Predictive Analytics | 9 mins read

Guide to Predictive Analytics- Definition, Process & More

guide to predictive analytics definition process more
Chloe Henderson

By Chloe Henderson

When businesses successfully manage their data and implement predictive analytics, they are able to prevent capital loss by anticipating future events.

Companies with predictive analytics solutions have a significant competitive advantage over peers by being able to prepare for changing customer demand and market patterns. By collaborating data from various sources, forecasting systems can alert businesses of rising product popularity, future traffic surges, and customer behavior trends. Access to this information allows companies to optimize stock levels, launch new products, and alter item prices to promote sales and revenue.

Predictive analytics tools have several other functions to generate metrics based on set parameters. For example, businesses can define sales volume per quarter by setting a time frame for analysis. This flexibility makes having forecasting software a versatile and valuable advantage.

What is Predictive Analytics?

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Predictive analytics is a type of data science that uses historical information and analysis tactics, such as statistic modeling and machine learning, to predict future trends. With a collaborative set of past and current data, businesses can generate precise outcomes, insights, and behaviors in the near or distant future.

However, precise estimates require extensive data mining to pull information from various business processes, such as sales and inventory management. The information processed can come in many forms, such as structured, unstructured, internal, external, quantitative, and qualitative. Analytics software uses significant amounts of real-time and historical data to accurately detect patterns and predict future outputs.

Advanced analytics tools can also measure potential risks by assessing the relationships between factors and how manipulating one affects the other. For example, analytics software can determine how changes in price points can affect future customer demand and sales. With these insights, companies can utilize internal information and big data to predict outcomes for specific operations and behaviors, such as customer demand and inventory reorder points.

By using predictive analytics data, companies can anticipate surges and drops in internal processes, rather than relying on assumptions. This gives businesses a competitive edge, allowing management to mitigate identified risks and adequately prepare for fluctuations in customer demand, average sales, stock levels, and other dependent operations.

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How Different Industries Use Predictive Analytics

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Many businesses throughout various industries use predictive analytics to minimize their exposure to risks, optimize internal processes, and promote profits. A few examples of industries that commonly utilize predictive modeling include-

  • Financial Institutions
Financial services, such as banks and loan companies, have highly sensitive data that they handle daily. Using predictive analytics allows these institutions to detect the risk of fraud, credit exposure, and theft.
For example, the Commonwealth Bank uses predictive analysis to assess the probability of fraudulent activities during each customer transaction before the authorization process is finalized.

  • Retail
Many retailers are using predictive analytics software not only to estimate future spikes in customer demand but also to find connections between the sales of different products. By understanding customer behavior and what products different consumer profiles are likely to buy, businesses can manipulate prices to optimize sales and profit margins.

  • Utilities
Utility companies use big data analytics less for customer reach and sales, and more for logistics and maintenance. Prescriptive analytics predicts equipment malfunctions, resource demand, and safety risks ahead of busy seasons. This allows companies to implement health training sessions, maintenance schedules, and other preventative measures.

  • Government
State and national governments have taken advantage of predictive data analytics for decades to understand population trends, improve service, and enhance performance. They also gain insight into the risk of fraudulent activities and threats to cybersecurity.

  • Health Insurance
Besides assessing fraudulent claims, predictive analytics help health insurance companies pinpoint patients at a high risk of chronic diseases and suggest the best practices. For example, Express Scripts, a pharmacy benefits company, used predictive tools to find patients not following prescribed treatments, saving them up to $9,000 per person.

  • Manufacturing
For manufacturers, it is essential to define the operational functions that can lead to system failures and low-quality products. Analytics use process metrics to identify risks and suggest methods to optimize machine parts, resource usage, and distribution.

Steps to Utilize Predictive Analytics

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The purpose of using predictive analytics tools is to develop a data-driven work environment to enhance decision-making. With accurate data sets, businesses can adequately anticipate risks and take advantage of profitable opportunities. In order to optimize analytics results, organizations can follow five comprehensive steps-

1. Define Business Goals
Businesses must first define their objectives to customize the forecasting solutions to generate expected results. By clearly outlining desired data output, the predictive model can provide insights on-

  • Customer demographics that are likely to remain loyal
  • Demand for different items and services
  • Customers with high probability of missing payments
  • Risk of delayed shipments based on specific suppliers
  • Increase in operational cost

2. Gather Information from Various Data Sources

Once expectations are identified, management teams must begin collecting data from relevant sources to enter into the analytics model. Depending on the desired forecasted insights, information may need to be pulled from various management software. Applications such as point-of-sale (POS), marketing, inventory control, and ordering systems provide vital metrics, key performance indicators (KPIs), and statistics.

These advanced tools also store historical and real-time data in a structured fashion, ensuring efficient transferal into the analytics application. Businesses can streamline data exchange from established systems to their analytics model with system integration. An integrator connects systems to automatically pull and transfer information to the desired software solution, eliminating the need for manual data consolidation.

3. Use Data Cleaning to Enhance the Information's Quality
Management should remember that the quality of data they collect and utilize will directly affect the quality of analytics produced by the model. This means that, if the collected data set is of low quality, the forecasting software will generate inaccurate results. Therefore, companies should take the time to go over proper data consolidation with employees to ensure relevant, accurate information is gathered. When data aggregation is executed correctly, it reduces the time needed to cleanse the information.

Cleaning data entails eliminating duplicate reports, reformatting inconsistent structures, and reconciling discrepancies. This process ensures the predictive analytics application can digest the entered data and generate accurate outputs.

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4. Choose or Build a Predictive Analytics Solution

After cleaning the data set, it is time to determine what analytics solution to use. Building predictive software from scratch requires a data scientist with extensive knowledge of programming and analytics and is often costly. Companies can also outsource data analysts or invest in a commercial forecasting product. Advanced pre-programmed predictive software is user friendly and is often more cost-efficient than outsourcing or building a customized model.

However, if a company is considering investing in a commercial forecasting solution, they should ensure it offers features that limit manual data handling for increased data security and reduced risk of human error. Modern analytics software should provide-

  • Data Mining - Extract relevant data from several sources and define trends.
  • Data Cleaning - Prepare information by deleting duplicates, standardizing format, and alerting users of data errors.
  • Predictive Modeling - Use statistical analysis to develop sophisticated algorithms and models of estimated outcomes.
  • Forecasting Insights - Use artificial intelligence and machine learning to handle large amounts of data in real-time to predict future events.
  • Data Visualization - Generate visual aids such as charts, graphs, tables, and maps presenting analytics reports in a comprehensive format.
  • Integration - Integrate seamlessly with existing systems to streamline data exchange and eliminate the need for manual labor.

5. Monitor and Assess the System

Once the forecasting solution is implemented and operating, management should perform routine evaluations to identify the system's strengths and weaknesses. By running analytics on selected data collections, companies can ensure the software can generate accurate results for different scenarios. Once the platform's functionality is validated, management can begin making data-driven decisions.

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Types of Predictive Models

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Several predictive analytics models are available for businesses in response to the varying data analysis needs of different industries.

Forecast Model

As one of the most common analytics tools, the forecast model bases predictions on metric values by defining patterns between new and historical data. This model can restructure historical information to generate numerical values that were previously unavailable. Businesses can also set different parameters specific to their industries within forecasting systems to produce customized results.

For example, a small startup business can use months of average sales data to detect growth and predict customer demand in order to adequately stock items. A large enterprise can also use forecasting to monitor customer retention and predict future loyalty, allowing management to strategize promotions and discover new ways to enhance the customer experience. This versatility is what makes forecasting models so popular.

Classification Model

Another popular analytics method is the classification model, which organizes data by categorizing historical information. All similar, relevant data is grouped to streamline analyses for broad topics, such as sales and marketing campaigns.

This makes the classification model unique from the other methods, as it is able to group past data based on programmed parameters. These variables can be based on information characteristics, time period, department, or whatever specification is needed. Although this model typically handles past data, it can easily be re-programmed to digest current data. This simplified and flexible structure makes classification models easy to use.

Outliers Model

Unlike classification and forecasting models that work with historical data, the outliers model handles anomalous data or information outside of standard business patterns. By pinpointing and defining unusual values, the outliers model can potentially save businesses significant expenses. The targeted data may represent discrepancies, fraud, or theft, in which case the user is alerted and can immediately act.

For example, when the system detects a fraudulent purchase, it assesses the location, time, purchase history, details of the transaction, as well as the amount of capital lost. This feature alone makes the outliers model prevalent in the retail and finance industries.

Time Series Model

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Contrary to the other systems that sift through extensive data collections, the time series model focuses on data that falls within the set time parameters. Businesses can set filters for specific days, months, or seasons to generate trends within a period. This allows companies to see how particular elements have progressed and predict their future outcome.

For example, restaurants can use the time series model to define their busy and slow seasons. This information, combined with big data, allows management to determine what external factors affect their business.

Outside factors such as weather patterns, local events, and school seasons can potentially affect traffic and sales. The ability to manipulate parameters and access evolving trends makes the time series model useful for organizations with fluctuating profits.

Clustering Model

Similar to the classification method, clustering models sort and group information. However, rather than defining data by historical metrics, this model groups information by common characteristics, such as departments or operations.

This function is especially useful for project management, such as when developing effective marketing campaigns. With the clustering model, marketers can create promotions that target specific customers by generating trends based on demographics.

The Importance of Predictive Analytics

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Regardless of the industry, businesses generate massive amounts of data from internal operations alone, from customer interactions to supply chain processes. However, without an analytics tool to generate insights, trends, and predicted outcomes, the information is of no use.

Raw data needs to be correctly processed and regulated to ensure management can make informed business decisions. With processed information, forecasting software can generate reports and visual aids that illustrate vital metrics in digestible formats.

Most importantly, predictive analytics takes the guessing out of operations planning. Through sophisticated algorithms and data science, predictive software can alert organizations of upcoming fluctuations in demand, operational costs, and consumer traffic. This allows businesses to adequately prepare stock levels, staffing, and purchase orders to optimize sales and limit unnecessary expenditures.
This solution can also-

  • Detect Fraud by combining analytics strategies to identify rogue metrics and prevent theft and other discrepancies.
  • Optimize Marketing Strategies by tracking customer purchase history, behaviors, and reviews that allow marketing teams to develop impactful promotions.
  • Enhance Operations through complex trend tracking that predicts the need for specific resources, alerting managers to place additional or fewer stock orders.
  • Minimize Risks by monitoring transactions to predict item sales, reducing the risk of stockouts and backorders.

Predictive analytics is not exclusive to large enterprises with several operations. Data analytics can also help small businesses optimize their sales metrics to define weaknesses and estimate profits.

This functionality allows companies to anticipate future events and prepare processes to enhance performance. With predictive analytics, businesses can work on improving profitability and scalability through optimized resources and data-driven strategies.

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