Response transformation and profit decomposition for revenue uplift modeling

Robin M. Gubela, Stefan Lessmann and Szymon Jaroszewicz

European Journal of Operational Research, 2020, vol. 283, issue 2, 647-661

Abstract: Uplift models support decision-making in marketing campaign planning. Estimating the causal effect of a marketing treatment, an uplift model facilitates targeting marketing actions to responsive customers and efficient allocation of marketing budget. Research into uplift models focuses on conversion models to maximize incremental sales. The paper introduces uplift models for maximizing incremental revenues. If customers differ in their spending behavior, revenue maximization is a more plausible business objective compared to maximizing conversions. The proposed methodology entails a transformation of the prediction target, customer-level revenues, that facilitates implementing a causal uplift model using standard machine learning algorithms. The distribution of campaign revenues is typically zero-inflated because of many non-buyers. Remedies to this modeling challenge are incorporated in the proposed revenue uplift strategies in the form of two-stage models. Empirical experiments using real-world e-commerce data confirm the merits of the proposed revenue uplift strategy over relevant alternatives, including uplift models for conversion and recently developed causal machine learning algorithms. To quantify the degree to which improved targeting decisions raise return on marketing, the paper develops a decomposition of campaign profit. Applying the decomposition to a digital coupon targeting campaign, the paper provides evidence that revenue uplift modeling, as well as causal machine learning, can improve campaign profit substantially.

Keywords: OR in Marketing; Profit Analytics; Uplift Model; Causal Machine Learning (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:283:y:2020:i:2:p:647-661

DOI: 10.1016/j.ejor.2019.11.030

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