How current targeting can hinder targeting in the future and what to do about it

Abstract

This study shows how current targeting of customers by a direct marketing firm can result in misleading models of customer response due to the truncation of observations for the customers who are not contacted, as well as the inevitable mis-specification of the explanatory variables in such models. These twin problems result in what technically is called selection bias and endogeneity, and are a direct result of standard industry practice when analysing such data. The current research corrects for these problems through a system of equations, including one for customer targeting and another for customer response, along with control variables. Hypotheses regarding the improvements the corrected approach would offer are that (1) the corrected approach would lower the inflated response forecast of the traditional approach; (2) the corrected approach would enable the customer targeting to be more efficient; and (3) the corrected approach would enable the customer targeting to be more effective. An application of the corrected approach to the customer database of a non-profit organisation shows that the corrected analysis supports the hypotheses and it further provides managerial implications. © 2009 Palgrave Macmillan.