In the famous Hollywood movie Minority Report, law enforcement has prevented all murders in Washington. Using the premonitions of Pre-Cogs – three psychic humans led by Chief John Anderton (Tom Cruise) are able to foresee crimes and arrest the perpetrator before harm is done. As customers become more discerning and the competitive pressures increase like never before, wouldn’t it be cool if we as business managers could foresee what each of their customers will do next, thereby affecting the outcome? Think about it. A typical conversation in a telecom company would be “Hi Tom, I can tell you that Mr Jones and Mr Parker are likely to switch to a competitor next week. What do you think we should do to retain them?” That insight is powerful! Well, predictive analytics lets you do just that.

Predictive analytics encompasses a variety of techniques from statistics and data mining that analyze current and historical data to make predictions about future events. It is being applied virtually across all functions of an organization including Sales & Marketing, Human Resources, R&D, Manufacturing, Operations, Logistics, Risk Management, Finance & Accounting; you name it. The three major benefits being derived include revenue generation, cost optimization and risk management. Let me share a few examples: ? Revenue Generation – Let’s say you are launching a new product variant. While you have a good idea (based on gut, some market research and basic statistical modeling), you can never really say which customer segment is likely to buy. Predictive analytics empowers you to pinpoint exactly which segments of customers are most likely to buy this new offering. It will also give you the insight on which customers are not likely to buy and which will buy only if there is a promotional offer coming along – with tremendous granularity. This will ensure that you channel your marketing and communication spends to the right audience. ? Cost Optimization – Typically, supply chain costs constitute a significant portion of the cost base of product marketing. Optimizing supply chain becomes a key challenge. Let’s take the example of the media and entertainment industry. Every new DVD release’s distribution to outlets is not governed by a demand forecast. As a result there are cases of both stock-outs and over-stocking. DVDs reshipped resulted in increased distribution costs. And re-shipping DVDs result in lost sales if they arrive late. Step in predictive analytics – which helps develop a forecasting model to estimate store demand based on consumer demographics, store traits and historical sales. Errors in allocation of DVDs can be reduced by over 40%! ? Risk management – This is one of the most critical areas where predictive analytics is being utilized in today’s economic scenario. Let’s take the example of a retail bank where predictive analytics allows organizations to assess both risks and opportunities: which customers are likely to default on loans; which are likely to be profitable, long-term customers? Predictive analytics helps you identify customers that are most likely to default and armed with this insight on expected consumer behavior, the bank can make decisions about marketing new products to this customer segment. I have seen Predictive Analytics work extremely well with clients with clear tangible results. Chief John Anderton had to wait till 2054 to see into the future, with predictive analytics you can do so now – well almost!

Most of us on the listening end of a generic mass marketing call have usually turned down (often not too politely) the “special offer,” even before the telemarketer is halfway through the script. As a result, it is no surprise that this approach produces very low response rates, presenting a challenge for marketing departments’ ROI. But consider this. You get a call where the telemarketer hits a sweet spot- a free 4 day / 3 night holiday at your favorite beach resort which you haven’t been to in a while… suddenly the deal doesn’t sound so bad; the car price covers insurance – you hate to pay insurance on a new car – and well, why not… sounds familiar. If so, you have been effectively profiled! The company representative knew that this was around that time of the year when you go on your holiday and presented the right offer at the right time. The key to this success is predictive analytics. Past customer demographic and purchase data was automatically mined and customer behavior patterns and relationship information was captured to predict buying behavior for specific customer segments. This methodology helps marketers arrive at the most probable products you will purchase and a rating of your interest in them.

Predictive analytics helps sales persons understand what you purchased previously and the offer that you are most likely to jump at in the future. In a sense, it’s like looking at the rear view mirror and then changing lanes. You could say that predictive analytics is used for targeted prediction of a potential customer and making personalized product recommendations that will help close a sale quickly. Having said that, this is just one of the many mainstream applications of predictive analytics. Given the tough economic times, if this deceptively simple discipline can help maximize ROI, minimize risks and most importantly create happy customers, it surely deserve a serious consideration.