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Classifying the Variety of Customers’ Online Engagement for Churn Prediction with a Mixed-Penalty Logistic Regression

Author

Listed:
  • Petra P. Šimović

    (University of Zagreb)

  • Claire Y. T. Chen

    (Montpellier Business School)

  • Edward W. Sun

    (KEDGE Business School)

Abstract

Using big data to analyze consumer behavior can provide effective decision-making tools for preventing customer attrition (churn) in customer relationship management (CRM). Focusing on a CRM dataset with several different categories of factors that impact customer heterogeneity (i.e., usage of self-care service channels, service duration, and responsiveness to marketing actions), this research provides new predictive analytics of customer churn rate based on a machine learning method that enhances the classification of logistic regression by adding a mixed penalty term. The proposed penalized logistic regression prevents overfitting when dealing with big data and minimizes the loss function when balancing the cost from the median (absolute value) and mean (squared value) regularization. We show the analytical properties of the proposed method and its computational advantage in this research. In addition, we investigate the performance of the proposed method with a CRM dataset (that has a large number of features) under different settings by efficiently eliminating the disturbance of (1) least important features and (2) sensitivity from the minority (churn) class. Our empirical results confirm the expected performance of the proposed method in full compliance with the common classification criteria (i.e., accuracy, precision, and recall) for evaluating machine learning methods.

Suggested Citation

  • Petra P. Šimović & Claire Y. T. Chen & Edward W. Sun, 2023. "Classifying the Variety of Customers’ Online Engagement for Churn Prediction with a Mixed-Penalty Logistic Regression," Computational Economics, Springer;Society for Computational Economics, vol. 61(1), pages 451-485, January.
    • Handle: RePEc:kap:compec:v:61:y:2023:i:1:d:10.1007_s10614-022-10275-1
    DOI: 10.1007/s10614-022-10275-1
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    References listed on IDEAS

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