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Applications of Data Mining to Electronic Commerce

Electronic commerce is emerging as the killer domain for data mining technology. The following are five desiderata for success. Seldom are they they all present in one data mining application. 1. Data with rich descriptions. For example, wide customer records with many potentially useful fields allow data mining algorithms to search beyond obvious correlations. 2. A large volume of data. The large model spaces corresponding to rich data demand many training instances to build reliable models. 3. Controlled and reliable data collection. Manual data entry and integration from legacy systems both are notoriously problematic; fully automated collection is considerably better. 4. The ability to evaluate results. Substantial, demonstrable return on investment can be very convincing. 5. Ease of integration with existing processes. Even if pilot studies show potential benefit, deploying automated solutions to previously manual processes is rife with pitfalls. Building a system to take advantage of the mined knowledge can be a substantial undertaking. Furthermore, one often must deal with social and political issues involved in the automation of a previously manual business process.

Electronic commerce is emerging as the killer domain for data mining technology. Is there support for such a bold statement? Data mining techologies have been around for decades, without moving significantly beyond the domain of computer scientists, statisticians, and hard-core business analysts. Why are electronic commerce systems any different from other data mining applications?
In his book Crossing the Chasm (Moore & McKenna 1995), Moore writes, "There were too many obstacles to its adoption . . . inability to integrate it easily into existing systems, no established design methodologies, and lack of people trained in how to implement it . . . " (p. 23). What was "it"? Artificial intelligence technology, as a product. Data mining shares many traits with AI technologies in general, so we should be concerned that they do not share the same business fate. 1 Notwithstanding several notable successes, data mining projects remain in the realm of research: high potential reward, accompanied by high risk. The risk stems from several sources. It has been reported by many (Langley & Simon 1995, Piatetsky-Shapiro, Brachman, Khabaza, Kloesgen & Simoudis 1996, and has been our experience, that the "data mining," or algorithmic modeling phase of the knowledge discovery process occupies at most 20% of the effort in a data mining project. Unfortunately, the other 80% contains several substantial hurdles that without heroic effort may block the successful completion of the project.
The following are five desiderata for success. Seldom are they they all present in one data mining application.
1. Data with rich descriptions. For example, wide customer records with many potentially useful fields allow data mining algorithms to search beyond obvious correlations.

2.
A large volume of data. The large model spaces corresponding to rich data demand many training instances to build reliable models.
3. Controlled and reliable data collection. Manual data entry and integration from legacy systems both are notoriously problematic; fully automated collection is considerably better.
4. The ability to evaluate results. Substantial, demonstrable return on investment can be very convincing.
5. Ease of integration with existing processes. Even if pilot studies show potential benefit, deploying automated solutions to previously manual processes is rife with pitfalls. Building a system to take advantage of the mined knowledge can be a substantial undertaking. Furthermore, one often must deal with social and political issues involved in the automation of a previously manual business process.
So, why is electronic commerce different? In short, many of the hurdles are significantly lower. Consider those mentioned above. As compared to ancient or shielded legacy systems, data collection can be controlled to a larger extent. We now have the opportunity to design systems that collect data for the purposes of data mining, rather than having to struggle with translating and mining data collected for other purposes. Data are collected electronically, rather than manually, so less noise is introduced from manual processing. Electronic commerce data are rich, containing information on prior purchase activity and detailed demographic data.
In addition, some data that previously were very difficult to collect now are accessible easily. For example, electronic commerce systems can record the actions of customers in the virtual "store," including what they look at, what they put into their shopping cart and do not buy, and so on. Previously, in order to obtain such data companies had to trail customers (in person), surreptitiously recording their activities, or had to undertake complicated analyses of in-store videos (Underhill 2000). It was not cost-effective to collect such data in bulk, and correlating them with individual customers is practically impossible. For electronic commerce systems massive amounts of data can be collected inexpensively. 2 At the other end of the knowledge discovery process sit implementation and evaluation. Unlike many data mining applications, the vehicle for capitalizing on the results of mining-the electronic commerce system-already is automated. Therefore the hurdles of system building are substantially lower, as are the political and social hurdles involved with automating a manual process. Also, because the mined models will fit well with the existing system, computing return on investment can be much easier.
The lowering of several significant hurdles to the applicability of data mining will allow many more companies to implement intelligent systems for electronic commerce. However, there is an even more compelling reason why it will succeed. As implied above, the volume of data collected by systems for electronic commerce dwarfs prior collections of commerce data. Manual analysis will be impossible, and even traditional semi-automated analyses will become unwieldy. Data mining soon will become essential for understanding customers.

The papers in this special issue
The mining of electronic commerce data is in its infancy. The papers in this special issue give us a peek into the state of the art. For the most part, they address the problem of Web merchandizing.
Web merchandising, as distinct for example from marketing, focuses on how to acquire products and how to make them available. Electronic commerce affects the acquisition of products, because (as illustrated best by Dell Computer Corporation) the supply chain can be integrated tightly with the customer interface. Even more intriguing from the data mining perspective, since customers are interacting with the computer directly, product assortments, virtual product displays, and other merchandising interfaces can be modified dynamically, and even can be personalized to individual customers. Lawrence, Almasi, Kotlyar, Viveros, and Duri (2001) discuss the application of data mining techniques to supermarket purchases, in order to provide personalized recommendations. The study is based on a project involving IBM and Britain's Safeway supermarkets, in which customers use palm-top PDAs to compose shopping lists (based to a large extent on the products they have purchased previously). The use of the PDAs increases customer convenience, because they don't have to walk the aisles for these purchases; they simply pick them up at the store. However, it reduces the company's ability to "recommend" products via in-store displays, and the like.
Lawrence et al. go on to show how recommendations can be made instead on the PDA, using a combination of data mining techniques. The recommendations were made to actual customers in two field trials. After incorporating "interestingness" knowledge learned from the first trial, in the second trial (in a different store) the results were encouraging notwithstanding several application challenges. 3 Specifically, 25% of orders included something from the recommendation list, corresponding to a revenue boost of 1.8% (respectable as compared to other promotions). Perhaps more important, they show that customers are significantly more likely to choose high-ranked recommendations than low-ranked ones, indicating that the algorithms are doing well at modeling the likelihood of purchasing items previously not purchased. The study shows intuitive rules and clusters and relative preferences, demonstrating the potential of data mining for improving understanding of the business-which may be useful even in cases where recommendations are not implemented (or are not effective).
The results of data mining seldom can be used "out of the box," without the involvement of expert users. Often this is because a business is reluctant to have unverified models determining important business decisions. Just as often, however, the involvment of expert users is to separate out the few precious nuggets of useful knowledge. One might ask, isn't this the task data mining is supposed to be solving? It is; however, there are different kinds of mining. Today's tools are rather like strip mining than like the lone prospector carving out single nuggets of pure gold. Data mining algorithms often produce a mass of patterns, much smaller than the original mountain of data, but still in need of post-processing.
Creating individual consumer profiles for personalized recommendation (or for other purposes, such as providing dynamic content or tailored advertizing) exacerbates this problem, because now one may be searching for patterns individually for each of millions of consumers. Adomavicius and Tuzhilin (2001) address this problem. They show how to automate, partially, the process of expert-driven validation and filtering of large sets of rules. Their method comprises various operators for browsing, grouping, validating, and filtering rules. They demonstrate the method by applying it to data on consumer purchases of beverages-about 2000 households over a year period. For example, association-rule mining produced over one million rules from these data. In about an hour and a half, comprising mostly browsing and thinking, the expert-filtering process had rejected definitively 96% of the rules, and had used 27,000 rules to build individual profiles for the households (averaging about 14 rules per profile).
As we've mentioned, electronic commerce systems allow unprecedented flexibility in merchandizing. However, flexibility is not a benefit unless one knows how to map the many options to different situations. For example, how should different product assortments or merchandising cues be chosen? Lee, Podlaseck, Schonberg, and Hoch (2001) focus on the analysis and evaluation of web merchandising. Specifically, they analyze the "clickstreams," the series of links followed by customers on a site. Their thesis is that the effectiveness of many on-line merchandising tactics can be analyzed by a combination of specialized metrics and visualization techniques applied to clickstreams.
Lee et al. provide a detailed case study of the analysis of clickstream data from a Web retailer. The study shows how the breakdown of clickstreams into subsegments can highlight potential problems in merchandising. For example, one product has many click-throughs but a low click-to-buy rate. Subsequent analysis shows that it has a high basket-to-buy rate, but a low click-to-basket rate. This analysis would allow merchandisers to begin to develop informed hypotheses about how performance might be improved. For example, since this is a high-priced product, one might hypothesize that customers were lured to the product page and then turned off by the product's high price. If this were true, there are several different actions that might be appropriate (reduce the price, convince the customer that the product is worth its high price, target the lure better so as not to "waste clicks," etc.). Spiliopoulou and Pohle (2001) also study measuring and improving the success of web sites. In particular, they are concerned that success should be evaluated in terms of the business goal of the web site (e.g., retail sales), and that treatments should not be limited to measurement alone, but also should suggest concrete avenues for improvement. To this end, they discuss the discovery of navigation patterns, presenting a brief but comprehensive survey of the state of the art, and also presenting a method that addresses some of its deficiencies.
They demonstrate their methods on the "SchulWeb" site, which provides information and resources regarding German schools. They describe that this site is similar to on-line merchandising sites, but also that the methods should apply more generally-measuring and improving success is not limited to sales. By analyzing sequences, they observe that users are misusing the search features. They use this discovery to improve the interface. After the change, the effects are measured; they show an improvement in efficiency.
We close the special issue with a survey of existing "recommender systems," by Schafer, Konstan, and Riedl (2001). The degree of use of data mining techniques in such systems can fall anywhere on the spectrum from trivial (extract a non-personalized, manually crafted recommendation list) to simple (queries for straightforward statistics) to complex (collaborative filtering), as the survey illustrates with a wide variety of real-world electronic commerce applications that use recommender systems in their day-to-day operations. The authors also show that recommender systems are used for a variety of (business) reasons, and that companies typically use several different techniques (e.g., they describe seven different recommendation applications used by Amazon.com). The different recommendation tasks include: helping new and infrequent visitors, building credibility through community, enticing customers to come back, cross-selling, and building long-term relationships.
Finally, Schafer et al. discuss the challenges that lie ahead for electronic commerce recommendation applications, from the perspectives of both research and business-and they include an appendix presenting an informative analysis of current privacy concerns, which threaten the continued use of data mining in business and should be taken seriously by all involved.

A common themes emerging from the papers
We have argued elsewhere that a significant contribution applied research papers is highlighting areas that require more attention from the scientific community (Provost & Kohavi 1998). Reading any of the papers in this special issue, you will find many examples. One theme pervades: we need to understand better how to bring problem-specific knowledge to bear effectively.
Problem-specific knowledge applies throughout the knowledge discovery process. For example, one type of knowledge regards useful structure to the data, which augments the traditional feature-vector representation. A common instance of such structure is hierarchies over data primitives, as are found in product catalogs. The need to be able to incorporate hierarchical background knowledge is shown in every paper, with the exception of the survey paper (which does mention the need to be able to deal with "rich data").
We see the need for a variety of other types of background knowledge. Lawrence et al. discuss that company preference knowledge must be incorporated-the task is not just to recommend what the customer will most like, but also what the store would like to sell (popular new products outside the current shopping pattern, products with high inventories, products with high profit margins, etc.). Schafer et al. discuss that, even from the same data, there are different fundamental recommendation tasks, also pointing out that there is more to recommending than just giving the customer what he most would like to buy. Really, the system is there to help to improve the (long-term) business relationship, which has several dimensions.
It also should be kept in mind that there is more to data mining than just building an automated recommendation system. If indeed one is participating in a knowledge discovery process, the knowledge that is discovered may be used for various purposes. The papers by Lee et al. and by Spiliopoulou and Pohle show knowledge discovery techniques used for understanding the business more deeply. Their primary purpose is to shed insight on how electronic commerce systems might be improved (e.g., by highlighting problem areas). Comprehensibility (beyond data mining experts) is crucial for successful knowledge discovery, yet we see relatively little research addressing it (Pazzani 2000).
With the exception of the data mining algorithm, in the current state of the practice the rest of the knowledge discovery process is manual. Indeed, the algorithmic phase is such a small part of the process because decades of research have focused on automating it-on creating effective, efficient data mining algorithms. However, when it comes to improving the efficiency of the knowledge discovery process as a whole, additional research on efficient mining algorithms will have diminishing returns if the rest of the process remains difficult and manual. Adomavicius and Tuzhilin contribute to research on "the rest of the process," dealing with the often mentioned but seldom addressed problem of filtering the resultant discoveries.
In sum, the papers in the special issue highlight that although electronic commerce systems are an ideal application for data mining, there still is much research needed-mostly in areas of the knowledge discovery process other than the algorithmic phase.