Including spatial interdependence in customer acquisition models: A cross-category comparison

Within analytical customer relationship management (CRM), customer acquisition models suffer the most from a lack of data quality because the information of potential customers is mostly limited to socio-demographic and lifestyle variables obtained from external data vendors. Particularly in this situation, taking advantage of the spatial correlation between customers can improve the predictive performance of these models. This study compares an autoregressive and hierarchical technique that both are able to incorporate spatial information in a model that can be applied on large datasets, which is typical for CRM. Predictive performances of these models are compared in an application that identifies potential new customers for 25 products and brands. The results show that when a discrete spatial variable is used to group customers into mutually exclusive neighborhoods, a multilevel model performs at least as well as, and for a large number of durable goods even significantly better than a frequently used autologistic model. Further, this application provides interesting insights for marketing decision makers. It indicates that especially for publicly consumed durable goods neighborhood effects can be identified. However, for more exclusive brands, incorporating spatial information will not always result in major predictive improvements. For these luxury products, the high spatial interdependence is mainly caused by homophily in which the spatial variable is a substitute for absent socio-demographic and lifestyle variables. As a result, these neighborhood variables lose a lot of predictive value on top of a traditional acquisition model that typically is based on such non-transactional variables.