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WORKING PAPER
 

Model-supported business-to-business prospect prediction

based on an iterative customer acquisition framework

Jeroen D’Haen1

Dirk Van den Poel2

November 2013

2013/863

1
PhD Candidate at Ghent University, Faculty of Economics and Business Administration, Tweekerkenstraat 2,
9000 Gent, Belgium, http://www.crm.UGent.be
2
Professor of Marketing Analytics at Ghent University, Faculty of Economics and Business Administration,
Tweekerkenstraat 2, 9000 Gent, Belgium, http://www.crm.UGent.be

D/2013/7012/34  
Abstract

This article discusses a model designed to help sales representatives acquire customers in a
business-to-business environment. Sales representatives are often overwhelmed by available
information, so they use arbitrary rules to select leads to pursue. The goal of the proposed
model is to generate a high-quality list of prospects that are easier to convert into leads and
ultimately customers in three phases: Phase 1 occurs when there is only information on the
current customer base and uses the nearest neighbor method to obtain predictions. As soon as
there is information on companies that did not become customers, phase 2 initiates, triggering
a feedback loop to optimize and stabilize the model. This phase uses logistic regression,
decision trees, and neural networks. Phase 3 combines phases 1 and 2 into a weighted list of
prospects. Preliminary tests indicate the good quality of the model. The study makes two
theoretical contributions: First, the authors offer a standardized version of the customer
acquisition framework, and second, they point out the iterative aspects of this process.

Keywords: customer acquisition, sales funnel, prospects, nearest neighbor, decision tree,
neural network
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1. Introduction
The phrase customer relationship management (CRM) is often used in contemporary
marketing literature. Although it has been in use since the beginning of the 1990s, researchers
have reached no consensus with regard to its definition (Buttle, 2009a; Ngai, 2005; Richards
& Jones, 2008). Most definitions have, however, some core features in common; for example,
CRM consistently deals with the acquisition and retention of customers and the maximization
of long-term customer value (Jackson, 2005; Ngai, Xiu, & Chau, 2009). Prior literature also
distinguishes four types of CRM: strategic, operational, analytical and collaborative (Buttle,
2009a). This paper focuses on analytical CRM, which involves mining customer-related data
for strategic purposes ( Ang & Buttle, 2006; Buttle, 2009a; Ngai et al., 2009), centered on the
process of acquiring new customers, and how data mining techniques can facilitate this
process.
Most CRM literature neglects customer acquisition in favor of other topics, such as retention
(Sohnchen & Albers, 2010), because retention strategies are typically cheaper than acquisition
strategies (Blattberg, Kim, Kim, & Neslin, 2008a; Wilson, 2006). However, as important as
customer retention might have become, customer acquisition is and should be a crucial focus
for companies and researchers for several reasons (Ang & Buttle, 2006; Buttle, 2009b;
Kamakura et al., 2005). Startups and companies aiming to exploit new markets need new
customers, because they lack existing customers. Even existing companies in a mature market
will lose some customers and must replace them (Wilson, 2006). Acquiring new customers is
a multistage process, in which only certain suspects (for a definition of the terms used herein,
see Section 2) become actual customers, also referred to as the “sales funnel” (Cooper &
Budd, 2007; Patterson, 2007; Yu & Cai, 2007). During this process, it is often difficult for
sales representatives to cope with all available data (Yu & Cai, 2007). Monat (2011, p. 192)
indicates that many companies face this issue:
“Sales leads are the lifeblood of industrial companies, yet determining which
leads are likely to convert to bookings is often based upon guesswork or intuition.
This results in a waste of resources, inaccurate sales forecasts, and potential loss
of sales. A quantitative model that may be used to predict which leads will
convert, based on information inherent in the leads themselves, would be highly
valuable.”
In response, this article presents a quantitative model, designed to be used as a tool to assist
sales representatives in customer acquisition—that is, a sales force automation tool.

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Moreover, it is designed to be implemented in a web application, giving it certain specific

characteristics and advantages. First, it should be usable regardless of specific company
characteristics such as size and industry. Whether for a large company in the automotive
sector or a small company in the food sector, the model should render high-quality
predictions. Second, it must be fully automated and run without the need for human
interference. Third, it must be fast and inexpensive. Because it is a web application, users
typically want results immediately.3 When the algorithm is embedded into a web application,
the cost to the user is limited. The user (i.e., a business-to-business [B2B] company) only
needs to pay a membership fee to obtain access to the application and does not need to pay for
the whole database of prospects, which can be expensive. Moreover, the company does not
need in-house experts to analyze the data, as the algorithm performs this step and provides
intuitive, ready-to-use output.
Sales representatives must sometimes make arbitrary decisions in selecting prospects from a
list of suspects and further qualifying them into leads. Thus, time is lost pursuing bad
prospects and leads, violating the famous “time is money” corporate mantra. A model with
high predictive power in forecasting the right prospects to pursue can save a company time
and, ipso facto, money. Research indicates that approximately 20% of a sales representative’s
time is spent selecting prospects (Trailer, 2006) and depicts prospecting as the most
cumbersome part of the selling process (Moncrief & Marshall, 2005). Furthermore, making
ineffective decisions in the customer acquisition process decreases the overall value of the
company over time (Hansotia & Wang, 1997). The proposed algorithm is designed to make
the decision-making process less arbitrary by providing model-based prospects.
Although the algorithm should work regardless of the company using it or the industry in
which it is situated, note that the proposed sales force automation tool will work best in
markets that are highly saturated, in which market penetration is strategically crucial.
Moreover, we expect the highest efficiency in markets in which the pool of potential
customers is large. In those markets, the selection process is often costly and arbitrary, due to
information overload. In contrast, in industries in which customers are large organizations,
well-known, and few in number, the proposed algorithm will not provide a significant
advantage, because the selection of prospects is limited (Long, Tellefsen, & Lichtenthal,
2007). The algorithm functions in a B2B environment and uses the current customer base of a

3
We ran the algorithm discussed herein on a 3.40 GHz Windows server containing 16 GB of RAM.

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company to predict prospects. It also contains a feedback loop that iteratively improves its
overall predictive performance.
There is a limited amount of research on customer acquisition (Blattberg et al., 2008a). With
this research, we aim to fill this void and also stimulate further research. The theoretical
contributions are twofold. First, we offer a standardized version of the customer acquisition
framework. Second, we point out the iterative aspect of this process, which has been
neglected in research. The remainder of this article is structured as follows: We present a
literature review on customer acquisition, then describe the different stages of our model.
After we elaborate on the data, we report the results of the model and finally discuss the
conclusions, implications, limitations, and further research suggestions.

2. Customer acquisition framework

The sales funnel conceptualization offers a way to describe the customer acquisition process,
dividing it into different stages (Ang & Buttle, 2006; Coe, 2004a; Patterson, 2007; Yu & Cai,
2007). These divisions vary from study to study, as do the definitions they use to characterize
each part. A main difference, however, is where the studies place a prospect and a lead in the
sales process: Some put the prospect before the lead (e.g., Coe, 2004a; Metzger, 2005),
whereas others put the lead before the prospect (e.g., Gillin & Schwartzman, 2011; Patterson,
2007). For the sake of clarity and as a way of creating a standardized framework, we first
describe our vision on the sales funnel and define each stage. The emphasis is not on where
the different terms are placed but on their definitions.

The darker portion of Figure 1 illustrates the sales funnel. The beginning is a list of suspects.
Suspects are all potential new customers available. In theory, they could include every other
company in a B2B context, apart from the current customer base. In practice, they boil down

Suspects

Prospects

Leads

Customers
5

Figure 1: The original and transformed sales funnel

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to a limited list of companies (perhaps purchased from specialized vendors; Buttle, 2009b;
Rygielski, Wang, & Yen, 2002; Wilson, 2006). The vast amounts of information in those lists
tends to overwhelm B2B marketers (Wilson, 2003). As a result, marketers often make
selections using a set of arbitrary rules. The outcome of this selection is the list of prospects.
Prospects are suspects who meet certain predefined characteristics. The next step is to qualify
these prospects. Leads are prospects that will be contacted, after they have been qualified as
the most likely to respond. This qualification is often driven by gut feeling or self-claimed
competence. Finally, leads who become clients of the company are customers.

However, current theories and models fail to acknowledge the iterative nature of these stages,
which implies none of the different stages is static. Yet the dynamics of this process influence
the process itself. First, if customer acquisition is successful, the customer base is altered as
new customers get added to it. As a result, these new customers are excluded from the next
iteration in the sales funnel. Second, knowledge from a previous iteration should be
incorporated in consecutive iterations. The successes and failures in each stage fine-tune the
overall process. Here, we focus on the interplay between prospects and leads. The created
model alters on the basis of the conversion from prospect to lead, including learning from the
new information generated in each iteration. Incorporating the iterative aspect will improve
the quality of customer acquisition models.

The procedure we propose radically alters the shape of the sales funnel (the lighter portion of
Figure 1), forming an isosceles trapezoid. More prospects are selected, but they are of higher
quality. As a result, a greater proportion will be converted into leads and ultimately
customers. Furthermore, the algorithm integrates a feedback loop that, over time, further
elevates the quality of the prospects. Note that Figure 1 is an exaggerated representation;
reality should be somewhere between the graphs, because sales representatives will most
likely select a smaller proportion of leads due to time constraints. It is nearly impossible for
companies to increase their number of sales calls, assuming sales representatives work close
to capacity (Coe, 2004b). The only alternative is to improve the quality of these calls, which is
what the proposed algorithm aims to do. It provides high-quality prospects that are easier to
convert, as recommended by research showing that call productivity can be improved by the
use of information technology tools (Ahearne, Hughes, & Schillewaert, 2007; Eggert &
Serdaroglu, 2011).

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Traditionally, the conversion rate from prospects to qualified leads is approximately 10% on
average (Coe, 2004b). Thus, getting a good list of prospects saves time that then can be spent
qualifying them. Moreover, better qualified leads should lead to a higher customer conversion
rate. Usually, a conversion rate from prospects to customers of 1%–5% on average can be
expected (Coe, 2004b). Research shows that a lower conversion rate increases the cost of
customer acquisition (Blattberg et al., 2008a). Thus, raising the conversion rate will also
lower the cost of customer acquisition.

3. Proposed model

The model contains three phases that must be executed chronologically. Phase 1 runs when
there are data only on the current customers. The model must indicate hidden structures in the
data without the presence of feedback data (i.e., a dependent variable). Therefore,
unsupervised learning is necessary. The input of phase 1 is data on a list of suspects and the
current customers of a company. The output is a list of ranked prospects. As soon as there are
data on which prospects were or were not qualified as leads, phase 2 initiates. The model uses
this feedback data and supervised learning methods, such as logistic regression, decision trees,
and neural networks. Phase 3 combines phases 1 and 2 into a weighted list of prospects. The
output of phase 3 generates more feedback data, which in turn are fed into phase 2, initializing
a feedback loop. That is:

Phase 1: This is the base (default) model. It uses the current customer base to predict
new potential customers.
Phase 2: When the outcome of phase 1 has been used to qualify leads, there is a
possibility for feedback. Phase 2 uses this feedback to improve the predictions.
Phase 3: This phase is a combination of phases 1 and 2.
Every model uses an estimation and validation sample to prevent overfitting and to calculate
the area under the receiver operating characteristic curve, also known as the AUC (Blattberg,
Kim, Kim, & Neslin, 2008c, 2008d). The AUC is a common metric to evaluate the accuracy
of a model (Chen, Hsu, & Hsu, 2011). It can vary from 0.5 (random model) to 1 (perfect
model) (Baecke & Van den Poel, 2011; Blattberg et al., 2008d). The data set is randomly
distributed over the estimation and validation sample, with a ratio of two-thirds and one-

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thirds, respectively, as Blattberg et al. (2008d) suggest. The estimation sample is used to
compute the models, whereas the validation sample tests the predictive performance of these
models.
3.1 Phase 1
The key problem of customer acquisition is that, in the beginning, the current customer base
in combination with a suspect list represents the only inputs, so no supervised learning can be
applied. A solution is to conduct a profiling model, also known as a look-alike model
(Blattberg et al., 2008a; Jackson, 2005; Setnes & Kaymak, 2001; Wilson, 2006). To acquire
new customers, sales representatives must know in detail who their own customers are (Ngai
et al., 2009). Profiles are created according to the current customer base, and these profiles are
subsequently used to predict prospects (Bose & Chen, 2009; Chou, 2000). This method is a
type of clustering, in which identical prospects are put in the same cluster rather than the
center of the cluster being a current customer. The cluster continues to expand with less
similar prospects, with a measure of (dis)similarity assigned to these prospects. This
procedure creates concentric circles, and in each circle, we find prospects that have the same
similarity to the center (being a specific current customer). The more distant a circle is, the
more dissimilar the prospects are on that circle. Prospects in the same cluster or circle share
comparable preferences and behaviors (Bruckhaus, 2010). As a result, we assume that finding
prospects that are similar to the current customer base increases the probability that these
prospects become future clients of the company, compared with less similar prospects,
because they share the same company preferences. Kim et al. (2005) use this profiling method
in a business-to-consumer (B2C) environment. They build a model on their current customers
and use that model on potential prospects to rank them from most to least likely to respond.
Here, we apply it in a B2B environment.
A profile is composed of a combination of variables (Hansotia & Wang, 1997). The profiles
of the prospects are compared with those of the current customers. The technique used here to
search for similar profiles is the nearest neighbor algorithm. This method is conceptually
simple; it involves calculating the distance between observations using a set of variables. The
more similar the cases are, the lower the distance. The advantage of this algorithm is that it is
powerful yet easy to understand (Weinberger & Saul, 2009). Figure 2 is a simplified
presentation of the nearest neighbor algorithm. In the two-dimensional space shown
(representing a profile of two variables), company C is closer to company A than company B
is to A, which means that company C is more similar to company A than company B is. The
reality is more complex though, in that there is a multidimensional space rather than a two-

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dimensional one. The method we apply here is a k-nearest neighbor algorithm, meaning that
for each current customer, it ranks the k-nearest prospects. We set k arbitrarily to 10,000. The
size of k is not that important, as long as it is set high enough. The larger the number, the
larger the list of outputted prospects. However, this list can be reduced, such as by selecting
only prospects with a similarity higher than a predefined threshold. A different, more
recommended strategy is to rank the list first on similarity and then on a different variable of
interest (e.g., company size). More ranking variables can be added to further refine this
ranking. Next, the top n prospects of the list are selected, with n being the maximum amount
of prospects that the sales representatives are able to handle. Thus, we advise practitioners to
set k > n and refine the ranking by adding variables that are relevant to the company of
interest.

B C

Figure 2: Nearest neighbor

The most important element of a nearest neighbor analysis is the distance metric, which
calculates how similar companies are. Thus, it is crucial for the quality of the model. Distance
metrics are data type specific: there is no easy way to combine categorical and numeric data
types in one nearest neighbor. Because most of the variables are categorical, numeric ones are
converted into categories (for more information, see Section 4). The Jaccard and Hamming
distance measures are two possible distance metrics for categorical data (Ichino & Yaguchi,
1994). The Jaccard similarity coefficient is obtained by dividing the size of the set of
variables that have the same value by the size of the set of variables that do not have the same
value (Charikar, 2002). The formula is as follows (where A and B signify companies):
|!    !|  
S!"##"$%   A, B = |!    !|  

The Hamming metric is similar (Steane, 1996). However, the Jaccard metric ignores variables
that have a zero for both companies, whereas the Hamming metric does not (Zytynska, Fay,
Penney, & Preziosi, 2011). Because in the used data, a zero usually stands for a missing value,
this comparison should be ignored; thus, we prefer the Jaccard metric. Although several

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distance metrics exist for numeric variables, such as the Euclidean and Mahalanobis
distances, there is no generally accepted preference. Aggarwal (2001) suggest that fractional
distance metrics work better than others when dimensionality is high. The output of phase 1 is
a list of prospects with their respective similarities (ranging from 0 to 1, with 1 being
completely the same with regard to the set of variables and 0 being completely different).
3.2 Phase 2
As mentioned previously, phase 2 can only be implemented after phase 1 has rendered
positive and negative feedback (see the feedback loop in Figure 1), which is used as a
dependent variable. Thus, the model in Phase 2 uses the prospect list of phase 1, including the
feedback data on those prospects, and the reference database (for more information, see
Section 2). By adding this second phase to the algorithm, we incorporate an iterative customer
acquisition process. Each time its output has been evaluated, the feedback is inserted into the
algorithm, and it re estimates the model. The process gradually optimizes and stabilizes the
model.
A basic model to predict customer acquisition is (logistic) regression (Bose & Chen, 2009;
Gupta et al., 2006; Hansotia & Wang, 1997), the formula for which is as follows:
! where z = β0 + β1x1 + β2x2 + … +
𝐹 𝑧 =   !!! !!
βnxn
(Blattberg et al., 2008a; Hansotia & Wang, 1997; Pampel, 2000; Van den Poel & Buckinx,
2005). Because there is a danger of overfitting the model when using all possible independent
variables, we apply a stepwise selection (i.e., the combination of a forward and backward
selection) (Blattberg et al., 2008d; Kim et al., 2005). We also include variable transformations
(e.g., taking the square of variables) to take nonlinearity and skewed distributions into
account. A problem with logistic regression is that it cannot use categorical variables, only
continuous ones (Pampel, 2000). We solve this problem using dummy variables. However,
the large number of categorical variables could lead to an overload of dummies, which is a
computational burden (Bose & Chen, 2009); moreover, no a priori knowledge is available
about which categorical variables are likely crucial to include in the model. Thus, the logistic
model only incorporates continuous variables.
Therefore, we estimate a model using the categorical variables as well, including categorized
versions of the continuous variables. We created the categories using equal frequency
binning: the different categories of a variable have the same size, and they are based on the
ranking of the values of this variable, the preferred technique for discretizing the variables for
commercial data, which are often unbalanced or contain outliers (Cantu-Paz, 2001). We apply

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a decision tree to estimate the model, an efficient method for estimating categorical input
variables (Bose & Chen, 2009). It involves dividing a data set into subsets, using the values of
the independent variables as selection criteria to predict the dependent variable (Blattberg,
Kim, Kim, & Neslin, 2008b). It then involves dividing the data into homogeneous subsets that
are heterogeneous to each other, while minimizing the cost of this division (Danielson &
Ekenberg, 2007). The top of a decision tree is called the root node (Berk, 2008). This root
node contains the full data set. The outcome of a decision at each node is called a split (Duda,
Hart, & Stork, 2001). Splits after the root node are termed branches, and the final splits are
the terminal nodes. All splits after the initial split imply interaction effects, unless they use the
same predictor (Berk, 2008). We use pruning to find the right size of the tree to avoid the
omnipresent problem of overfitting: the bigger a tree is, the fewer cases there are in the
terminal nodes and the more chance there is of having an overfitted tree. Pruning a tree begins
at the terminal nodes and works up to the top (Berk, 2008). It eliminates nodes that do not
reduce heterogeneity enough compared with the complexity they add to the tree. Occam’s
razor prescribes that researchers should prefer the simplest model that explains the data
(Baesens, Mues, Martens, & Vanthienen, 2009; Duda et al., 2001). The decision tree and its
pruning method are based on Breiman et al. (1984). We use a majority voting scheme to
calculate the probabilities of the decision tree. We then calculate the probabilities by taking
the percentage of ones in each ending node. Figure 3 presents a simple tree.

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Selection
criterion 1

0 1

Selection
criterion 2 Subse
t1
1 0

Subse Subse
t3 t2

Figure 3: Decision tree

We calculate the AUC to determine whether to use the logistic model or the decision tree and
choose the model with the highest AUC. We include both logistic regression and a decision
tree, because there is no a priori hypothesis for which model works best. Furthermore, it
might be company or industry specific. (Recall the stipulation that the algorithm must run
fully automatically without human interference.)
We incorporate a backup model that runs if both the logistic model and the decision tree fail
to produce a model that predicts better than a random ranking of prospects (i.e., a model of an
AUC of 0.5): a neural network. The reason we use it only as a back-up is that it is relatively
slow and unstable (Rygielski et al., 2002), and the algorithm must provide fast and reliable
results. A neural network is a nonlinear nonparametric regression model that mimics the
structure and function of the brain (Ha, Cho, & Mela, 2005). It is a black box method, in that
it provides no information on the estimated model. The input generates a certain output, and
the way this output is generated remains hidden from the user. The main advantage of neural
networks is that they are capable of estimating very complex relationships.

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Input

Hidden

Output

Figure 4: Neural network

A neural network usually contains an input layer, a hidden layer, and an output layer (Figure
4). The input layer corresponds to the independent variables, and the output layer is the
dependent variable. The hidden layer represents the nonlinearity of the model. Multiple
hidden layers can be introduced, but one hidden layer is deemed enough to obtain quality
estimations (Ha et al., 2005). The neural network is implemented in Matlab and is a feed-
forward network. For the input, hidden, and output layers, the purelin, tansig, and purelin
transfer functions are applied, respectively. The hidden layer size is varied from 1 to 10
neurons selecting the one rendering the highest AUC. The output of phase 2 is the list of
prospects of phase 1 with their respective predicted probability.
3.3 Phase 3
Prior literature indicates that predictability can be improved by weighting the predictions from
different models (Gupta et al., 2006). Combining models can partially eliminate the bias
inherent in each model (Bose & Chen, 2009). The AUC calculated in phase 2 (i.e., the AUC
of the best model) is used to assign the weights in phases 1 and 2. We apply the following
linear function to calculate the weight of phase 2:
𝜔!!!"#  ! = 𝐴𝑈𝐶 − 0.5   ∗  2
The weight of phase 1 is naturally computed as follows:
𝜔!!!"#  ! = 1 −   𝜔!!!"#  !
Table 1 portrays some AUCs between 0.5 and 1 and their respective weights for phases 1 and
2. The function used to calculate the weights is conservative in the sense that it requires a

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relatively high AUC before phase 2 weights more than phase 1. The output of phase 3 is the
prospect list generated in phase 1 and the weighted similarity.

AUC phase 2 0.5 0.6 0.7 0.8 0.9 1

Weight phase 2 0 0.2 0.4 0.6 0.8 1
Weight phase 1 1 0.8 0.6 0.4 0.2 0
Table 1: AUC and weights

In summary, phase 1 generates a list of prospects with their similarity; some prospects will be
qualified as leads, while others are not; this feedback is entered into phase 2, and the
algorithm calculates a new similarity (probability); phase 3 defines the weights of phase 1 and

Phase 1

Phase 3 Prospect list

Phase 2

Figure 5: Overview of the algorithm

2 and produces a final prospect list (see Figure 5).

Phase 3 combines the similarities of phase 1 and the probabilities of phase 2. Even though
they are not the same measure, they represent the same idea. More specifically, the higher a
prospect is ranked in the list, the more likely this prospect is to become a customer. This
justifies combining two different measures because they measure the same content.
Furthermore, they both range between 0 and 1, making a combination simple and
straightforward.

4. Data

We leased a database of more than 16 million U.S. companies from an international data
provider (hereinafter referred to as the reference database). It represents the list of suspects,

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after excluding current customers. It contains a selection of 4 numerical and 24 categorical

variables (see the Appendix, Table A.1). Moreover, we created four additional variables,
representing the discretized versions of the numeric variables. Some literature exists on which
variables are relevant in profiling models. Industrial demographic data are often used to
prospect new potential customers (Bounsaythip & Rinta-Runsala, 2001). Two basic
demographic variables of companies are industry type and company size (Coe, 2004c).
However, to our knowledge, no research addresses the full range of relevant industrial
demographic variables, and it is likely that these variables will be industry or even company
specific. Therefore, we included as many variables as possible, because the algorithm must
perform well regardless of the company using it. We used three criteria to exclude variables:

1. Redundant variables: Redundant variables are highly correlated with other variables. Including
them in a nearest neighbor analysis would artificially assign them more weight. Because we
make no hypotheses about variable importance, this would be detrimental to the quality of the
analysis.
2. Name-based variables: Name-based variables are mainly general company variables that have
no predictive power, such as the chief executive officer name and company name. For
example, the fact that a company is called Apple has no predictive performance as such. The
connotation and familiarity of the name might influence customer acquisition, but the specific
letters do not. If we were to run a nearest neighbor algorithm with Apple as a current
customer, Applebee’s would be a relatively good match based on the name variable. It is
however unlikely that Applebee’s will be evaluated as a good prospect, due to the large
difference between the two companies.
3. Variables containing a high percentage of missing values: We excluded variables with more
than 50% of missing values. For the retained variables, we did not infer missing values, which
might insert bias in the data (Han & Kamber, 2006).

The B2B company that serves as a test case for the algorithm is active in telecommunication
services and was founded in 1997. It is based in the United States and is one of the leaders in
its market. The platform the firm developed handles more than 1 billion calls a year and has
deployed more than 750 tailored solutions for customers. The telecom company has 389
active current customers, of whom we selected 107 as input for the algorithm. We deleted
companies that had a large amount of missing data or that could not be matched in the
reference database. The matching with the reference database is necessary because we
extracted the variables of the current customers from this database.

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In summary, we used two types of data: the reference data set and the telecom company data
set. The reference data set is a database containing variables on more than 16 million U.S.
companies. We used this database as a list of suspects, which is the input of the algorithm
(excluding the current customers of the company). The telecom data set contains the
customers of the telecom company, without any variables on these customers. We extracted
variables of the telecom company customers from the reference database.

5. Results

The sales funnel of B2B companies is more complex than that of B2C companies (Yu & Cai,
2007). More processes are needed to complete transactions, and, as a result, deals take longer
to close. Thus, it is difficult to conduct an extensive real-life test in a B2B setting. We were,
however, able to do a (limited) real life test of the algorithm.

We inserted the current customers of the company in the algorithm as input for phase 1. This
rendered a list of prospects sent to the telecom company. The company reviewed this list and
qualified prospects into “good” and “bad” leads. The list was first ranked on similarity and
then on company sales volume, which was a relevant ranking variable according to the
company sales manager. The sales representatives selected the top 356 prospects to evaluate.
Of these, 56 companies were qualified as good leads, corresponding to a conversion rate from
prospect to lead of 15.73% [ = 56/(56 + 300)], higher than the overall conversion rate of 10%
on average (Coe, 2004b). Next, we administered two pseudo tests to determine the quality of
the algorithm. Although they are not real-life tests, they use real data.

In the first test, we used the positively qualified prospects as input to the algorithm. Here, we
employed a reverse logic to test the model. We used the 56 positively qualified prospects
received from the telecom company as input to find the 107 original telecom company
customers. Using an (arbitrary) selection rule of retaining prospects with the highest similarity
(to the 56 positively qualified prospects that we used as input), we retained 228 potential
prospects, of which 8 were original telecom company customers. Assuming that these 8
prospects would become company clients, we obtain a conversion rate of prospect to
customer of 3.5% (= 8/228), similar to what can be expected on average (Coe, 2004b).
However, this is obtained by only running phase 1. We expect that running phases 2 and 3
will elevate this conversion rate by including feedback data.

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The second test assesses the combination of the three phases and their ability to find specific
companies, mainly as a test of the efficiency of the feedback loop. This test does not use the
telecom company data, only the reference data. We selected companies with the following
random profile from the reference database (the interpretation of the variables is not relevant
here): sales volume > $100 000 and ≤ $190 000; number of employees > 4 and ≤ 50; square
footage estimator >2 210 and ≤ 3319; import export indicator = 2; population code > 4; and
active in the accommodations and food services industry. This rendered a list of 36
companies. We then randomly selected 10 companies as current customers and ran the model
to search for the other 26 profile customers. In other words, these 26 companies are “hidden”
in the reference database, and the goal is to find them. In each run, the algorithm chose
prospects that had the highest similarity, regardless of how big this selection was. The first
run only used the nearest neighbor algorithm, because no feedback data were available yet
(Table 2). Ten prospects had the highest similarity, and all of these were part of the 26 profile
customers. In the second run, again only the nearest neighbor algorithm ran, because the
previous run gave only positive feedback points and no negative ones. Of the 123 prospects
with the highest similarity, none were profile customers. Run 3 rendered 10,176 prospects, of
which 12 were profile customers. The selected method in phase 2 was a decision tree
(Appendix, Figure A.1). The AUC of the decision tree was 1. Run 4 provided two more
prospects, both of which were profile customers. A decision tree again represented the
selected method (Appendix, Figure A.2), with an AUC of 0.99985. Additional runs did not
reveal the remaining two customers, most likely because run 4 did not add a great deal of
feedback data to the model (only two feedback points).

Run 1 2 3 4
Number of prospects 10 123 10176 2
Number of profile 10 0 12 2
customers
Phase 2: Selected method Only Phase Only Phase 1 Decision Decision
1 Tree Tree
AUC / / 1 0.99985

Table 2: Results of profile searching

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6. Conclusions and implications

This article presents a procedure to facilitate the customer acquisition process in a B2B
environment. The algorithm contains three phases, and the output is a ranked list of prospects.
Sales representatives could select a top percentage of these ranked prospects to qualify further
as leads to pursue. Because these prospects are higher quality, it is easier for sales
representatives to qualify and, in turn, convert them into customers. Real-life and pseudo tests
show positive results. The real-life test suggests a conversion rate from prospect to lead that is
higher than average. The first pseudo test produced a conversion rate from prospect to
customer similar to the average conversion rate by only using the first phase of the algorithm.
The second pseudo test needs only four runs to find 24 of 26 companies in a suspect list that
contains more than 16 million companies.

This study provides several managerial implications. First, the proposed sales force
automation tool operates in a fully automated way, but human intervention remains possible,
when necessary. As a result, the tool can work in a broad range of situations. It supports sales
managers from a starting position, in which there is merely a basic set of current customers
and no information on the acquisition process, to a situation in which the customer base is
more mature and a vast amount of data is available on the history of this process. However,
human intervention might be preferable in some cases. Look-alike models tend to overlook
opportunities in other segments (Blattberg et al., 2008a), which is inherent to the method, in
that it searches for new prospects similar to the current customers. As a result, it is not always
optimal to include the full set of variables. For example, the industry (NAICS code) can be
withheld from the algorithm to find prospects in different industries as well.

Second, the output of the algorithm can be used straightforwardly without any knowledge of
the statistical models running in the background. Thus, its applicability does not rely on any
human expertise, such that it lowers the threshold for sales representatives to use this tool.
Furthermore, research has shown that the efficiency of sales representatives using sales force
automation tools is only augmented when it is accompanied by user training and support
(Ahearne, Jelinek, & Rapp, 2005). Because this tool can intuitively be used and no significant
training is necessary, the cost and time of such support is marginal, making it more likely that
B2B sales managers will implement it and that this implementation is fluent.

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Third, the tool could help sales managers negotiate with a data vendor to pay for only the
prospects indicated by the sales force automation tool and not the whole list of suspects. The
tool can also be embedded into a web application, limiting the costs (see Section 1). However,
even if a data vendor was already willing to sell a selection of prospects on the basis of some
arbitrary rules instead of a list of suspects, sales managers or the vendors themselves could
improve the selection using the proposed algorithm.

Fourth, this study offers an explicit iterative view of the customer acquisition process. Each
iteration provides useful information for the next. Therefore, there is a need for an extensive
documentation when sales managers attempt to acquire new customers. Information on
decisions made, steps taken, strategies employed, and so on must be recorded and analyzed
periodically. This way, new customer acquisition can be improved incrementally.

This iterative view is also a theoretical implication. The shift from a static to a dynamic
framework is a more accurate conceptualization of reality. When designing models using a
customer acquisition framework, modelers should take the iterative aspect into account, which
has been neglected to date. A different but related theoretical implication is the need for a
standardized customer acquisition framework. We provide a personal, though literature-based,
view on the flow between the different acquisition stages and their respective definitions. It is
by no means meant as an ultimate framework, but rather as a tool tailored for our purposes.

7. Limitations and further research

The main limitation of this study is that it was not possible to run a full, real-life test of the
algorithm. Such a test is necessary to fully validate the model. Therefore, further research
should first involve an extensive, real-life test using the suggested algorithm. If these tests
prove the model valid, adjustments can be made to improve it further. A possible avenue of
study is to make a distinction within the current customer base between good and bad
customers and give corresponding weights to them when running the algorithm. The
distinction between good and bad customers might be based, for example, on profitability,
because research shows that customers are not equally profitable (Jacobs, Johnston, &
Kotchetova, 2001). Another possible avenue is to include other data sources into the model,
because the success of a model depends partly on the data input (Baecke & Van den Poel,
2012a, 2012b). For example, web data have proven to be strong predictors of profitable

19
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customers (D'Haen, Van den Poel, & Thorleuchter, 2012; Thorleuchter, Van den Poel, &
Prinzie, 2012).

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APPENDIX
Variable Name Type
Sales_volume Numeric
Employees_total Numeric
Employees_here Numeric
Status_indicator_0 Categorical

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Naics_1 to Naics_5 Categorical

Veteran_indicator Categorical
Women_owned_indicator Categorical
Minority_owned_indicator Categorical
Minority_type Categorical
Cottage_indicator Categorical
Import_export_indicator Categorical
Manufacturing_indicator Categorical
Public_private_indicator Categorical
Legal_status_code Categorical
Owns_rents_indicator Categorical
Small_business_indicator Categorical
Population_code Categorical
Fortune_1000_indicator Categorical
Non_profit_indicator Categorical
8a_disadvantage_indicator Categorical
Square_footage_estimator Numeric
Franchise_indicator Categorical
Territory_covered Categorical
Hierarchy_code Categorical
Sales_cat Categorical
Emp_here_cat Categorical
Emp_total_cat Categorical
Square_footage_cat Categorical

Table A.1: Variable list

25
 Minority owned

<0.5 >=0.5

1 0
Figure A.1: Decision tree round 3

Import-export
industry

<1 >=1

0 1
Figure A.2: Decision tree round 4