HANDS ON Wo r k b o ok

PRIMER

Predictive AnalyticsBY KEVIN FOGARTY

What is it? Sophisticated algorithms designed to sift through a data warehouse and
identify patterns of behavior that suggest what offers customers might respond to in the
future, or which customers you may be in danger of losing. For example, when sifting through
a bank’s data warehouse, an application using predictive analytic techniques might recognize
that customers who cancel an automatic bill payment or automatic deposit often move to
another bank within a certain period of time.
REFERENCE: Which Customer Is More Valuable?
Isn’t that data mining? It’s related, but with a
Predictive analyses work by examining the behavior of multiple customers more advanced degree in statistics. Data mining relies
to identify patterns of behavior common to many. For example, a computer on a database manager who can structure a specific
company might identify power users and style-conscious power users as question and define the fields in the database from
separate groups, who respond in different ways to the same offer. Or, as in
this example, they can separate the consistently valuable customers from which the answer will come. For example: “Of the
flashes-in-the-pan. accounts that were closed last month, how many includ-
$160K ed an automatic deposit and were located in Chicago?”
Decision point: the moment at which all A predictive analytic query would include parame-
three customers are rated and ranked ters, but fewer specifics. It might, for example, analyze
140 according to their value to the company patterns of activity in all accounts to identify geograph-
ic locations or changes in accounts. Then, it would cor-
120 relate those factors to find patterns related to
accounts that were closed, or that were expanded.
Big-spender Ralph may qualify That approach would not only identify that a cancelled
100 for all the perks of a high roller, automatic payment was a danger sign, but that loca-
but his value will drop rapidly. tion was not a relevant factor.
80
George started
slow, but has What business problem would it solve?
become more A report from Forrester Research’s Giga Information
Purchase amounts

60 valuable every
month. Group says predictive analytics can identify potential
John isn't spending much, incidences of fraud by highlighting changes in existing
but shows all the signs of a or new accounts that are consistent with previous
40 George-class spender,if you
know how to look for them. offenses; reduce inventory and shipping costs by more
accurately predicting sales volumes and locations; and
20 increase the profitability of each customer by recogniz-
ing opportunities to sell add-on products or services, or
JAN FEB MAR APR MAY JUN JUL AUG to keep them from defecting.

How do I buy it, and for how much?

Predictive analytics is a technique, not a product. So
George John Ralph
you’d buy it from companies that sell business-intelli-
gence software, marketing-analysis applications, data-

Predicting the Future mining tools and other related products. Unica Corp. of Waltham, Mass., for
example, sells predictive modeling tools within its “enterprise marketing man-
Should you invest in predictive analyses? Give your-
self 1 point for each True answer, 0 for each False. agement suite” of applications, which are designed to help identify market
opportunities, valuable customers, trends in customer behavior and tactics for
TRUE FALSE addressing those patterns. Business Objects of San Jose, SSPS of Chicago, San
Our market is highly volatile; we have Francisco-based KXEN, and other customer relationship management (CRM) and
to be ready to respond quickly to changes. data-mining software companies offer products with predictive analytic capabili-
We need more accountability in our ties. They’re also available within databases from IBM, Oracle and Teradata.
I N F O G R A P H I C B Y H E AT H E R J O N E S

marketing; right now it’s hard to tell what Costs vary with the customer’s size and software type. CRM or database
customers will respond to which offers. costs depend on the size of the implementation and what kind of applications
you build on top of them. Unica—whose products come in discrete chunks,
We run data-warehouse and data-mining making it easy to identify and draw cost comparisons among the predictive ana-
software, but need more effective lytic modules—estimates a company with revenue in the tens of millions would
BASELINE DECEMBER 2004

answers from both processes. pay about $50,000 for the software, while one with $1 billion in revenue would
pay in the hundreds of thousands.
Our product mix is complex, our market
is mature, and we need an edge to gain What’s the downside? To make accurate predictions, your data has to
or defend every point of market share. be pretty clean. That means going through your data warehouse to make sure
Score: 4 Trues If you’re not already using John Smith, J. Smith and John. Q. Smith are the same person, with the same
predictive analytics, you need to start. buying history. You may need to scrub the data you have, or retrain the people
2-3 Add analytics to your CRM or data- who enter the data so they understand the importance of data format rules.
mining apps in your next upgrade. You may also discover you need more information than you have, meaning
0-1 Fret about the future when it happens. you’ll have to buy demographic data from external service companies such as
credit bureaus. 
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