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Chap. 3 You Are in The Business of Analytics
Chap. 3 You Are in The Business of Analytics
1
Subset of a city; a geographic unit used by the United States Census Bureau.
You’re in the Business of Analytics 23
These calculations provide the basis for customer lifetime value and
assorted customer ranking. The next step is to determine the attributes
for projected future spend. This is done by assigning customers a lifetime
spend. Lifetime spend is based on (a) n-year performance linear regression
or (b) n-year performance of their assigned quartile,2 if less than n years of
history is available.
2
A quartile is 25% of the customer base. You could do more divisions (quintile) or fewer (decile).
The point is a few, manageable profiles.
24 Information Management
3
When a customer becomes a former customer through an act of attrition or inactivity, as determined
by the company.
You’re in the Business of Analytics 25
PREDICTIVE ANALYTICS
Analytics is a business strategy that must be supported with high
quality, cross-platform-border data, as just discussed. The data is formed in
order to make predictions about the business. We use “Predictive Analytics”
to refer to the class of analytics focused on creating a better future for the
company, from grand process change to individual customer interactions.
If done well, predictive analytics help companies avoid business
situations analogous to being struck by a bus. Business situations, however,
are usually less dramatic and much more nuanced than avoiding a moving
vehicle. And, unlike the bus, a company will often not even know there
was a situation worth avoiding.
Therein lies the fate of many analytics—in order to prove its worth, you
need to build trust in your predictions. Occasionally, I have let predictions
26 Information Management
of minor doom pass with a client in order to build trust (“We had 142
churners in Maine this month, just like the model predicted. Now can we
apply the model nationwide and prevent the churn?”).
Predictive analytics are key to the prevention of loss by fraud, churn
and other unwanted outcomes—the equivalents of being hit by the bus.
Company profiles also come into play. Actions take cycles and a
fast-moving company driving a strong top line is going to care about
something different than an established multinational company with
You’re in the Business of Analytics 27
High
probability High
to churn intervention
Low
intervention
No intervention
Low
probaility
to churn
Low CLV High CLV
a large customer base and low margins. The former may only prepare
for relatively low probability events that come with a particularly
bad outcome or try to only enact change that leads to high increased
profitability. The latter companies are more risk averse and will seize every
opportunity to move the needle even slightly.
A predictive modeler might produce a result that indicates a customer
is likely to churn, yet the model might not indicate how likely it is to
happen or whether the company should care about this.
There is a set of company reactions to any likely unwanted business
event or business opportunity. These range from highly invasive actions,
like terminating the credit card, to simply changing a metric about the
customer that may, one day, lead to a more invasive action if compounded.
And, of course, there’s “do nothing.”
through the data stores, you may wonder where to place your analytic
data and where to actually do the analytic processing. Analytic data is
increasingly interesting everywhere processing is done. It will be important
to make the analytic data accessible to every data store if the data is not
actually in the data store.
In the chapter on master data management, I will make a case for
Master Data Management (MDM) to be a primary distribution point,
perhaps in addition to being the system that originates some of the
analytic data.
As far as analytic processing goes, the goals of all the processing that
goes on throughout the enterprise is only enhanced with analytic data.
Many enterprises already acknowledge that they “compete on analytics.”
Many more will join them.
Analytics are used to assess current markets and new markets to enter.
They are used in determining how to treat customers and prospects, in
very detailed ways. They are used for bundling and pricing products and
services and marketing products and services. And clearly they are used to
protect a company’s downside, like fraud, theft, and claims.
You may have a workable supply chain that gets a product to the store
(or whatever passes for a store in your business), have low prices, and
tactically everything may seem to “work.” That is not enough today. Today,
the supply chain must be very efficient, prices should be set based on a firm
grounding in analysis, and customers must be known at an intimate level.
The use of analytics comprises the major area of competitive focus for
organizations in the foreseeable future.
ACTION PLAN
●
Survey your use of information—are your users using only base
information or is it pre-summarized and enhanced to draw real,
actionable meaning out of it prior to user interface
●
Ensure analytics are a part of corporate strategy
●
Enlist the support of business representation in determining the
analytic calculations and predictive models
●
Determine the analytic data that will be useful to your business
strategy
●
Understand the calculations on base information necessary to bring
the data to full utility
●
Understand where the base information resides today and if it is in
a leverageable place
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