A primer on Predictive Analytics

Agenda

• What is Predictive Analytics

• Critical Requirements for success

• Real life applications

Direct Marketing : Maximizing ROI

Consumer Finance : Whom to sell? What to sell? Which Channel?

Consumer Packaged Goods : Marketing $ Optimization

• Summary

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www.puntersgenie.com

……….we take as much historical data from racing as we can and try to find the
things that are important for predicting the outcome of future races. Once
we find those things (in some cases we can be working with tens of
thousands of combinations of variables), we then run the models against a
test set of races and look at the results. We then look at the races that we
predicted correctly and work out what things made that possible for those
particular races. This is how we come up with the Bet Index. This
information is then fed back into the models to make them better

Predictive Modeling
…. predict the probability of a horse winning a race

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What is Predictive Analytics ?

“Use historical data to make certain predictions for the future”

Hindsight Insight Foresight

“What will happen?”
“What is happening ?” “Why is it happening ?”
“What should happen?”

• Typical MIS or BI • Business analysis • Predictive Analytics;

• Cognos; Business Objects;
Hyperion; ProClarity; etc
• Largely backward looking
• Referred to by many folks
as ‘Analytics’ although it
is not
• behavior analysis; trends;
etc
• Gives us insights on what
is happening and why
forecasting; optimization,
etc
• Uses past behavior to
predict future outcomes
• Game changing
• Forward-looking

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Some types of Predictive Analytics

Logistic Forecasting; Segmentation;

Regression OLS; ARIMA CHAID; CART
• Commonly used when the • Used to forecast • Used to bucket or ‘cluster’
objective is to predict a outcomes that are of a like things
binary outcome continuous nature • Each member in a cluster
• Example: will Customer X • Example: how much will is very similar to another
respond or not respond to this Customer Y spend in member in same cluster;
my marketing offer the next month? but very different from a
• Example: What is the • Example: movement of member in a different
chance Customer Y will the S&P 500 index on a cluster
dis-enroll in the next 12 weekly basis for the next • Example: Customers in a
months 12 weeks particular segment have
similar behaviors
ARIMA: Autoregressive Integrated Moving Average
CHAID: Chi-squared Automatic Interaction Detector
CART: Classification & Regression Tree
OLS: Ordinary Least Squares

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Critical Requirements for Success

Business Objective

Data Expertise Culture

More data is better; Requires folks that Typically Senior

and data from are not only management buy-
varied information statisticians; but can in is critical.
sources is even also understand Successful
better business projects are top-
driven

Predictive Analytics
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Business Objective

I want to identify which Customers will ‘attrite’ so that I can take some
proactive actions

All Customers? Or just new Customers???

Attrite today / tomorrow / next month / etc

What is attrition to me? No activity for 6

months / 2 months / etc

I want to predict which of my high tenure Customers will ‘attrite’

or ‘churn’ in the next 6 months
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Analytical Framework

Business Objective:
I want to predict which of my high tenure Customers will ‘attrite’ or ‘churn’ in
the next 6 months

Past Future

-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7

Months

1. Historical Customer transaction data Decision Period

(mob>12; transactions, interactions)

2. External data
(Credit bureaus; demographics; psychographic,
macroeconomic; etc)

Decision Point
Dec09

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1. Data Collection

Identify a suitable time period in the past to collect relevant information

Past

-25 -24 -23 -22 -21 -20 -19 -18 -17 -16 -15 -14 -13 -12 -11

Months

1. Historical Customer transaction data Decision Period

(mob>12; transactions, interactions) • Identify Attritors; label them as 1’s
2. External data • All others labeled as 0’s
(Credit bureaus; demographics; psychographic,
macroeconomic; etc)

Reference Point
July08

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2. Model Build & Deployment

Model
Raw data
Exploratory Data Variable Variable Development
& Deployment
Analysis Treatment Selection &
Sampling
Validation

• Data Preparation • Defining • Missing Value • Stepwise • OLS / Logistic / • Scorecard

• Over sampling ? dependent Treatment regression CHAID / etc development
variable • Variable • Logit Plots • KS • Statistical paper
• Reject
Inferencing • Business sense Transformation • Business Logic • Rank-ordering • Implementation
check • Variable capping code
• Multi-collinearity • Out-of-time
& Flooring Validation
• 5 – 10 most
significant
variables

Ongoing Model Validation & Maintenance

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Output of Modeling Process

Every Customer has a unique ‘Score’ that captures the essence of

what is being modeled.

The ‘Score’ is essentially the ‘probability’ of something happening scaled in a

pre-defined fashion; having an upper- and an lower-bound

Called a ‘Score-card’

For Example:
1. Customer #17523 has a score of 769; translating to a 90% probability of ‘churning’ in the next 6
months
2. Household # 845 has a score of 423; translating to a 36% chance of accepting the offer for a
magazine if sent a Direct mail Offer

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Resources & Timelines
CRISP-DM Process

20% 25%
CRISP

15%
5%

25%

Business: 30%
Data: 40%
Modeling: 25%
10%

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 Explaining the benefits

Random w/ MIDAS Blaze™

100%

90%
• Save: 25% improvement in marketing
efficiency; leading to annual cost
% Responders Captured

80%

70% savings of $1.5MM. Same number of

Boost
60% Customers acquired
50%
Save
40% • Boost: 25% more acquired
30%
Customers with a marketing budget
20%
of $6MM.
10%

0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% • Build scenarios and optimize
% Mailbase

Sell the business impact; not the technical power !

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Business Applications

• Optimize your Marketing $

Direct Marketing • Maximizing Customer Lifetime

Value

Consumer Finance • Deepen relationships by cross-sell

& up-sell

Telecom & Utilities • Retain Profitable Customers

• Risk Management & Fraud

Healthcare • Collect past-dues faster

• Predict Part Failures

Manufacturing
• Web targeting

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 1. Direct Marketing
Cut marketing expenses significantly; while maintaining acquisition volumes

Random Mailing Intelligent Mailing

Response Rate: 4.5% Response Rate: 6.0%

Mailed
Mailed

Scorecard

Not Mailed
: Prospect
: Responder

Response Scorecards help in identifying Prospects/Customers to target

so as to maximize Response rates

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 Final Mailing Strategy
25% improvement in marketing ROI

- 6 campaigns of 1MM mailings each; annual cost of $6MM

- Random mailing Response rate of 4.5% → 270,000 Responders
- Response Model built; assigns each prospect a ‘Response Score’, between 1 and 10
- 9 campaigns of 0.5MM mailings each; annual cost of $4.5MM → 270,000 Responders
- 25% improvement in marketing efficiency; leading to annual cost savings of $1.5MM

RANDOM MAILINGS TARGETED MAILINGS

Response # Cumulative # Cumulative Marginal Cuml # Cumulative Marginal Cuml
# Prospects # Responders # Responders
Score Prospects Responders Response rate Response rate Responders Response rate Response rate
1 100,000 100,000 4,500 4,500 4.5% 4.5% 9,507 9,507 9.5% 9.5%
2 100,000 200,000 4,500 9,000 4.5% 4.5% 6,761 16,268 6.8% 8.1%
3 100,000 300,000 4,500 13,500 4.5% 4.5% 5,282 21,549 5.3% 7.2%
Increasing 4 100,000 400,000 4,500 18,000 4.5% 4.5% 4,437 25,986 4.4% 6.5%
Response 5 100,000 500,000 4,500 22,500 4.5% 4.5% 4,014 30,000 4.0% 6.0%
6 100,000 600,000 4,500 27,000 4.5% 4.5% 3,592 33,592 3.6% 5.6%
Rates 7 100,000 700,000 4,500 31,500 4.5% 4.5% 3,169 36,761 3.2% 5.3%
8 100,000 800,000 4,500 36,000 4.5% 4.5% 2,958 39,718 3.0% 5.0%
9 100,000 900,000 4,500 40,500 4.5% 4.5% 2,746 42,465 2.7% 4.7%
10 100,000 1,000,000 4,500 45,000 4.5% 4.5% 2,535 45,000 2.5% 4.5%
1,000,000 45,000 4.5% 45,000 4.5%

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Response Model Performance
10%
9% Modeled
8%
7%

Cumulative 6%
Response 5%
Rates
4% Random
3%
2%
1%
0%
1 2 3 4 5 6 7 8 9 10

Increasing
Response
Rates

If needed, marketing efficiencies can be further increased by targeting high

responding prospects

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2. Consumer Finance
What to Sell? To whom? Which Channel

Channels

Products

Customers
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 What is Customer Lifetime Value ?

Measuring Customer Lifetime Value

CLV is defined as the sum of cumulated Cash-flows – discounted using the Weighted Average
Cost of Capital (WACC) – of a Customer over his or her entire lifetime with the Franchise

Known from Predict Response

existing P&L’s Rates

Acquisition
Monthly
Costs
Expenses
Customer
Net Margin Lifetime Value

Monthly Accumulated
Revenues Margin
Customer
Lifespan

Predict monthly
Spend Predict Customer
Attrition

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Eg. Credit Cards

CLV(Customer1, product XY, Channel PQ) = f (P&L drivers, discount rate)

Customer / Segment
Acquisition Cost Acquisition Models:
Discount Rate -Product & Channel based
-p(Response Score)
Total Customers -p(Approval Score)
Revenue Models:
Purchase Sales, $
-p(Activation)
-p(Monthly purchase sales) Payment $
-p(Payment $) Net Credit Losses, $
-p(Attrition) Ending Loan Balances, $

Revenues
Expenses Expense Models:
Net Income (after taxes) -p(Credit Loss)
Terminal Value
Models can be built at Customer-
Discounted Net Income
level or Segment-level
Discounted Terminal Value

CLV

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 Eg. Credit Cards Cross-sell

Over 80MM Combinations !

4 Channels
Business
constraints
10 Products
Optimize
Target

Right Product to right

2MM Customers
Customer in the right
Channel

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 3. Consumer Packaged Goods
Optimize marketing spend across channels

Marketing-Mix-Optimization
Optimize investments across Media so as to maximize Sales

Historical data is collected for sales (and/or other KPIs) and Multivariate regression analysis is used to quantify
all key Media Marketing activities incremental sales generated
$600,000 $600,000

$500,000 Past sales $500,000

performance
$400,000 $400,000

$300,000 $300,000

$200,000 $200,000
Incremental sales
$100,000 Past TV $100,000 generated by TV
activities
$0 $0

Week10
Week13
Week16
Week19
Week22
Week25
Week28
Week31
Week34
Week37
Week40
Week43
Week46
Week49
Week52
Week1
Week4
Week7
Week10
Week13
Week16
Week19
Week22
Week25
Week28
Week31
Week34
Week37
Week40
Week43
Week46
Week49
Week52
Week1
Week4
Week7

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Optimally allocate Media spend to maximize Sales

Baseline Sales Magazine Incr. Sales TV Incr. Sales Daily Incr. Sales

test Magazine Spend TV Spend Dailies Spend

20 900

18 800

Media Spend, ‘000 SGD

16 700
Volume, ‘000 units

14
600
12
500
10
400
8
300
6
200
4

2 100

0 0
DEC07

DEC08
OCT07

OCT08
MAY07

AUG07

AUG08
SEP07

MAY08

SEP08
MAR07

JUN07
FEB07

NOV07

MAR08

JUN08
FEB08

NOV08
APR07

JUL07

APR08

JUL08
JAN07

JAN08

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Magazine gives the highest ROI per $ spend

Incremental Sales per ‘000 SGD media spend

0.14

0.12
For every $ spend,
Magazine gives 6
0.10
times the return of
Efficiency

0.08 TV and dailies

0.06

0.04

0.02

-
Total Spends Magazine TV Daily

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Key Takeaways

Predictive Analytics can be a potent weapon in

your toolbox

With increasing commoditization, it is truly the

next differentiator

It requires specialized expertise, talent

and tools to execute well

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www.marketelligent.com

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Thank You

Contact us at:
+91-80-26642802 (India)
1-201-301-2411 (USA)
info@marketelligent.com
www.marketelligent.com

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