Predictive Analytics Delivers Value Across Business Applications

Originally published January 6, 2009

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.

BUSINESS APPLICATION:

 

WHAT IS PREDICTED:

 

READ MORE ABOUT IT:

 

Company case study at PAW-09:

 

Customer retention

 

customer defection/churn/attrition

 

Article

 

Linden Lab, Reed Elsevier, 3M and Telenor

 

Direct marketing

 

customer response

 

Article, podcast

 

Charles Schwab

 

Product recommendations

 

what each customer wants/likes

 

 

 

Netflix Prize leader, HSBC and Amazon.com

 

Behavior-based advertising

 

which ad customer will click on

 

“$1 million” case study and Podcast

 

Google, Yahoo! and Click Forensics

 

Email targeting

 

which message customer will respond to

 

 

 

Arthur Hughes

 

Credit scoring

 

debtor risk

 

 

 

Wells Fargo

 

Fundraising for nonprofits

 

donation amount

 

 

 

NRA

 

Insurance pricing and selection

 

applicant response, insured risk

 

 

 

Pinnacol Assurance

 



And there are many more applications of predictive analytics, including collections, supply chain optimization, human resource decision support for recruitment and human capital retention,and market research survey analysis.

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.

  • Eric Siegel, Ph.D.

    The president of Prediction Impact, Inc., and the program chair for Predictive Analytics World, Eric Siegel is an expert in predictive analytics and data mining and a former computer science professor at Columbia University, where he won awards for teaching, including graduate-level courses in machine learning and intelligent systems – the academic terms for predictive analytics. After Columbia, Dr. Siegel co-founded two software companies for customer profiling and data mining, and then started Prediction Impact in 2003, providing predictive analytics services and training to mid-tier through Fortune 100 companies.

    Dr. Siegel is the instructor of the acclaimed training program, Predictive Analytics for Business, Marketing and Web, and the online version, Predictive Analytics Applied. He has published 19 papers in data mining research and computer science education, has served on 10 conference program committees, and has cochaired an Association for the Advancement of Artificial Intelligence Symposium held at MIT.

Recent articles by Eric Siegel, Ph.D.



 

Comments

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Posted January 22, 2009 by mary crissey

Eric - how true - it does almost seem like MAGIC to those who are unfamiliar with the way we can make SENSE out of piles of data in order to RECOMMEND wise choices --- for figuring out which customers to retain and which ones to target for which promotion.  How terrific that over 235 viewers stayed on the line for 60 minutes listening to your webcast yesterday!  for those of you who missed the Better Management Live webcast - the archived version is available at  

http://www.bettermanagement.com/attend.aspx?L=14924

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