Response Transformation and Profit Decomposition for Revenue Uplift Modeling

TL;DR

This paper introduces revenue-focused uplift modeling strategies that transform customer revenue data to better predict and maximize incremental campaign profits, validated through real-world e-commerce experiments.

Contribution

It proposes a novel revenue transformation approach for uplift modeling and develops a profit decomposition method to evaluate campaign effectiveness.

Findings

Revenue uplift models outperform conversion-based models in profit maximization.

Two-stage models effectively handle zero-inflated revenue data.

Applying the methods significantly increases campaign profit in real-world data.

Abstract

Uplift models support decision-making in marketing campaign planning. Estimating the causal effect of a marketing treatment, an uplift model facilitates targeting communication to responsive customers and efficient allocation of marketing budgets. Research into uplift models focuses on conversion models to maximize incremental sales. The paper introduces uplift modeling strategies for maximizing incremental revenues. If customers differ in their spending behavior, revenue maximization is a more plausible business objective compared to maximizing conversions. The proposed methodology entails a transformation of the prediction target, customer-level revenues, that facilitates implementing a causal uplift model using standard machine learning algorithms. The distribution of campaign revenues is typically zero-inflated because of many non-buyers. Remedies to this modeling challenge are incorporated in the proposed revenue uplift strategies in the form of two-stage models. Empirical experiments using real-world e-commerce data confirm the merits of the proposed revenue uplift strategy over relevant alternatives including uplift models for conver-sion and recently developed causal machine learning algorithms. To quantify the degree to which improved targeting decisions raise return on marketing, the paper develops a decomposition of campaign profit. Applying the decomposition to a digital coupon targeting campaign, the paper provides evidence that revenue uplift modeling, as well as causal machine learning, can improve cam-paign profit substantially.