Questions $($use SPSS if needed$)$ THANK YOU

$1.$ Using the information in Exhibit $5$ and $6,$ summarize which customer groups should be targeted with this mailing. Use language that could be understood by someone unfamiliar with decision tree analyses.

$2.$ Based on the information in Exhibit $7,$ the manager drew two gains charts $($for training data and testing data$)$ and combined them. Based on your graphs and assessment, does the decision tree appear overfit? Why or why not?

$3.$ Calculate the estimated profit.

$4.$ Calculate the return on marketing.

$5.$ Compare the estimated profit from decision tree and the profit from HW$5.($You can also review the videos I posted$).$

$($a$)$ Which method should you use?

$($b$)$ Is it always better to use one method over the other? How do we determine this?

Exhibit $7$ shows a summary of the number of customers, the number of

buyers and the response rate in each 'leaf' or terminal node for both the

training sample and the test sample. The nodes in Exhibit $7$ are sorted by

response rate from highest to lowest.

Exhibit $7$ Response Rates by Node

Original case: Professor Charlotte Mason prepared this case to provide material for class

discussion rather than to illustrate either effective or ineffective handling of a business situation.

Names and data may have been disguised to assure confidentiality. The assistance of the Direct

Marketing Educational Foundation in supplying the data used for this case is gratefully

acknowledged.

Current version: Professor Crystal Reeck made modifications to the original case. The revised

material does not necessarily illustrate either effective or ineffective handling of a business

situation.

EXHIBIT $6$

CHAID Tree

Based on $1/3$rd of customer records used for

'test' sample

EXHIBIT $5$

CHAID Tree

Based on $2/3$rds of customer records used

for 'training' sample

For example, node $"$A$"$ in Exhibit $5$ includes $15,799$ customers from the

training sample. Of the $15,799$ customers in this node, $576$ belong to the

target category of Yes $($i$.$e$.$ they are buyers$),$ which is a response rate of

$3\mathrm{.}65\%.$

The terminal nodes of the tree and the summary statistics in Exhibit $7$ are

used to identify which segments to target and which to avoid. An important

decision is how 'deep' in the customer base to go$.$ This decision may be

based on the number of prospects wanted, a desired response rate or a

desired proportion of potential buyers you want to contact, or profitability.

For the BookBinders' mailing offering The Art History of Florence, we know:

Cost to mail offer to customer: $$0\mathrm{.}50$

Selling price $($shipping included$)$: $$18\mathrm{.}00$

Wholesale price paid by Bookbinders: $$9\mathrm{.}00$

Shipping costs: $$3\mathrm{.}00$

Breakeven for this promotion $=$$$0\mathrm{.}50//$$$6\mathrm{.}00=8\mathrm{.}33\%$