Double hurdle model: Not if, but when will customer attrite?

Abstract

Similar to the SDM, this chapter attempts to introduce a class of model known as double hurdle models (originally proposed by Cragg (1971)), which allows the potential attrition and the extent of attrition to be modeled separately. This double hurdle model of attrition is attempted for a European auto finance portfolio. The methodology developed in this chapter identifies a group of potential attritor who would never attrite under any circumstances. Most importantly, it not only recognizes this subset of customer, but also explicitly models the degree of attrition to depend on customer attributes. Identification of this group of customers is crucial to any consumer finance business, since it provides the basis of efficient retention tactics and profitable target population. The chapter successfully demonstrates the improvement achieved by the double hurdle model over the conventional logistic regression technique in all the segments of attrition (over the different degrees of attrition).