How do you apply Markov decision processes to optimize customer journeys?

1 What are MDPs?

MDPs are a mathematical framework that consists of four elements: states, actions, transitions, and rewards. States are the possible situations that the system can be in, such as a customer's stage in the purchase funnel. Actions are the choices that the system can make, such as sending an email or offering a discount. Transitions are the probabilities that the system will move from one state to another after taking an action, such as the likelihood that a customer will open an email or buy a product. Rewards are the outcomes that the system receives after taking an action, such as the revenue or customer satisfaction.

2 How to formulate MDPs for customer journeys?

In order to apply MDPs to customer journeys, it is necessary to define the states, actions, transitions, and rewards relevant for your business. To do this, you can identify the key stages of your customer journey, such as awareness, consideration, purchase, and loyalty. These will serve as your states. Then you can define the actions that you can take to influence customers at each stage - such as sending emails, ads, coupons, or recommendations - which will be your actions. Additionally, you must estimate the transition probabilities between the states based on historical data (such as conversion rates, click-through rates, or churn rates), which will be your transitions. Lastly, assign rewards that you want to maximize or minimize at each stage (such as revenue, cost, or customer lifetime value), which will be your rewards.

4 How to evaluate MDPs for customer journeys?

To evaluate MDPs for customer journeys, you need to measure the performance of your optimal policy against your baseline or alternative policies. You can use different metrics to evaluate your policy, such as the average reward, the return on investment, or the customer satisfaction score. You can also use simulation or experimentation methods to test your policy in a realistic or controlled environment, such as using a synthetic data set or conducting an A/B test.

5 What are some examples of MDPs for customer journeys?

MDPs can be applied to a number of domains and scenarios that involve customer journeys, such as e-commerce, gaming, or health care. For instance, in e-commerce, MDPs can be used to personalize product recommendations, pricing, and promotions based on customer preferences, behavior, and feedback. Similarly, in gaming MDPs can assist in designing game levels, rewards and challenges according to player skills, engagement and retention. Additionally, in health care MDPs can be used to customize treatment plans, interventions and follow-ups based on patient conditions, outcomes and adherence.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?