Targeting High Value Customers While Under Resource Constraint: Partial Order Constrained Optimization with Genetic Algorithm

To maximize sales or profit given a fixed budget, direct marketing targets a preset top percentage of consumers who are the most likely to respond and purchase a greater amount. Existing forecasting models, however, largely ignore the resource constraint and render sup-optimal performance in maximizing profit given the budget constraint. This study proposes a model of partial order constrained optimization (POCO) using a penalty weight that represents the marginal penalty for selecting one more customer. Genetic algorithms as a tool of stochastic optimization help to select models that maximize the total sales at the top deciles of a customer list. The results of cross-validation with a direct marketing dataset indicate that the POCO model outperforms the competing methods in maximizing sales under the resource constraint and has distinctive advantages in augmenting the profitability of direct marketing. © 2014 Direct Marketing Educational Foundation, Inc., dba Marketing EDGE.