Predictive analytics – the concept is dazzling yet daunting. To foresee what each customer will do next may sound like an overwhelmingly complex feat of math and statistics. Is such a thing even possible? And, if so, tell me specifically how it helps my business!

Here's the bottom line: the predictions don't actually have to be all that accurate to deliver great value to your business. For example, if predictive analytics identifies a customer segment 3 times more likely to defect than average, you can target a retention offer such as a discount accordingly, and avoid incurring the revenue loss that results from providing the discount to those customers not destined to defect.

This “numbers game” translates into a high return, and doesn't depend on highly accurate predictions. If your overall defection rate is 5%, the segment we've discovered has a higher defection rate of 15%, so, in this case, we're not actually confident in predicting whether any one individual customer will defect. Rather, the value comes from identifying this kind of customer segment which is predicted in aggregate to behave much differently than your overall customer base.

How It Works

The “magic” of predictive analytics is in how these valuable segments are discovered. The optimal segment is often arcane and involved, the kind of esoteric combination of features you'd expect only a computer to uncover. Core predictive modeling methods do this very well by crunching historical data, thus learning from the collective experience of your organization. To get a concise overview of how this actually works in simple terms, see my article, Predictive Analytics with Data Mining: How It Works.

Customer Predictions Drive Operational Decisions

Predictive scores are the golden eggs produced by predictive analytics – one predictive score per customer or prospect. Each customer's score, in turn, informs what action to take with that customer. Business intelligence just doesn't get more actionable than this kind of decision automation.

Predictive analytics is applied in many ways to help businesses overcome a plethora of challenges. The core difference in one mode of application to another is in what's being predicted. Predicting customer response, click, or defection are each very different things, and deliver business value in different ways.

Business Applications of Predictive Analytics

Organizations of all sizes apply predictive analytics to automate operational decisions, both online and off-, across marketing, sales and beyond. Which business application of predictive analytics is best for you is a strategic question, and depends on which type of decision you choose to automate – that is, how predictive scores will best serve to drive decisions within your organization.

The following table lists predictive analytics business applications. The first column names the flavor of business benefit, and the second column tells you the type of customer prediction required – that is, which behavior or action must be predicted to undertake each business application. There are many such applications – this list includes only the most pervasive in commercial deployment to date.

As you can see, the way predictive scores help your business depends on the customer behavior predicted – just aim predictive analytics toward the right customer prediction goal and fire away. This is why we like to say, if you predict it, you own it!

Learn More: Conference and Resources

Want to learn more? Since there's no better way to learn about predictive analytics than from concrete case studies, look to Predictive Analytics World, February 18-19, 2009, in San Francisco, the conference packed with case studies from Fortune 500 analytics competitors and other top practitioners. A dozen examples are listed in the rightmost column of the table, with links to more detail about these sessions at the conference.

For further reading, training options and other resources, see the Predictive Analytics Guide.

Recent articles by Eric Siegel, Ph.D.

• Six Ways to Lower Costs with Predictive Analytics