How can we model the visit pattern of a customer in a retail store?

Question

I am trying to segment customers based on how recently they visited the store. However, I am also trying to incorporate the frequency with which they visit the store. For example, in a data collected between Jan 2015 and Dec 2017, Customer 1 visited 3 times in Jan 2015 and then once in Dec 2017; Customer 2 visited 4 times in Dec 2017. Although the frequency for both the customers is 4 and their recency is same (both came last in Dec 2017), it is clear that Customer 2 is a more recent customer and must be targeted differently than Customer 1.

I tried dividing the data points into n-tiles but it is giving a very crude measure.

Could you guys suggest something which is more sophisticated than an RFM-type segmentation?

Answer 1

You might try using an exponentially weighed moving average (EWMA) on visits, giving recent months a higher weight than earlier months.

Here are the steps to calculating an EWMA:

1. sort the data by customer ID and by Month
2. weight=0.8; //in the equations in wikipedia, weight is called lambda
3. if (customerID!=lag(customerID) {movingAverage=NVisits} else { movingAverage=movingAverage*weight + (1-weight)*NVisits}

Here's a link to a Wikipedia article on EWMA: https://en.wikipedia.org/wiki/EWMA_chart

Here's screen shot of a data table where I took a weighted average over 6 months. The highlighted rows are the rows you would actually use in your analysis. You can see that the customer who has more visits in recent months has a higher weighted average than the customer who has more visits in past months.

Picking the weight is a bit of an art. It has to be a number between 0 and 1. If it's closer to 1, later months will have more weight. If it's less than 0.5, later months will have less weight.