME sample:

 Media Source Indicators

 Continuity Program Affinity Interest Indicators

 Unpaid Dollars Outstanding

 Number of Days Customer Active in Continuity Program Prior Going Bad

 Total Dollars paid in Continuity Program Prior Going Bad

  

Data enhancement elements, based on responses, appended to the frozen file:

 Age

 Credit Card Status

 Dwelling Type

 Rent/Own Status

 Occupation Code

 Length of Current Residence

 
METHODOLOGY

 Analytical Technique: CHAID created a decision tree model to

show relationships positively and negatively correlated with the
value of measurement
 Dependent Value of Measure: Likeliness to Pay

 Data Considered:
 Response
 Cost
 Revenue Information
 Data Hierarchy of Correlated Variables:
1. Amount Outstanding
2. Past-Payment
3. LOR
4. SFDU Dwelling
 Resulting CHAID Tree
Total Sample
Names=5,849 Paid=177
Amt Collected = $6,018
RR- 3.03% ROI-2.88%

Amount Outstanding/Due < $19.68 Amount Outstanding/Due >= $19.68

Names=311 # Paid=23
Amt Collected = $328
1 RR- 7.4% ROI- 5.5% Index- 244

Past Payment < $776.21 Past Payment >= $776.21

Names=453 # Paid=28
Amt Collected = $769
RR- 6.2%, ROI- 69.8%, Index- 205 2

LOR < 6 Years LOR >= 6 Years

Amount Outstanding/Due < $24.60 SFDU Dwelling

Names=301 # Paid=9
Amt Collected = $140
RR- 2.99% ROI-(53.49%) Index-99

Amount Outstanding/Due >= $24.60* Not SFDU Dwelling

Names=533 # Paid=10
Amt Collected = $389
RR-1.87% ROI-(27.01%) Index- 62 6

Age 26-35* Amount Outstanding/Due < $44.60

Names=480 # Paid=3 Names=1,490 # Paid=63
Amt Collected = $119 Amt Collected = $2,475
3
RR- 0.63% ROI- (75.21%) Index- 21 RR-4.23% ROI-66.12% Index- 140

Age not 26-35* Amount Outstanding/Due >= $44.60

Names=1,948 # Paid=32 Names=333 # Paid=9
7 Amt Collected = $999 Amt Collected = $799
RR- 2.7% ROI- 140% Index- 89 5
RR- 1.64% ROI-(48.72) Index- 54
Segmentation Decision: Considering costs, responsiveness, and revenue information, XYZ
should target the the following segments for maximum profitability:

Cluster 2 Cluster 3 Cluster 5 OVERALL

# of Names 453 1,490 333 2,276
# Respondents 28 63 9 100
Response Rate 6.20% 4.23% 2.70% 4.4%
Amount
$769 $2,475 $799 $ 4,043
Collected
Average amount
$27.5 $39.3 $88.8 $40.43
per responder
Index to Total
205 140 89 145