Incorporating Direct Marketing Activity into Latent Attrition Models

When defection is unobserved, latent attrition models provide useful insights about customer behavior and accurate forecasts of customer value. Yet extant models ignore direct marketing efforts. Response models incorporate the effects of direct marketing, but because they ignore latent attrition, they may lead firms to waste resources on inactive customers. We propose a parsimonious model that allows direct marketing to impact three relevant behaviors in latent attrition models---the frequency with which customers conduct transactions, the size of the transactions, and the duration for which customers remain active. Our model also accounts for how the organization targets its direct marketing across individuals and over time. Using donation data from a nonprofit organization, we find that direct marketing increases donation incidence for active donors. However, our analysis also shows that direct marketing has the potential to shorten the length of a donor's relationship. We find that our proposed model offers superior predictive performance compared with models that ignore the impact of direct marketing activity or latent attrition. We demonstrate the managerial applicability of our modeling approach by estimating the impact of direct marketing on donation behavior and identifying those donors most likely to conduct transactions in the future.