CHURN PREDICTION IN THE MOBILE TELECOMMUNICATIONS INDUSTRY

An application of Survival Analysis in Data Mining

L.J.S.M. Alberts, 29-09-2006

OVERVIEW
Introduction Research questions Operational churn definition Data Survival Analysis Predictive churn models Tests and results Conclusions and recommendations Questions

INTRODUCTION
Mobile telecommunications industry

Changed from a rapidly growing market, into a state of saturation and fierce competition. Focus shifted from building a large customer base into keeping customers in house.

Acquiring new customers is more expensive than retaining existing customers.

INTRODUCTION
Churn

A term used to represent the loss of a customer is churn.

Churn prevention:
Acquiring more loyal customers initially Identifying customers most likely to churn

Predictive churn modelling

INTRODUCTION
Predictive churn modelling

Applied in the field of

Banking Mobile telecommunication Life insurances Etcetera

Common model choices

Neural networks Decision trees Support vector machines

INTRODUCTION
Predictive churn modelling

Trained by offering snapshots of churned customers and nonchurned customers. Disadvantage: The time aspect often involved in these problems is neglected.

How to incorporate this time aspect?

Survival analysis

INTRODUCTION
Prepaid versus postpaid

Vodafone is interested in churn of prepaid customers.

Prepaid: Not bound by a contract pay per call

As a consequence: irregular usage

Prepaid: No registration required

As a consequence: passing of sim-cards and loss of information

INTRODUCTION
Prepaid versus postpaid

Prepaid: Actual churn date in most cases difficult to assess

As a consequence: churn definition required

RESEARCH QUESTIONS
Is it possible to make a prepaid churn model based on the theory of survival analysis?
What is a proper, practical and measurable prepaid churn definition? How well do survival models perform in comparison to the established predictive models?

Do survival models have an added value compared to the established predictive models?

RESEARCH QUESTIONS
To answer the 2nd and 3rd sub question, a second predictive model is considered Decision tree Direct comparison in tests and results.

OPERATIONAL CHURN DEFINITION

Should indicate when a customer has permanently stopped using his sim-card as early as possible. Necessary since the proposed models are supervised models require a labeled dataset for training purposes.

Based on number of successive months with zero usage.

OPERATIONAL CHURN DEFINITION

The definition consists of two parameters, and , where
= fixed value = the maximum number of successive months with zero usage

+ is used as a threshold.

OPERATIONAL CHURN DEFINITION

=3 =2

OPERATIONAL CHURN DEFINITION

Two variations are examined:
Churn definition 1: = 2 Churn definition 2: = 3

Customers with >= 5 left out outliers.

DATA
Database provided by Vodafone. Already monthly aggregated data. Only usage and billing information. Derived variables: capture customer behaviour in a better way.
recharge this month yes/no time since last recharge

SURVIVAL ANALYSIS
Survival analysis is a collection of statistical methods which model time-to-event data. The time until the event occurs is of interest. In our case the event is churn.

SURVIVAL ANALYSIS
Survival function S(t):

T =event time, f(t) = density function, F(t) = cum. Density function.

The survival at time t is the probability that a subject will survive to that point in time.

SURVIVAL ANALYSIS

SURVIVAL ANALYSIS
Hazard rate function :
Probability that event occurs in current interval, given that event has not already occurred.

The hazard (rate) at time t describes the frequency of the occurance of the event in events per <time period>. instantaneous

SURVIVAL ANALYSIS

SURVIVAL ANALYSIS

commitment date

15 months after commitment date time scale = month

SURVIVAL ANALYSIS
How can accommodate to an individual?

Survival regression models

Can be used to examine the influence of explanatory variables on the event time. Accelerated failure time models Cox model (Proportional hazard model)

SURVIVAL MODEL
Cox model

Hazard for individual i at time t Baseline hazard: the average hazard curve

Regression part: the influence of the variables Xi on the baseline hazard

SURVIVAL MODEL
Cox model

SURVIVAL MODEL
Cox model

Drawback: hazard at time t only dependent on baseline hazard, not on variables. We want to include time-dependent covariates variables that vary over time, e.g. the number of SMS messages per month.

SURVIVAL MODEL
Extended Cox model

This is possible: Extended Cox model

SURVIVAL MODEL
Extended Cox model

Now we can compute the hazard for time t, but in fact we want to forecast. In fact, the data from this month is already outdated. Lagging of variables is required:

SURVIVAL MODEL
Principal component regression

Principal component analysis (PCA): Reduce the dimensionality of the dataset while retaining as much as possible of the variation present in the dataset. Transform variables into new ones principal components.

SURVIVAL MODEL
Principal component regression

SURVIVAL MODEL
Principal component regression

Principal component regression: Use principal components as variables in model. First reason: Reduces collinearity. Collinearity causes inaccurate estimations of the regression coefficients.

SURVIVAL MODEL

SURVIVAL MODEL
Principal component regression

Second reason: Reduce dimensionality The first 20 components are chosen. Safe choice, because principal components with largest variances are not necessarily the best predictors.

SURVIVAL MODEL
Extended Cox model

Survival models not designed to be predictive models.

How do we decide if a customer is churned? Scoring method

A threshold applied on the hazard is used to indicate churn.

SURVIVAL MODEL
Example

SURVIVAL MODEL
Example

DECISION TREE
Compare with the performance the extended Cox model.

Classification and regression trees.

Classification trees predict a categorical outcome. Regression trees predict a continuous outcome.

DECISION TREE

DECISION TREE
Recursive partitioning. An iterative process of splitting the data up into (in this case) two partitions.

DECISION TREE
Optimal tree size

Overfitting capture artefacts and noise present in the dataset.

Predictive power is lost.

Solution:
prepruning postpruning

DECISION TREE
Optimal tree size

10-fold cross-validation

The training set is split into 10 subsets.

Each of the 10 subsets is left out in turn.
train on the other subsets Test on the one left out

DECISION TREE
Optimal tree size

DECISION TREE
Oversampling

Oversampling: alter the proportion of the outcomes in the training set. Increases the proportion of the less frequent outcome (churn). Why? Otherwise not sensible enough. Proportion changed to 1/3 churn and 2/3 non-churn.

DECISION TREE
Churn definition 1

DECISION TREE
Churn definition 2

TESTS AND RESULTS

Tests

Goal: gain insight into the performance of the extended Cox model. Same test set for extended Cox model and decision tree. Direct comparison possible.

TESTS AND RESULTS

Tests

Dataset: 20.000 customers

training set: 15.000 customers test set: 5000 customers 1313 churned customers 3403 non-churned customers 284 outliers

The test set consists of

All months of history are offered.

TESTS AND RESULTS

Results

TESTS AND RESULTS

Results

TESTS AND RESULTS

Results

Extended Cox model gives satisfying results with both a high sensitivity and specificity. However, the decision tree performs even better. Time aspect incorporated by the extended Cox model does not provide an advantage over the decision tree in this particular problem.

TESTS AND RESULTS

Results

Put the results in perspective dependent on churn definition. Already difference between churn definition 1 and 2. A new and different churn definition is likely to yield different results. Churn definition too simple? Size of the decision trees.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

What is a proper, practical and measurable prepaid churn definition?

Extensive examination of the customer behaviour. Churn definition is consistent and intuitive. Allows for large range of customer behaviours. For larger periods of zero usage the definition becomes less reliable.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

How well do survival models perform in comparison to the established predictive models?
Survival model = Extended Cox model. Established predictive model = Decision tree. High sensitivity and specificity. However, not better than the decision tree.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

Do survival models have an added value compared to the established predictive models?
Models time aspect through baseline hazard. Can handle censored data. Stratification customer groups. If only time-independent variables predict at a future time.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

Is it possible to make a prepaid churn model based on the theory of survival analysis?
Yes! We have shown that it gives results with both a high sensitivity and specificity. In this particular prepaid problem, no benefit over decision tree.

CONCLUSIONS AND RECOMMENDATIONS

Recommendations

Better churn definition. Based on reliable data.

Switching of sim-cards.
Neural networks for survival data can handle nonlinear relationships. Other scoring methods.

QUESTIONS