Markovian model approach

Even though we have three types of account, the classic, premier, and the platinum, it doesn't mean that we are only going to have nine transition types possible as in Figure 4.1. There are customers who will upgrade, but also others who may downgrade. There could also be some customers who leave the bank and at the same time there will be a constant inflow of new customers. Let's evaluate the transition states flow for our business problem:

Figure 4.2: Transition flow of customers across account types

In Figure 4.2, we haven't jotted down the transition probability between each state. We can try to do this by looking at the historical customer movements, to arrive at the transitional probability. Be aware that most business managers would prefer to use their instincts while assigning transitional probabilities. They may achieve some merit...