Learning Management Marketing and Customer Support_3 ppt

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Furthermore, there is a general pattern of zip codes increasing from East to
West. Codes that start with 0 are in New England and Puerto Rico; those
beginning with 9 are on the west coast. This suggests a distance function that
approximates geographic distance by looking at the high order digits of the
zip code.
■■ d
zip
(A,B) = 0.0 if the zip codes are identical
■■ d
zip
(A,B) = 0.1 if the first three digits are identical (e.g., “20008” and
“20015”
■■ d
zip
(A,B) = 0.5 if the first digits are identical (e.g., “95050” and “98125”)
■■ d
zip
(A,B) = 1.0 if the first digits are not identical (e.g., “02138” and
“94704”)
Of course, if geographic distance were truly of interest, a better approach
would be to look up the latitude and longitude of each zip code in a table and
calculate the distances that way (it is possible to get this information for the
United States from www.census.gov). For many purposes however, geographic
proximity is not nearly as important as some other measure of similarity. 10011
and 10031 are both in Manhattan, but from a marketing point of view, they
don’t have much else in common, because one is an upscale downtown neigh-
borhood and the other is a working class Harlem neighborhood. On the other
hand 02138 and 94704 are on opposite coasts, but are likely to respond very
similarly to direct mail from a political action committee, since they are for

Cambridge, MA and Berkeley, CA respectively.
This is just one example of how the choice of a distance metric depends on
the data mining context. There are additional examples of distance and simi-
larity measures in Chapter 11 where they are applied to clustering.
When a Distance Metric Already Exists
There are some situations where a distance metric already exists, but is diffi-
cult to spot. These situations generally arise in one of two forms. Sometimes, a
function already exists that provides a distance measure that can be adapted
for use in MBR. The news story case study provides a good example of adapt-
ing an existing function, the relevance feedback score, for use as a distance
function.
Other times, there are fields that do not appear to capture distance, but can
be pressed into service. An example of such a hidden distance field is solicita-
tion history. Two customers who were chosen for a particular solicitation in
the past are “close,” even though the reasons why they were chosen may no
longer be available; two who were not chosen, are close, but not as close; and
one that was chosen and one that was not are far apart. The advantage of this
metric is that it can incorporate previous decisions, even if the basis for the
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Memory-Based Reasoning and Collaborative Filtering 279
decisions is no longer available. On the other hand, it does not work well for
customers who were not around during the original solicitation; so some sort
of neutral weighting must be applied to them.
Considering whether the original customers responded to the solicitation
can extend this function further, resulting in a solicitation metric like:
■■ d
solicitation
(A, B) = 0, when A and B both responded to the solicitation
■■ d
solicitation

(A, B) = 0.1, when A and B were both chosen but neither
responded
■■ d
solicitation
(A, B) = 0.2, when neither A nor B was chosen, but both were
available in the data
■■ d
solicitation
(A, B) = 0.3, when A and B were both chosen, but only one
responded
■■ d
solicitation
(A, B) = 0.3, when one or both were not considered
■■ d
solicitation
(A, B) = 1.0, when one was chosen and the other was not
Of course, the particular values are not sacrosanct; they are only meant as a
guide for measuring similarity and showing how previous information and
response histories can be incorporated into a distance function.
The Combination Function: Asking the
Neighbors for the Answer
The distance function is used to determine which records comprise the neigh-
borhood. This section presents different ways to combine data gathered from
those neighbors to make a prediction. At the beginning of this chapter, we
estimated the median rent in the town of Tuxedo, by taking an average
of the median rents in similar towns. In that example, averaging was the
combination function. This section explores other methods of canvassing the
neighborhood.
The Basic Approach: Democracy
One common combination function is for the k nearest neighbors to vote on an

answer—”democracy” in data mining. When MBR is used for classification,
each neighbor casts its vote for its own class. The proportion of votes for each
class is an estimate of the probability that the new record belongs to the corre-
sponding class. When the task is to assign a single class, it is simply the one
with the most votes. When there are only two categories, an odd number of
neighbors should be poled to avoid ties. As a rule of thumb, use c+1 neighbors
when there are c categories to ensure that at least one class has a plurality.
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In Table 8.12, the five test cases seen earlier have been augmented with a flag
that signals whether the customer has become inactive.
For this example, three of the customers have become inactive and two have
not, an almost balanced training set. For illustrative purposes, let’s try to deter-
mine if the new record is active or inactive by using different values of k for
two distance functions, deuclid and dnorm (Table 8.13).
The question marks indicate that no prediction has been made due to a tie
among the neighbors. Notice that different values of k do affect the classifica-
tion. This suggests using the percentage of neighbors in agreement to provide
the level of confidence in the prediction (Table 8.14).
Table 8.12 Customers with Attrition History
RECNUM GENDER AGE SALARY INACTIVE
1 female 27 $19,000 no
2 male 51 $64,000 yes
3 male 52 $105,000 yes
4 female 33 $55,000 yes
5 male 45 $45,000 no
new female 45 $100,000 ?
Table 8.13 Using MBR to Determine if the New Customer Will Become Inactive
NEIGHBOR
NEIGHBORS ATTRITION K = 1 K = 2 K = 3 K = 4 K = 5

d
sum
4,3,5,2,1 Y,Y,N,Y,N yes yes yes yes yes
d
Euclid
4,1,5,2,3 Y,N,N,Y,Y yes ? no ? yes
Table 8.14 Attrition Prediction with Confidence
K = 1 K = 2 K = 3 K = 4 K = 5
d
sum
yes, 100% yes, 100% yes, 67% yes, 75% yes, 60%
d
Euclid
yes, 100% yes, 50% no, 67% yes, 50% yes, 60%
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Memory-Based Reasoning and Collaborative Filtering 281
The confidence level works just as well when there are more than two cate-
gories. However, with more categories, there is a greater chance that no single
category will have a majority vote. One of the key assumptions about MBR
(and data mining in general) is that the training set provides sufficient infor-
mation for predictive purposes. If the neighborhoods of new cases consistently
produce no obvious choice of classification, then the data simply may not con-
tain the necessary information and the choice of dimensions and possibly of
the training set needs to be reevaluated. By measuring the effectiveness of
MBR on the test set, you can determine whether the training set has a sufficient
number of examples.
WARNING MBR is only as good as the training set it uses. To measure
whether the training set is effective, measure the results of its predictions on
the test set using two, three, and four neighbors. If the results are inconclusive
or inaccurate, then the training set is not large enough or the dimensions and

distance metrics chosen are not appropriate.
Weighted Voting
Weighted voting is similar to voting in the previous section except that the
neighbors are not all created equal—more like shareholder democracy than
one-person, one-vote. The size of the vote is inversely proportional to the dis-
tance from the new record, so closer neighbors have stronger votes than neigh-
bors farther away do. To prevent problems when the distance might be 0, it is
common to add 1 to the distance before taking the inverse. Adding 1 also
makes all the votes between 0 and 1.
Table 8.15 applies weighted voting to the previous example. The “yes, cus-
tomer will become inactive” vote is the first; the “no, this is a good customer”
vote is second.
Weighted voting has introduced enough variation to prevent ties. The con-
fidence level can now be calculated as the ratio of winning votes to total votes
(Table 8.16).
Table 8.15 Attrition Prediction with Weighted Voting
K = 1 K = 2 K = 3 K = 4 K = 5
d
sum
0.749 to 0 1.441 to 0 1.441 2.085 to 2.085 to
to 0.647 0.647 1.290
d
Euclid
0.669 to 0 0.669 to 0.669 to 1.157 to 1.601 to
0.562 1.062 1.062 1.062
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Table 8.16 Confidence with Weighted Voting
1 2 3 4 5
d

sum
yes, 100% yes, 100% yes, 69% yes, 76% yes, 62%
d
Euclid
yes, 100% yes, 54% no, 61% yes, 52% yes, 60%
In this case, weighting the votes has only a small effect on the results and the
confidence. The effect of weighting is largest when some neighbors are con-
siderably further away than others.
Weighting can also be applied to estimation by replacing the simple average
of neighboring values with an average weighted by distance. This approach is
used in collaborative filtering systems, as described in the following section.
Collaborative Filtering: A Nearest Neighbor
Approach to Making Recommendations
Neither of the authors considers himself a country music fan, but one of them
is the proud owner of an autographed copy of an early Dixie Chicks CD. The
Chicks, who did not yet have a major record label, were performing in a local
bar one day and some friends who knew them from Texas made a very enthu-
siastic recommendation. The performance was truly memorable, featuring
Martie Erwin’s impeccable Bluegrass fiddle, her sister Emily on a bewildering
variety of other instruments (most, but not all, with strings), and the seductive
vocals of Laura Lynch (who also played a stand-up electric bass). At the break,
the band sold and autographed a self-produced CD that we still like better
than the one that later won them a Grammy. What does this have to do with
nearest neighbor techniques? Well, it is a human example of collaborative fil-
tering. A recommendation from trusted friends will cause one to try something
one otherwise might not try.
Collaborative filtering is a variant of memory-based reasoning particularly
well suited to the application of providing personalized recommendations. A
collaborative filtering system starts with a history of people’s preferences. The
distance function determines similarity based on overlap of preferences—

people who like the same thing are close. In addition, votes are weighted by
distances, so the votes of closer neighbors count more for the recommenda-
tion. In other words, it is a technique for finding music, books, wine, or any-
thing else that fits into the existing preferences of a particular person by using
the judgments of a peer group selected for their similar tastes. This approach
is also called social information filtering.
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Memory-Based Reasoning and Collaborative Filtering 283
Collaborative filtering automates the process of using word-of-mouth to
decide whether they would like something. Knowing that lots of people liked
something is not enough. Who liked it is also important. Everyone values some
recommendations more highly than others. The recommendation of a close
friend whose past recommendations have been right on target may be enough
to get you to go see a new movie even if it is in a genre you generally dislike.
On the other hand, an enthusiastic recommendation from a friend who thinks
Ace Ventura: Pet Detective is the funniest movie ever made might serve to warn
you off one you might otherwise have gone to see.
Preparing recommendations for a new customer using an automated col-
laborative filtering system has three steps:
1. Building a customer profile by getting the new customer to rate a selec-
tion of items such as movies, songs, or restaurants.
2. Comparing the new customer’s profile with the profiles of other cus-
tomers using some measure of similarity.
3. Using some combination of the ratings of customers with similar pro-
files to predict the rating that the new customer would give to items he
or she has not yet rated.
The following sections examine each of these steps in a bit more detail.
Building Profiles
One challenge with collaborative filtering is that there are often far more items
to be rated than any one person is likely to have experienced or be willing to
rate. That is, profiles are usually sparse, meaning that there is little overlap
among the users’ preferences for making recommendations. Think of a user
profile as a vector with one element per item in the universe of items to be

rated. Each element of the vector represents the profile owner’s rating for the
corresponding item on a scale of –5 to 5 with 0 indicating neutrality and null
values for no opinion.
If there are thousands or tens of thousands of elements in the vector and
each customer decides which ones to rate, any two customers’ profiles are
likely to end up with few overlaps. On the other hand, forcing customers to
rate a particular subset may miss interesting information because ratings of
more obscure items may say more about the customer than ratings of common
ones. A fondness for the Beatles is less revealing than a fondness for Mose
Allison.
A reasonable approach is to have new customers rate a list of the twenty or
so most frequently rated items (a list that might change over time) and then
free them to rate as many additional items as they please.
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Comparing Profiles
Once a customer profile has been built, the next step is to measure its distance
from other profiles. The most obvious approach would be to treat the profile
vectors as geometric points and calculate the Euclidean distance between
them, but many other distance measures have been tried. Some give higher
weight to agreement when users give a positive rating especially when most
users give negative ratings to most items. Still others apply statistical correla-
tion tests to the ratings vectors.
Making Predictions
The final step is to use some combination of nearby profiles in order to come
up with estimated ratings for the items that the customer has not rated. One
approach is to take a weighted average where the weight is inversely propor-
tional to the distance. The example shown in Figure 8.7 illustrates estimating
the rating that Nathaniel would give to Planet of the Apes based on the opinions
of his neighbors, Simon and Amelia.

Nathaniel
Alan
Michael
Stephanie
Amelia
Simon
Crouching Tiger
–1
Osmosis Jones
.
.
.
Crouching Tiger
–4
Osmosis Jones
.
.
.
P eter
Jenn y
Apocalypse Now
Vertical Ray of Sun
Planet Of The Apes
American Pie 2
Plan 9 From Outer Space
Apocalypse Now
Vertical Ray of Sun
Planet Of The Apes
American Pie 2
Plan 9 From Outer Space

Figure 8.7 The predicted rating for Planet of the Apes is –2.66.
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Memory-Based Reasoning and Collaborative Filtering 285
Simon, who is distance 2 away, gave that movie a rating of –1. Amelia, who
is distance 4 away, gave that movie a rating of –4. No one else’s profile is close
enough to Nathaniel’s to be included in the vote. Because Amelia is twice as
far away as Simon, her vote counts only half as much as his. The estimate for
Nathaniel’s rating is weighted by the distance:
(
1
⁄2 (–1) +
1
⁄4 (–4)) / (
1
⁄2 +
1
⁄4)= –1.5/0.75= –2.
A good collaborative filtering system gives its users a chance to comment on
the predictions and adjust the profile accordingly. In this example, if Nathaniel
rents the video of Planet of the Apes despite the prediction that he will not like
it, he can then enter an actual rating of his own. If it turns out that he really
likes the movie and gives it a rating of 4, his new profile will be in a slightly
different neighborhood and Simon’s and Amelia’s opinions will count less for
Nathaniel’s next recommendation.
Lessons Learned
Memory based reasoning is a powerful data mining technique that can be used
to solve a wide variety of data mining problems involving classification or
estimation. Unlike other data mining techniques that use a training set of pre-
classified data to create a model and then discard the training set, for MBR, the
training set essentially is the model.

Choosing the right training set is perhaps the most important step in MBR.
The training set needs to include sufficient numbers of examples all possible
classifications. This may mean enriching it by including a disproportionate
number of instances for rare classifications in order to create a balanced train-
ing set with roughly the same number of instances for all categories. A training
set that includes only instances of bad customers will predict that all cus-
tomers are bad. In general, the size of the training set should have at least thou-
sands, if not hundreds of thousands or millions, of examples.
MBR is a k-nearest neighbors approach. Determining which neighbors are
near requires a distance function. There are many approaches to measuring the
distance between two records. The careful choice of an appropriate distance
function is a critical step in using MBR. The chapter introduced an approach to
creating an overall distance function by building a distance function for each
field and normalizing it. The normalized field distances can then be combined
in a Euclidean fashion or summed to produce a Manhattan distance.
When the Euclidean method is used, a large difference in any one field is
enough to cause two records to be considered far apart. The Manhattan method
is more forgiving—a large difference on one field can more easily be offset by
close values on other fields. A validation set can be used to pick the best dis-
tance function for a given model set by applying all candidates to see which
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produces better results. Sometimes, the right choice of neighbors depends on
modifying the distance function to favor some fields over others. This is easily
accomplished by incorporating weights into the distance function.
The next question is the number of neighbors to choose. Once again, inves-
tigating different numbers of neighbors using the validation set can help
determine the optimal number. There is no right number of neighbors. The
number depends on the distribution of the data and is highly dependent on
the problem being solved.

The basic combination function, weighted voting, does a good job for cate-
gorical data, using weights inversely proportional to distance. The analogous
operation for estimating numeric values is a weighted average.
One good application for memory based reasoning is making recommenda-
tions. Collaborative filtering is an approach to making recommendations that
works by grouping people with similar tastes together using a distance func-
tion that can compare two lists user-supplied ratings. Recommendations for a
new person are calculated using a weighted average of the ratings of his or her
nearest neighbors.
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Market Basket Analysis
and Association Rules
9
CHAPTER
To convey the fundamental ideas of market basket analysis, start with the
image of the shopping cart in Figure 9.1 filled with various products pur-
chased by someone on a quick trip to the supermarket. This basket contains an
assortment of products—orange juice, bananas, soft drink, window cleaner,
and detergent. One basket tells us about what one customer purchased at one
time. A complete list of purchases made by all customers provides much more
information; it describes the most important part of a retailing business—what
merchandise customers are buying and when.
Each customer purchases a different set of products, in different quantities,
at different times. Market basket analysis uses the information about what cus-
tomers purchase to provide insight into who they are and why they make cer-
tain purchases. Market basket analysis provides insight into the merchandise
by telling us which products tend to be purchased together and which are
most amenable to promotion. This information is actionable: it can suggest
new store layouts; it can determine which products to put on special; it can
indicate when to issue coupons, and so on. When this data can be tied to indi-

vidual customers through a loyalty card or Web site registration, it becomes
even more valuable.
The data mining technique most closely allied with market basket analysis
is the automatic generation of association rules. Association rules represent
patterns in the data without a specified target. As such, they are an example of
undirected data mining. Whether the patterns make sense is left to human
interpretation.
287
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288 Chapter 9
In this shopping basket, the shopper purchased
a quart of orange juice, some bananas, dish
detergent, some window cleaner, and a six
pack of soda.
Is soda typically purchased with
bananas? Does the brand of soda
demographics of the
What should be in the
make a difference?
How do the
neighborhood affect
what customers buy?
basket but is not?
Are window cleaning products
purchased when detergent and orange
juice are bought together?
Figure 9.1 Market basket analysis helps you understand customers as well as items that
are purchased together.
Association rules were originally derived from point-of-sale data that
describes what products are purchased together. Although its roots are in ana-

lyzing point-of-sale transactions, association rules can be applied outside the
retail industry to find relationships among other types of “baskets.” Some
examples of potential applications are:
■■ Items purchased on a credit card, such as rental cars and hotel rooms,
provide insight into the next product that customers are likely to
purchase.
■■ Optional services purchased by telecommunications customers (call
waiting, call forwarding, DSL, speed call, and so on) help determine
how to bundle these services together to maximize revenue.
■■ Banking services used by retail customers (money market accounts,
CDs, investment services, car loans, and so on) identify customers
likely to want other services.
■■ Unusual combinations of insurance claims can be a sign of fraud and
can spark further investigation.
■■ Medical patient histories can give indications of likely complications
based on certain combinations of treatments.
Association rules often fail to live up to expectations. In our experience,
for instance, they are not a good choice for building cross-selling models in
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Market Basket Analysis and Association Rules 289
industries such as retail banking, because the rules end up describing previous
marketing promotions. Also, in retail banking, customers typically start with a
checking account and then a savings account. Differentiation among products
does not appear until customers have more products. This chapter covers the
pitfalls as well as the uses of association rules.
The chapter starts with an overview of market basket analysis, including
more basic analyses of market basket data that do not require association rules.
It then dives into association rules, explaining how they are derived. The chap-
ter then continues with ways to extend association rules to include other facets
of the market basket analysis.

Defining Market Basket Analysis
Market basket analysis does not refer to a single technique; it refers to a set of
business problems related to understanding point-of-sale transaction data.
The most common technique is association rules, and much of this chapter
delves into that subject. Before talking about association rules, this section
talks about market basket data.
Three Levels of Market Basket Data
Market basket data is transaction data that describes three fundamentally
different entities:
■■ Customers
■■ Orders (also called purchases or baskets or, in academic papers, item sets)
■■ Items
In a relational database, the data structure for market basket data often
looks similar to Figure 9.2. This data structure includes four important entities.
LINE ITEM
ORDER ID
UNIT PRICE
UNIT COST
etc.
ORDER
ORDER ID
SHIPPING COST
etc.
NAME
ADDRESS
etc.
DESCRIPTION
etc.
LINE ITEM ID
PRODUCT ID

QUANTITY
GIFT WRAP FLAG
TAXABLE FLAG
CUSTOMER ID
ORDER DATE
PAYMENT TYPE
TOTAL VALUE
SHIP DATE
CUSTOMER
CUSTOMER ID
PRODUCT
PRODUCT ID
CATEGORY
SUBCATEGORY
Figure 9.2 A data model for transaction-level market basket data typically has three
tables, one for the customer, one for the order, and one for the order line.
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The order is the fundamental data structure for market basket data. An
order represents a single purchase event by a customer. This might correspond
to a customer ordering several products on a Web site or to a customer pur-
chasing a basket of groceries or to a customer buying a several items from a
catalog. This includes the total amount of the purchase, the total amount, addi-
tional shipping charges, payment type, and whatever other data is relevant
about the transaction. Sometimes the transaction is given a unique identifier.
Sometimes the unique identifier needs to be cobbled together from other data.
In one example, we needed to combine four fields to get an identifier for pur-
chases in a store—the timestamp when the customer paid, chain ID, store ID,
and lane ID.
Individual items in the order are represented separately as line items. This

data includes the price paid for the item, the number of items, whether tax
should be charged, and perhaps the cost (which can be used for calculating
margin). The item table also typically has a link to a product reference table,
which provides more descriptive information about each product. This descrip-
tive information should include the product hierarchy and other information
that might prove valuable for analysis.
The customer table is an optional table and should be available when a cus-
tomer can be identified, for example, on a Web site that requires registration or
when the customer uses an affinity card during the transaction. Although the
customer table may have interesting fields, the most powerful element is the
ID itself, because this can tie transactions together over time.
Tracking customers over time makes it possible to determine, for instance,
which grocery shoppers “bake from scratch”—something of keen interest to
the makers of flour as well as prepackaged cake mixes. Such customers might
be identified from the frequency of their purchases of flour, baking powder,
and similar ingredients, the proportion of such purchases to the customer’s
total spending, and the lack of interest in prepackaged mixes and ready-to-eat
desserts. Of course, such ingredients may be purchased at different times and
in different quantities, making it necessary to tie together multiple transac-
tions over time.
All three levels of market basket data are important. For instance, to under-
stand orders, there are some basic measures:
■■ What is the average number of orders per customer?
■■ What is the average number of unique items per order?
■■ What is the average number of items per order?
■■ For a given product, what is the proportion of customers who have ever
purchased the product?
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Market Basket Analysis and Association Rules 291
■■ For a given product, what is the average number of orders per cus-

tomer that include the item?
■■ For a given product, what is the average quantity purchased in an order
when the product is purchased?
These measures give broad insight into the business. In some cases, there are
few repeat customers, so the proportion of orders per customer is close to 1;
this suggests a business opportunity to increase the number of sales per cus-
tomers. Or, the number of products per order may be close to 1, suggesting an
opportunity for cross-selling during the process of making an order.
It can be useful to compare these measures to each other. We have found that
the number of orders is often a useful way of differentiating among customers;
good customers clearly order more often than not-so-good customers. Figure
9.3 attempts to look at the breadth of the customer relationship (the number of
unique items ever purchased) by the depth of the relationship (the number of
orders) for customers who purchased more than one item. This data is from a
small specialty retailer. The biggest bubble shows that many customers who
purchase two products do so at the same time. There is also a surprisingly
large bubble showing that a sizeable number of customers purchase the same
product in two orders. Better customers—at least those who returned multiple
times—tend to purchase a greater diversity of goods. However, some of them
are returning and buying the same thing they bought the first time. How can
the retailer encourage customers to come back and buy more and different
products? Market basket analysis cannot answer the question, but it can at
least motivate asking it and perhaps provide hints that might help.
0
1
2
3
4
5
6

7
8
9
10
Num Distincts Products
Across All Orders
0 1 2 3 4 5 6
Num Orders
Figure 9.3 This bubble plot shows the breadth of customer relationships by the depth of
the relationship.
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292 Chapter 9
Order Characteristics
Customer purchases have additional interesting characteristics. For instance,
the average order size varies by time and region—and it is useful to keep track
of these to understand changes in the business environment. Such information
is often available in reporting systems, because it is easily summarized.
Some information, though, may need to be gleaned from transaction-level
data. Figure 9.4 breaks down transactions by the size of the order and the credit
card used for payment—Visa, MasterCard, or American Express—for another
retailer. The first thing to notice is that the larger the order, the larger the average
purchase amount, regardless of the credit card being used. This is reassuring.
Also, the use of one credit card type, American Express, is consistently associ-
ated with larger orders—an interesting finding about these customers.
For Web purchases and mail-order transactions, additional information may
also be gathered at the point of sale:
■■ Did the order use gift wrap?
■■ Is the order going to the same address as the billing address?
■■ Did the purchaser accept or decline a particular cross-sell offer?
Of course, gathering information at the point of sale and having it available

for analysis are two different things. However, gift giving and responsiveness
to cross-sell offers are two very useful things to know about customers. Find-
ing patterns with this information requires collecting the information in the
first place (at the call center or through the online interface) and then moving
it to a data mining environment.
$0
$250
$500
$750
$1,000
$1,250
$1,500
MasterCard
Visa
Average Order Amount
American Express
1 2 3 4 5 6 7 8 9
Number of Items Purchased
Figure 9.4 This chart shows the average amount spent by credit card type based on the
number of items in the order for one particular retailer.
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Item Popularity
What are the most popular items? This is a question that can usually be
answered by looking at inventory curves, which can be generated without
having to work with transaction-level data. However, knowing the sales of an
individual item is only the beginning. There are related questions:
■■ What is the most common item found in a one-item order?
■■ What is the most common item found in a multi-item order?
■■ What is the most common item found among customers who are repeat
purchasers?
■■ How has the popularity of particular items changed over time?
■■ How does the popularity of an item vary regionally?

The first three questions are particularly interesting because they may
suggest ideas for growing customer relationships. Association rules can pro-
vide answers to these questions, particularly when used with virtual items to
represent the size of the order or the number of orders a customer has made.
The last two questions bring up the dimensions of time and geography,
which are very important for applications of market basket analysis. Differ-
ent products have different affinities in different regions—something that
retailers are very familiar with. It is also possible to use association rules to
start to understand these areas, by introducing virtual items for region and
seasonality.
TIP Time and geography are two of the most important attributes of market
basket data, because they often point to the exact marketing conditions at the
time of the sale.
Tracking Marketing Interventions
As discussed in Chapter 5, looking at individual products over time can pro-
vide a good understanding of what is happening with the product. Including
marketing interventions along with the product sales over time, as in Figure
9.5, makes it possible to see the effect of the interventions. The chart shows a
sales curve for a particular product. Prior to the intervention, sales are hover-
ing at 50 units per week. After the intervention, they peak at about seven or
eight times that amount, before gently sliding down over the six or seven
weeks. Using such charts, it can be possible to measure the response of the
marketing effort.
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0
50
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250
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Mail Drop
Mar 01
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Jul 05
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Aug 02
Figure 9.5 Showing marketing interventions and product sales on the same chart makes

it possible to see effects of marketing efforts.
Such analysis does not require looking at individual market baskets—daily
or weekly summaries of product sales are sufficient. However, it does require
knowing when marketing interventions take place—and sometimes getting
such a calendar is the biggest challenge. One of the questions that such a chart
can answer is the effect of the intervention. A challenge in answering this ques-
tion is determining whether the additional sales are incremental or are made
by customers who would purchase the product anyway at some later time.
Market basket data can start to answer this question. In addition to looking
at the volume of sales after an intervention, we can also look at the number of
baskets containing the item. If the number of customers is not increasing, there
is evidence that existing customers are simply stocking up on the item at a
lower cost.
A related question is whether discounting results in additional sales of other
products. Association rules can help answer this question by finding combina-
tions of products that include those being promoted during the period of the
promotion. Similarly, we might want to know if the average size of orders
increases or decreases after an intervention. These are examples of questions
where more detailed transaction level data is important.
Clustering Products by Usage
Perhaps one of the most interesting questions is what groups of products often
appear together. Such groups of products are very useful for making recom-
mendations to customers—customers who have purchased some of the prod-
ucts may be interested in the rest of them (Chapter 8 talks about product
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Market Basket Analysis and Association Rules 295
recommendations in more detail). At the individual product level, association
rules provide some answers in this area. In particular, this data mining tech-
nique determines which product or products in a purchase suggest the pur-
chase of other particular products at the same time.
Sometimes it is desirable to find larger clusters than those provided by asso-
ciation rules, which include just a handful of items in any rule. Standard cluster-
ing techniques, which are described in Chapter 11, can also be used on market
basket data. In this case, the data needs to be pivoted, as shown in Figure 9.6, so
that each row represents one order or customer, and there is a flag or a counter
for each product purchased. Unfortunately, there are often thousands of differ-
ent products. To reduce the number of columns, such a transformation can take
place at the category level, rather than at the individual product level.
There is typically a lot of information available about products. In addition
to the product hierarchy, such information includes the color of clothes,
whether food is low calorie, whether a poster includes a frame, and so on.
Such descriptions provide a wealth of information, and can lead to useful ad
hoc questions:
■■ Do diet products tend to sell together?
■■ Are customers purchasing similar colors of clothing at the same time?
■■ Do customers who purchase framed posters also buy other products?
Being able to answer such questions is often more useful than trying to clus-
ter products, since such directed questions often lead directly to marketing
actions.
LINE ITEM
LINE I
ORDER ID
UNIT PRICE
UNIT COST

GIFT WRAP
etc.
LINE ITEM
LINE I
ORDER ID
UNIT PRICE
UNIT COST
GIFT WRAP
etc.
LINE ITEM
ORDER ID
UNIT PRICE
UNIT COST
etc.
PRODUCT ID
QUANTITY
TAXABLE FLA
PRODUCT ID
QUANTITY
TAXABLE FLA
LINE ITEM ID
PRODUCT ID
QUANTITY
GIFT WRAP FLAG
TAXABLE FLAG
ORDER PIVOT
ORDER ID
HAS PRODUCT A
HAS PRODUCT B
HAS PRODUCT C

HAS PRODUCT D
etc.
ORDER ID
PRODUCT A
PRODUCT B
PRODUCT C
PRODUCT D
0 1 1 0 . .
ORDER ID LINE ITEM ID B
ORDER ID LINE ITEM ID C
Figure 9.6 Pivoting market basket data makes it possible to run clustering algorithms to
find interesting groups of products.
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Association Rules
One appeal of association rules is the clarity and utility of the results, which
are in the form of rules about groups of products. There is an intuitive appeal
to an association rule because it expresses how tangible products and services
group together. A rule like, “if a customer purchases three-way calling, then that
customer will also purchase call waiting,” is clear. Even better, it might suggest a
specific course of action, such as bundling three-way calling with call waiting
into a single service package.
While association rules are easy to understand, they are not always useful.
The following three rules are examples of real rules generated from real data:
■■ Wal-Mart customers who purchase Barbie dolls have a 60 percent likeli-
hood of also purchasing one of three types of candy bars.
■■ Customers who purchase maintenance agreements are very likely to
purchase large appliances.
■■ When a new hardware store opens, one of the most commonly sold
items is toilet bowl cleaners.

The last two examples are examples that we have actually seen in data. The
first is an example quoted in Forbes on September 8, 1997. These three exam-
ples illustrate the three common types of rules produced by association rules:
the actionable, the trivial, and the inexplicable. In addition to these types of rules,
the sidebar “Famous Rules” talks about one other category.
Actionable Rules
The useful rule contains high-quality, actionable information. Once the pattern is
found, it is often not hard to justify, and telling a story can lead to insights and
action. Barbie dolls preferring chocolate bars to other forms of food is not a likely
story. Instead, imagine a family going shopping. The purpose: finding a gift for
little Susie’s friend Emily, since her birthday is coming up. A Barbie doll is the
perfect gift. At checkout, little Jacob starts crying. He wants something too—a
candy bar fits the bill. Or perhaps Emily has a brother; he can’t be left out of the
gift-giving festivities. Maybe the candy bar is for Mom, since buying Barbie dolls
is a tiring activity and Mom needs some energy. These scenarios all suggest that
the candy bar is an impulse purchase added onto that of the Barbie doll.
Whether Wal-Mart can make use of this information is not clear. This rule
might suggest more prominent product placement, such as ensuring that cus-
tomers must walk through candy aisles on their way back from Barbie-land. It
might suggest product tie-ins and promotions offering candy bars and dolls
together. It might suggest particular ways to advertise the products. Because the
rule is easily understood, it suggests plausible causes and possible interventions.
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Trivial Rules
Trivial results are already known by anyone at all familiar with the business. The sec-
ond example (“Customers who purchase maintenance agreements are very
likely to purchase large appliances”) is an example of a trivial rule. In fact, cus-
tomers typically purchase maintenance agreements and large appliances at the
same time. Why else would they purchase maintenance agreements? The two

are advertised together, and rarely sold separately (although when sold sepa-
rately, it is the large appliance that is sold without the agreement rather than
the agreement sold without the appliance). This rule, though, was found after
analyzing hundreds of thousands of point-of-sale transactions from Sears.
Although it is valid and well supported in the data, it is still useless. Similar
results abound: People who buy 2-by-4s also purchase nails; customers who
purchase paint buy paint brushes; oil and oil filters are purchased together, as
are hamburgers and hamburger buns, and charcoal and lighter fluid.
A subtler problem falls into the same category. A seemingly interesting
result—such as the fact that people who buy the three-way calling option on
their local telephone service almost always buy call waiting—may be the result
of past marketing programs and product bundles. In the case of telephone ser-
vice options, three-way calling is typically bundled with call waiting, so it is
difficult to order it separately. In this case, the analysis does not produce action-
able results; it is producing already acted-upon results. Although it is a danger
for any data mining technique, market basket analysis is particularly suscepti-
ble to reproducing the success of previous marketing campaigns because of its
dependence on unsummarized point-of-sale data—exactly the same data that
defines the success of the campaign. Results from market basket analysis may sim-
ply be measuring the success of previous marketing campaigns.
Trivial rules do have one use, although it is not directly a data mining use.
When a rule should appear 100 percent of the time, the few cases where it does
not hold provide a lot of information about data quality. That is, the exceptions
to trivial rules point to areas where business operations, data collection, and
processing may need to be further refined.
Inexplicable Rules
Inexplicable results seem to have no explanation and do not suggest a course of action.
The third pattern (“When a new hardware store opens, one of the most com-
monly sold items is toilet bowl cleaner”) is intriguing, tempting us with a new
fact but providing information that does not give insight into consumer behav-

ior or the merchandise or suggest further actions. In this case, a large hardware
company discovered the pattern for new store openings, but could not figure
out how to profit from it. Many items are on sale during the store openings,
but the toilet bowl cleaners stood out. More investigation might give some
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explanation: Is the discount on toilet bowl cleaners much larger than for other
products? Are they consistently placed in a high-traffic area for store openings
but hidden at other times? Is the result an anomaly from a handful of stores?
Are they difficult to find at other times? Whatever the cause, it is doubtful that
further analysis of just the market basket data can give a credible explanation.
WARNING When applying market basket analysis, many of the results are
often either trivial or inexplicable. Trivial rules reproduce common knowledge
about the business, wasting the effort used to apply sophisticated analysis
techniques. Inexplicable rules are flukes in the data and are not actionable.
Lo and behold, lurking in all the transaction data, is the fact that beer and
to figure out what is happening. A flash of insight provides the explanation:
likely story is that families with young children are preparing for the weekend,
couple of beers, Mom will change the diapers.
the customer must walk by as many stocked shelves as possible, having the
Forbes magazine
called “Beer-Diaper Syndrome.”
FAMOUS RULES: BEER AND DIAPERS
Perhaps the most talked about association rule ever “found” is the association
between beer and diapers. This is a famous story from the late 1980s or early
1990s, when computers were just getting powerful enough to analyze large
volumes of data. The setting is somewhere in the midwest, where a retailer is
analyzing point of sale data to find interesting patterns.
diapers are selling together. This immediately sets marketing minds in motion
beer drinkers do not want to interrupt their enjoyment of televised sports, so

they buy diapers to reduce trips to the bathroom. No, that’s not it. The more
diapers for the kids and beer for Dad. Dad probably knows that after he has a
This is a powerful story. Setting aside the analytics, what can a retailer do
with this information? There are two competing views. One says to put the beer
and diapers close together, so when one is purchased, customers remember
to buy the other one. The other says to put them as far apart as possible, so
opportunity to buy yet more items. The store could also put higher-margin
diapers a bit closer to the beer, although mixing baby products and alcohol
would probably be unseemly.
The story is so powerful that the authors noticed at least four companies
using the story—IBM, Tandem (now part of HP), Oracle, and NCR Teradata. The
actual story was debunked on April 6, 1998 in an article in
The debunked story still has a lesson. Apparently, the sales of beer and
diapers were known to be correlated (at least in some stores) based on
inventory. While doing a demonstration project, a sales manager suggested that
the demo show something interesting, like “beer and diapers” being sold
together. With this small hint, analysts were able to find evidence in the data.
Actually, the moral of the story is not about the power of association rules. It is
that hypothesis testing can be very persuasive and actionable.
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How Good Is an Association Rule?
Association rules start with transactions containing one or more products or ser-
vice offerings and some rudimentary information about the transaction. For the
purpose of analysis, the products and service offerings are called items. Table 9.1
illustrates five transactions in a grocery store that carries five products.
These transactions have been simplified to include only the items pur-
chased. How to use information like the date and time and whether the cus-
tomer paid with cash or a credit card is discussed later in this chapter.
Each of these transactions gives us information about which products are

purchased with which other products. This is shown in a co-occurrence table
that tells the number of times that any pair of products was purchased
together (see Table 9.2). For instance, the box where the “Soda” row intersects
the “OJ” column has a value of “2,” meaning that two transactions contain
both soda and orange juice. This is easily verified against the original transac-
tion data, where customers 1 and 4 purchased both these items. The values
along the diagonal (for instance, the value in the “OJ” column and the “OJ”
row) represent the number of transactions containing that item.
Table 9.1 Grocery Point-of-Sale Transactions
CUSTOMER ITEMS
1 Orange juice, soda
2 Milk, orange juice, window cleaner
3 Orange juice, detergent
4 Orange juice, detergent, soda
5 Window cleaner, soda
Table 9.2 Co-Occurrence of Products
WINDOW
OJ CLEANER MILK SODA DETERGENT
OJ 4 1 1 1 2
Window Cleaner 1 2 1 1 0
Milk 1 1 1 0 0
Soda 2 1 0 3 3
Detergent 1 0 0 1 2
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This simple co-occurrence table already highlights some simple patterns:
■■ Orange juice and soda are more likely to be purchased together than
any other two items.
■■ Detergent is never purchased with window cleaner or milk.
■■ Milk is never purchased with soda or detergent.

These observations are examples of associations and may suggest a formal
rule like: “If a customer purchases soda, then the customer also purchases orange
juice.” For now, let’s defer discussion of how to find the rule automatically, and
instead ask another question. How good is this rule?
In the data, two of the five transactions include both soda and orange juice.
These two transactions support the rule. The support for the rule is two out of
five or 40 percent. Since both the transactions that contain soda also contain
orange juice, there is a high degree of confidence in the rule as well. In fact, two
of the three transactions that contains soda also contains orange juice, so the
rule “if soda, then orange juice” has a confidence of 67 percent percent. The
inverse rule, “if orange juice, then soda,” has a lower confidence. Of the four
transactions with orange juice, only two also have soda. Its confidence, then, is
just 50 percent. More formally, confidence is the ratio of the number of the
transactions supporting the rule to the number of transactions where the con-
ditional part of the rule holds. Another way of saying this is that confidence is
the ratio of the number of transactions with all the items to the number of
transactions with just the “if” items.
Another question is how much better than chance the rule is. One way to
answer this is to calculate the lift (also called improvement), which tells us how
much better a rule is at predicting the result than just assuming the result in
the first place. Lift is the ratio of the density of the target after application of the
left-hand side to the density of the target in the population. Another way of
saying this is that lift is the ratio of the records that support the entire rule to
the number that would be expected, assuming that there is no relationship
between the products (the exact formula is given later in the chapter). A
similar measure, the excess, is the difference between the number of records
supported by the entire rule minus the expected value. Because the excess
is measured in the same units as the original sales, it is sometimes easier to
work with.
Figure 9.7 provides an example of lift, confidence, and support as provided

by Blue Martini, a company that specializes in tools for retailers. Their soft-
ware system includes a suite of analysis tools that includes association rules.
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Market Basket Analysis and Association Rules 301
This particular example shows that a particular jacket is much more likely to
be purchased with a gift certificate, information that can be used for improv-
ing messaging for selling both gift certificates and jackets.
The ideas behind the co-occurrence table extend to combinations with any
number of items, not just pairs of items. For combinations of three items, imag-
ine a cube with each side split into five different parts, as shown in Figure 9.8.
Even with just five items in the data, there are already 125 different subcubes
to fill in. By playing with symmetries in the cube, this can be reduced a bit (by
a factor of six), but the number of subcubes for groups of three items is
proportional to the third power of the number of different items. In general,
the number of combinations with n items is proportional to the number of
items raised to the nth power—a number that gets very large, very fast.
And generating the co-occurrence table requires doing work for each of these
combinations.
Figure 9.7 Blue Martini provides an interface that shows the support, confidence, and lift
of an association rule.
Figure 9.8 A co-occurrence table in three dimensions can be visualized as a cube.
Building Association Rules
This basic process for finding association rules is illustrated in Figure 9.9.
There are three important concerns in creating association rules:
■■ Choosing the right set of items.
■■ Generating rules by deciphering the counts in the co-occurrence matrix.
■■ Overcoming the practical limits imposed by thousands or tens of thou-
sands of items.
The next three sections delve into these concerns in more detail.
OJ Soda DetergentCleaner Milk

OJ
Cleaner
Milk
Soda
Detergent
OJ
Cleaner
Milk
Soda
Detergent
Orange juice, milk, and
window cleaner appear
together in exactly one
transaction.
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11100
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