Market Segmentation Trees

Ali Aouad (), Adam N. Elmachtoub (), Kris J. Ferreira () and Ryan McNellis ()
Additional contact information
Ali Aouad: London Business School, London NW1 4SA, United Kingdom
Adam N. Elmachtoub: Department of Industrial Engineering and Operations Research and Data Science Institute, Columbia University, New York, New York 10027
Kris J. Ferreira: Harvard Business School, Harvard University, Boston, Massachusetts 02163
Ryan McNellis: Department of Industrial Engineering and Operations Research and Data Science Institute, Columbia University, New York, New York 10027

Manufacturing & Service Operations Management, 2023, vol. 25, issue 2, 648-667

Abstract: Problem definition : We seek to provide an interpretable framework for segmenting users in a population for personalized decision making. Methodology/results : We propose a general methodology, market segmentation trees (MSTs), for learning market segmentations explicitly driven by identifying differences in user response patterns. To demonstrate the versatility of our methodology, we design two new specialized MST algorithms: (i) choice model trees (CMTs), which can be used to predict a user’s choice amongst multiple options, and (ii) isotonic regression trees (IRTs), which can be used to solve the bid landscape forecasting problem. We provide a theoretical analysis of the asymptotic running times of our algorithmic methods, which validates their computational tractability on large data sets. We also provide a customizable, open-source code base for training MSTs in Python that uses several strategies for scalability, including parallel processing and warm starts. Finally, we assess the practical performance of MSTs on several synthetic and real-world data sets, showing that our method reliably finds market segmentations that accurately model response behavior. Managerial implications : The standard approach to conduct market segmentation for personalized decision making is to first perform market segmentation by clustering users according to similarities in their contextual features and then fit a “response model” to each segment to model how users respond to decisions. However, this approach may not be ideal if the contextual features prominent in distinguishing clusters are not key drivers of response behavior. Our approach addresses this issue by integrating market segmentation and response modeling, which consistently leads to improvements in response prediction accuracy, thereby aiding personalization. We find that such an integrated approach can be computationally tractable and effective even on large-scale data sets. Moreover, MSTs are interpretable because the market segments can easily be described by a decision tree and often require only a fraction of the number of market segments generated by traditional approaches. Disclaimer: This work was done prior to Ryan McNellis joining Amazon.

Keywords: market segmentation; business analytics; decision trees (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:25:y:2023:i:2:p:648-667

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