Analyzing Customer Churn – Using “tmerge” to Build Data Sets

If you've ever done churn analysis using cox regression with time-dependent covariates, you know that the hardest part of doing that type of research is building your base data set. You have to divide each customer's lifetime into "chunks" where the changing values of a host of different predictor variables apply. I've coded this in SQL before, and it gets ugly. Fast.

Merge, everybody, merge!

Thankfully, R has a solution for this that makes life significantly more simple. It's the "tmerge" function, and it's in the survival package. Today, we'll walk through how to use it.

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Analyzing Customer Churn – Time-Dependent Coefficients

There are numerous strategies for dealing with non-proportional hazards in cox regression analysis. You can stratify your data based on a problematic variable. You can chuck the cox model and create "pseudo-observations" to analyze the gains (or losses) in lifetime within a certain period associated with changes in a variable. If age is a problem (unlikely for customer churn, but it happens a lot in medical contexts), you can use age rather than time in the cohort as your time scale. The list goes on.

But this is statistics! We're supposed to be modeling things!

this is sparta

Statistics. Almost as cool as Sparta.

Well, as it turns out, it's actually possible to directly model how the effects of a variable change with time, so that you can not only handle the proportional hazards problem, but also get a reliable estimate of how hazard ratios for a given variable change with time. The way to do this is actually incredibly simple... we introduce an interaction term between the variable of interest and time. Let's get started!

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Analyzing Customer Churn – Time-Dependent Covariates

My previous series of guides on survival analysis and customer churn has become by far the most popular content on this blog, so I'm coming back around to introduce some more advanced techniques...

When you're using cox regression to model customer churn, you're often interested in the effects of variables that change throughout a customer's lifetime. For instance, you might be interested in knowing how many times that customer has contacted support, how many times they've logged in during the last 30 days, or what web browser(s) they use. If you have, say, 3 years of historical customer data and you set up a cox regression on that data using covariate values that are applicable to customers right now, you'll essentially be regressing customer's churn hazards from months or years ago on their current characteristics. Your model will be allowing the future to predict the past. Not terribly defensible.

In the classic double-slit experiment, past events are seemingly affected by current conditions. But unless you're a quantum physicist or Marty McFly, you're probably not going to see causality working this way.

In this post, we'll walk through how to set up a cox regression using "time-dependent covariates," which will allow us to model historical hazard rates on variables whose values were applicable at the time.

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Analyzing Customer Churn – Cox Regression

Last week, we discussed using Kaplan-Meier estimators, survival curves, and the log-rank test to start analyzing customer churn data. We plotted survival curves for a customer base, then bifurcated them by gender, and confirmed that the difference between the gender curves was statistically significant. Of course, these methods can only get us so far… What if you want to use multiple variables to predict churn? Will you create 5, 12, 80 survival curves and try to spot differences between them? Or, what if you want to predict churn based on a continuous variable like age? Surely you wouldn’t want to create a curve for each individual age. That’s preposterous!

Too Many Survival Curves

Don’t do this. This isn’t useful analysis. This is an etch-a-sketch gone horribly wrong.

Luckily, statisticians (once again, primarily in the medical and engineering fields) are way ahead of us here. A technique called cox regression lets us do everything we just mentioned in a statistically accurate and user-friendly fashion. In fact, because the technique is powerful, rigorous, and easy to interpret, cox regression has largely become the “gold standard” for statistical survival analysis. Sound cool? Let’s get started.

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