Data Mining Techniques

in CRM

CRM Assignment

By

DINESH BABU P
 M090045MS

What is CRM?

CRM stands for Customer Relationship Management. It is a process or methodology used

to learn more about customers' needs and behaviors in order to develop stronger relationships
with them. There are many technological components to CRM, but thinking about CRM in
primarily technological terms is a mistake. The more useful way to think about CRM is as a
process that will help bring together lots of pieces of information about customers, sales,
marketing effectiveness, responsiveness and market trends.

CRM helps businesses use technology and human resources to gain insight into the behavior
of customers and the value of those customers.

CRM Software

Sales Force Automation

• Contact management
Contact management software stores, tracks and manages contacts, leads of an
enterprise.
• Lead management
Enterprise Lead management software enables an organization to manage, track and
forecast sales leads. Also helps understand and improve conversion rates.

eCRM or Web based CRM

• Self Service CRM

Self service CRM (eCRM) software Enables web based customer interaction,
automation of email, call logs, web site analytics, campaign management.
• Survey Management Software
Survey Software automates an enterprise's Electronic Surveys, Polls, Questionnaires
and enables understand customer preferences.

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Customer Service

• Call Center Software

• Help Desk Software

Partner Relationship Management

• Contract Management Software Contract Management Software enables an enterprise

to create, track and manage partnerships, contracts, agreements.
Example: Upside Software, Accruent Software, diCarta, I-Many.
• Distribution management Software

Data Mining

Data mining (sometimes called data or knowledge discovery) is the process of analyzing data
from different perspectives and summarizing it into useful information - information that can
be used to increase revenue, cuts costs, or both. Data mining software is one of a number of
analytical tools for analyzing data. It allows users to analyze data from many different
dimensions or angles, categorize it, and summarize the relationships identified. Technically,
data mining is the process of finding correlations or patterns among dozens of fields in large
relational databases.

Data, Information, and Knowledge

Data

Data are any facts, numbers, or text that can be processed by a computer. Today,
organizations are accumulating vast and growing amounts of data in different formats and
different databases. This includes:

• operational or transactional data such as, sales, cost, inventory, payroll, and
accounting

• nonoperational data, such as industry sales, forecast data, and macro economic data

• meta data - data about the data itself, such as logical database design or data dictionary
definitions

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Information

The patterns, associations, or relationships among all this data can provide information. For
example, analysis of retail point of sale transaction data can yield information on which
products are selling and when.

Knowledge

Information can be converted into knowledge about historical patterns and future trends. For
example, summary information on retail supermarket sales can be analyzed in light of
promotional efforts to provide knowledge of consumer buying behavior. Thus, a manufacturer
or retailer could determine which items are most susceptible to promotional efforts.

Data Warehouses

Dramatic advances in data capture, processing power, data transmission, and storage
capabilities are enabling organizations to integrate their various databases into data
warehouses. Data warehousing is defined as a process of centralized data management and
retrieval. Data warehousing, like data mining, is a relatively new term although the concept
itself has been around for years. Data warehousing represents an ideal vision of maintaining a
central repository of all organizational data. Centralization of data is needed to maximize user
access and analysis. Dramatic technological advances are making this vision a reality for
many companies. And, equally dramatic advances in data analysis software are allowing users
to access this data freely. The data analysis software is what supports data mining.

What can data mining do?

Data mining is primarily used today by companies with a strong consumer focus - retail,
financial, communication, and marketing organizations. It enables these companies to
determine relationships among "internal" factors such as price, product positioning, or staff
skills, and "external" factors such as economic indicators, competition, and customer
demographics. And, it enables them to determine the impact on sales, customer satisfaction,
and corporate profits. Finally, it enables them to "drill down" into summary information to
view detail transactional data.

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With data mining, a retailer could use point-of-sale records of customer purchases to send
targeted promotions based on an individual's purchase history. By mining demographic data
from comment or warranty cards, the retailer could develop products and promotions to
appeal to specific customer segments.

For example, Blockbuster Entertainment mines its video rental history database to
recommend rentals to individual customers. American Express can suggest products to its
cardholders based on analysis of their monthly expenditures.

WalMart is pioneering massive data mining to transform its supplier relationships. WalMart
captures point-of-sale transactions from over 2,900 stores in 6 countries and continuously
transmits this data to its massive 7.5 terabyte Teradata data warehouse. WalMart allows more
than 3,500 suppliers, to access data on their products and perform data analyses. These
suppliers use this data to identify customer buying patterns at the store display level. They use
this information to manage local store inventory and identify new merchandising
opportunities. In 1995, WalMart computers processed over 1 million complex data queries.

The National Basketball Association (NBA) is exploring a data mining application that can be
used in conjunction with image recordings of basketball games. The Advanced Scout
software analyzes the movements of players to help coaches orchestrate plays and strategies.
For example, an analysis of the play-by-play sheet of the game played between the New York
Knicks and the Cleveland Cavaliers on January 6, 1995 reveals that when Mark Price played
the Guard position, John Williams attempted four jump shots and made each one! Advanced
Scout not only finds this pattern, but explains that it is interesting because it differs
considerably from the average shooting percentage of 49.30% for the Cavaliers during that
game.

By using the NBA universal clock, a coach can automatically bring up the video clips
showing each of the jump shots attempted by Williams with Price on the floor, without

needing to comb through hours of video footage. Those clips show a very successful pick-
and-roll play in which Price draws the Knick's defense and then finds Williams for an open
jump shot.

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How does data mining work?

While large-scale information technology has been evolving separate transaction and
analytical systems, data mining provides the link between the two. Data mining software
analyzes relationships and patterns in stored transaction data based on open-ended user
queries. Several types of analytical software are available: statistical, machine learning, and
neural networks. Generally, any of four types of relationships are sought:

• Classes: Stored data is used to locate data in predetermined groups. For example, a
restaurant chain could mine customer purchase data to determine when customers visit
and what they typically order. This information could be used to increase traffic by
having daily specials.

• Clusters: Data items are grouped according to logical relationships or consumer

preferences. For example, data can be mined to identify market segments or consumer
affinities.

• Associations: Data can be mined to identify associations. The beer-diaper example is

an example of associative mining.

• Sequential patterns: Data is mined to anticipate behavior patterns and trends. For
example, an outdoor equipment retailer could predict the likelihood of a backpack
being purchased based on a consumer's purchase of sleeping bags and hiking shoes.

Data mining consists of five major elements:

• Extract, transform, and load transaction data onto the data warehouse system.

• Store and manage the data in a multidimensional database system.

• Provide data access to business analysts and information technology professionals.

• Analyze the data by application software.

• Present the data in a useful format, such as a graph or table.

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 Different levels of analysis are available:

• Artificial neural networks: Non-linear predictive models that learn through training
and resemble biological neural networks in structure.

• Genetic algorithms: Optimization techniques that use processes such as genetic

combination, mutation, and natural selection in a design based on the concepts of
natural evolution.

• Decision trees: Tree-shaped structures that represent sets of decisions. These

decisions generate rules for the classification of a dataset. Specific decision tree
methods include Classification and Regression Trees (CART) and Chi Square
Automatic Interaction Detection (CHAID) . CART and CHAID are decision tree
techniques used for classification of a dataset. They provide a set of rules that you can
apply to a new (unclassified) dataset to predict which records will have a given
outcome. CART segments a dataset by creating 2-way splits while CHAID segments
using chi square tests to create multi-way splits. CART typically requires less data
preparation than CHAID.

• Nearest neighbor method: A technique that classifies each record in a dataset based
on a combination of the classes of the k record(s) most similar to it in a historical
dataset (where k 1). Sometimes called the k-nearest neighbor technique.

• Rule induction: The extraction of useful if-then rules from data based on statistical
significance.

• Data visualization: The visual interpretation of complex relationships in

multidimensional data. Graphics tools are used to illustrate data relationships.

In the evolution from business data to business information, each new step has built upon the
previous one. For example, dynamic data access is critical for drill-through in data navigation
applications, and the ability to store large databases is critical to data mining.

Evolutionary Business Question Enabling Product Characteristics

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Step Technologies Providers

Data Collection "What was my total Computers, tapes, IBM, CDC Retrospective,
revenue in the last five disks static data
(1960s)
years?" delivery

Data Access "What were unit sales in Relational databases Oracle, Retrospective,
New England last (RDBMS), Sybase, dynamic data
(1980s)
March?" Structured Query Informix, delivery at record
Language (SQL), IBM, level
ODBC Microsoft

Data "What were unit sales in On-line analytic Pilot, Retrospective,

Warehousing & New England last processing (OLAP), Comshare, dynamic data
March? Drill down to multidimensional Arbor, delivery at
Decision Support
Boston." databases, data Cognos, multiple levels
warehouses Microstrategy
(1990s)

Data Mining "What’s likely to Advanced Pilot, Prospective,

happen to Boston unit algorithms, Lockheed, proactive
(Emerging
sales next month? multiprocessor IBM, SGI, information
Today)
Why?" computers, massive numerous delivery
databases startups
(nascent
industry)

Steps in the Evolution of Data Mining.

The core components of data mining technology have been under development for decades, in
research areas such as statistics, artificial intelligence, and machine learning. Today, the
maturity of these techniques, coupled with high-performance relational database engines and
broad data integration efforts, make these technologies practical for current data warehouse
environments.

Analysis of Data Mining in CRM

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Problem Context: The maximization of lifetime values of the (entire) customer base in the
context of a company's strategy is a key objective of CRM. Various processes and personnel
in an organization must adopt CRM practices that are aligned with corporate goals. For each
institution, corporate strategies such as diversification, coverage of market niches or
minimization of operative costs are implemented by "measures", such as mass customization,
segment-specific product configurations etc. The role of CRM is in supporting customer-
related strategic measures. Customer understanding is the core of CRM. It is the basis for
maximizing customer lifetime value, which in turn encompasses customer segmentation and
actions to maximize customer conversion, retention, loyalty and profitability. Proper customer
understanding and actionability lead to increased customer lifetime value. Incorrect customer
understanding can lead to hazardous actions. Similarly, unfocused actions, such as unbounded
attempts to access or retain all customers, can lead to decrease of customer lifetime value (law
of diminishing return). Hence, emphasis should be put on correct customer understanding and
concerted actions derived from it.

Customer Life Cycle

The customer takes the initiative of contacting the company, e.g. to purchase something, to
ask for after sales support, to make a reclamation or a suggestion etc.
• The company takes the initiative of contacting the customer, e.g. by launching a marketing
campaign, selling in an electronic store or a brick-and-mortar store etc.

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• The company takes the initiative of understanding the customers by analyzing the
information available from the other two types of action. The results of this understanding
guide the future behaviour of the company towards the customer, both when it contacts the
customer and when the customer contacts it. The reality of CRM, especially in large
companies, looks quite different from the central coordination and integration
• Information about customers flows into the company from many channels, but not all of
them are intended for the acquisition of customer-related knowledge.
• Information about customers is actively gathered to support well-planed customer-related
actions, such as marketing campaigns and the launching of new products. The knowledge
acquired as the result of these actions is not always juxtaposed to the original assumptions,
often because the action-taking organizational unit is different from the information-gathering
unit. In many cases, neither the original information, nor the derived knowledge are made
available outside the borders of the organizational unit(s) involved. Sometimes, not even their
existence is known.
• The limited availability of customer-related information and knowledge has several causes.
Political reasons, e.g. rivalry among organization units, are known to lead often in data and
knowledge hoarding. A frequently expressed concern of data owners is that data, especially in
aggregated form, cannot be interpreted properly without an advanced understanding of the
collection and aggregation process. Finally, confidentiality constraints, privacy considerations
and law restrictions often disallow the transfer of data and derived patterns among
departments.
• In general, one must assume that data gathered by an organization unit for a given purpose
cannot be exported unconditionally to other units or used for other purpose and that in many
cases such an export or usage is not permitted at all.
• Hence, it is not feasible to strive for a solution that integrates all customer-related data into a
corporate warehouse. The focus should rather be in mining non-integrated, distributed data
while preserving privacy and confidentiality constraints. A more realistic picture of current
CRM, incorporating the typical flow of information
• Data is collected from multiple organizational units, for different purposes, and stored in
multiple locations, leading to redundancies, inconsistencies and conflicting beliefs.
o No organization unit has access to all data and to all derived knowledge.
o Some data are not analyzed at all.
o Not all background knowledge is exploited.
o Data analysis is performed by many units independently.

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o Some analyses do not mount to actions.

Ideally, the CRM cycle should encompass:

• the exploitation of all data and background knowledge
• the coordination of analyses, and resulting actions, in different parts of the organization

Extended Customer Life Cycle

Gap Analysis: The grand KDD challenges in CRM arise from the objectives of exploiting all
information and coordinating analysis and actions. These objectives require methods to deal
with several specific challenges, which we discuss in turn:

• Cold start: In CRM, one tries to influence customer behavior on the basis of prior
knowledge. Often, there is no (reliable) such prior knowledge.

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• Correct vs. incorrect customer understanding: CRM is about understanding the customer.
It's about time to elaborate on the impact of misunderstanding the customer, and to fold this
into our analyses and action workflows.

• Data sovereignity: There is no such thing as a CRM data warehouse; we are faced with
multiple data sources. If and when problems of semantic disparity are solved, we will still
face legislative and the political hurdles.3 We need solutions where the data owner is allowed
to specify what data she wants to deliver, at what level of abstraction, and with what meta-
information.

• Data quality: Some Customer-Company-Interaction channels deliver very good data. Others
deliver notoriously poor quality data; web server logs belong to the latter category. The issue
of data sovereignty impedes integration of raw data. Despite these odds, data must be
enhanced to ensure that the results of the analysis are reliable.

• Deeper understanding: Profiling is based on some rudimentary behavioral data and some
preferences, carefully extracted from questionnaires or learned from the data using data
mining methods. Integration of cultural and psychological data is at its infancy. The experts in
those domains come from outside of the KDD community (marketing researchers,
practitioners, etc.) and we should establish collaborative relationships with them.

• Questioning prior knowledge: Everything associated with prior knowledge is assumed

correct. We need mechanisms that capture and align prior knowledge in the face of conflicting
information.

• Actionability: Pattern discovery should lead to actions. In some cases, this is

straightforward, e.g., site customization and personalization, but this step is often omitted. We
need mechanisms that incorporate patterns into the action-taking processes in a seamless way.
We also need an understanding of the action-taking processes and their influence on what
patterns are most valuable.

Data Mining Challenges & Opportunities in CRM

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In this section, we build upon our discussion of CRM and Life Sciences to identify key data
mining challenges and opportunities in these application domains. The following is a list of
challenges for CRM:

• Non-trivial results almost always need a combination of DM techniques

• There is a strong requirement for data integration before data mining
• Diverse data types are often encountered
• Highly and unavoidably noisy data must be dealt with
• Privacy and confidentiality considerations for data and analysis results are a major
issue.
• Legal considerations influence what data is available for mining and what actions are
permissible
• Real-world validation of results is essential for acceptance
• Developing deeper models of customer behavior:
• Acquiring data for deeper understanding in a non-intrusive, low-cost, high accuracy
manner
• Managing the “cold start/bootstrap” problem
• Evaluation framework for distinguishing between correct/incorrect customer
understanding
• Good actioning mechanisms
• Incorporating prior knowledge

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Data Mining Applications

Data Mining Applications : Retail

 Performing basket analysis

 Which items customers tend to purchase together. This knowledge can

improve stocking, store layout strategies, and promotions.

 Sales forecasting

 Examining time-based patterns helps retailers make stocking decisions. If a

customer purchases an item today, when are they likely to purchase a
complementary item?

 Database marketing

 Retailers can develop profiles of customers with certain behaviors, for

example, those who purchase designer labels clothing or those who attend
sales. This information can be used to focus cost–effective promotions.

 Merchandise planning and allocation

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  When retailers add new stores, they can improve merchandise planning and
allocation by examining patterns in stores with similar demographic
characteristics. Retailers can also use data mining to determine the ideal layout
for a specific store.

Data Mining Applications : Banking

 Card marketing

 By identifying customer segments, card issuers and acquirers can improve

profitability with more effective acquisition and retention programs, targeted
product development, and customized pricing.

 Cardholder pricing and profitability

 Card issuers can take advantage of data mining technology to price their
products so as to maximize profit and minimize loss of customers. Includes
risk-based pricing.

 Fraud detection

 Fraud is enormously costly. By analyzing past transactions that were later

determined to be fraudulent, banks can identify patterns.

 Predictive life-cycle management

 DM helps banks predict each customer’s lifetime value and to service each
segment appropriately (for example, offering special deals and discounts).

Data Mining Applications : Telecommunication

 Call detail record analysis

 Telecommunication companies accumulate detailed call records. By

identifying customer segments with similar use patterns, the companies can
develop attractive pricing and feature promotions.

 Customer loyalty

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  Some customers repeatedly switch providers, or “churn”, to take advantage of
attractive incentives by competing companies. The companies can use DM to
identify the characteristics of customers who are likely to remain loyal once
they switch, thus enabling the companies to target their spending on customers
who will produce the most profit.

Data Mining Applications : Other Applications

 Customer segmentation

 All industries can take advantage of DM to discover discrete segments in their

customer bases by considering additional variables beyond traditional analysis.

 Manufacturing

 Through choice boards, manufacturers are beginning to customize products for

customers; therefore they must be able to predict which features should be
bundled to meet customer demand.

 Warranties

 Manufacturers need to predict the number of customers who will submit

warranty claims and the average cost of those claims.

 Frequent flier incentives

 Airlines can identify groups of customers that can be given incentives to fly
more.

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