Deriving Target Selection Rules from Endogenously Selected Samples
One of the aims of direct marketing in practice is to target the most profitable customers in the database at hand. This selection is often done based on observed behavior in the past. As a consequence, databases arising from the responses to direct mailings are not a random sample from all potential respondents. When not all heterogeneity is observed, part of the target selection rule will be based on the unobserved heterogeneity, so selection is endogenous. Treating an endogenously selected sample as a random sample results in inconsistent parameter estimates, which in general also harms the predictive performance of the model. We develop an adjustment to the likelihood of the model that corrects for the endogenous sample selection. We apply this technique to the selection of mail targets for a charitable organization. In the application we also show that, based on a model for the response rate and the amount donated simultaneously, we can create a target selection rule that maximizes expected revenues. Such a selection rule outperforms selection rules based on response rates or donated amount only. The traditional approach of maximizing response is therefore not the optimal approach to target selection.
|Keywords||direct marketing, econometric models, endogeneity, sample selection, target selection|
|JEL||Econometric and Statistical Methods: Other (jel C19), Statistical Decision Theory; Operations Research (jel C44), Business Administration and Business Economics; Marketing; Accounting (jel M), Marketing (jel M31)|
|Publisher||Erasmus Research Institute of Management|
|Series||ERIM Report Series Research in Management|
|Rights||Copyright 2001, B. Donkers, J. Jonker, P.H. Franses, R. Paap, This report in the ERIM Report Series Research in Management is intended as a means to communicate the results of recent research to academic colleagues and other interested parties. All reports are considered as preliminary and subject to possibly major revisions. This applies equally to opinions expressed, theories developed, and data used. Therefore, comments and suggestions are welcome and should be directed to the authors.|
Donkers, A.C.D, Jonker, J-J, Franses, Ph.H.B.F, & Paap, R. (2001). Deriving Target Selection Rules from Endogenously Selected Samples (No. ERS-2001-68-MKT). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/132