Churn prediction in subscription services: An application of support vector machines while comparing two parameter-selection techniques

CRM gains increasing importance due to intensive competition and saturated markets. With the purpose of retaining customers, academics as well as practitioners find it crucial to build a churn prediction model that is as accurate as possible. This study applies support vector machines in a newspaper subscription context in order to construct a churn model with a higher predictive performance. Moreover, a comparison is made between two parameter-selection techniques, needed to implement support vector machines. Both techniques are based on grid search and cross-validation. Afterwards, the predictive performance of both kinds of support vector machine models is benchmarked to logistic regression and random forests. Our study shows that support vector machines show good generalization performance when applied to noisy marketing data. Nevertheless, the parameter optimization procedure plays an important role in the predictive performance. We show that only when the optimal parameter-selection procedure is applied, support vector machines outperform traditional logistic regression, whereas random forests outperform both kinds of support vector machines. As a substantive contribution, an overview of the most important churn drivers is given. Unlike ample research, monetary value and frequency do not play an important role in explaining churn in this subscription-services application. Even though most important churn predictors belong to the category of variables describing the subscription, the influence of several client/company-interaction variables cannot be neglected. (c) 2006 Elsevier Ltd. All rights reserved.