Potential: Revealed
Strategic Thinking, Innovative Ideas, Growth Marketing, and Revealing of PotentialArchive for decision-making
Predictive Analytics: How it Works (#2)
In the first post about predictive analtyics we learned about the essential building block of predictive analytics: the predictor. This is a value calculated for each entity (say, a customer) who’s actions or behaviors are to be predicted – for instance the recency, in months, since a customer’s last purchase.
Prediction power is enhanced if you use more than one predictor at a time. In doing so you are creating a model. Models are the heart of predictive analytics. In this post I’ll discuss how you can find the “best” predictive model. I put “best” in quotes because from a practical standpoint, unless you assume unlimited time and resources you may be best off finding a model that improves your results (e.g., reduction in customer churn) over previous experience. Today there is available very powerful modeling software and well-trained and talented statisticians, but the number of variables to consider in any predictive model (across demographics, transactions, behaviors) can be extremely large making determination of the “best” model cost prohibitive.
Fortunately, taking an incremental, continuous improvement approach can yield solid results for most any business and the promise that results will improve over time. A common tool is to develop a yield curve. For example, plotting the results of a predictive model for churn with amount of churn on the Y axis and percentage of customers contacted in a retention campaign on the X axis will show a curve the decreases to a point — i.e., up to a certain percentage of a universe of customers contacted, attrition rates will fall — but will bottom out and then move upward. Meaning that not all customers will respond to a retention campaign and you are best off contacting only those predicted to respond well. After that point, you are best leaving the balance of the universe of customers alone – either because they are not likely to churn anyway or because the predictive models say campaigns to retain them will be unsuccessful (and possibly other methods are needed – along with models that might predict how these approaches can be equally tuned to expend effort on just those predicted to be successful).
Now, although the model does not work perfectly, the socring and ranking of customers according to their likelihood to be retained provides clear guidance on how to invest in retention programs to yield the best results. It will prevent campaigns to retain customers that are too aggressive (trying to retain those that are not likely to respond positively, or wasting effort on those that are likely to stay).
There is a great deal more to predictive analytics than I’ve covered in the past two posts. But I hope one message is clear: you can gain practical improvements in marketing results or other customer touch points through the use of analytics that don’t need to be complex (at least to start) nor perfect. Commitment, willingness to experiment and continuous improvement are what’s really required.
Thanks for reading and I’ll look forward to comments.
Predictive Analytics: How it Works (1)
Sorry for the delay between posts. For past month or so we’ve been working on a very interesting project dealing with product ideas based on financial transaction data and powered by predictive analytics. While we are working to develop some early prototypes we have also been talking about challenges that need to be addressed when taking such products to market.
One issue over and over has been risk of market launch failure due to lack understanding of how analytics work (often lacking even rudimentary let alone deep understanding). A majority of key stakeholders – potential customers and internal business unit and functional area team – have heard of and are relatively convinced of the potential for analytics to optimize decision making. Whether that be to improve marketing effectiveness or precision of sales forecasts. Yet the basis for belief is often what they’ve read about or been led to believe by others. Analytics are not perfect and an important approach to achieving long term benefits from analytics is experimentation, challenging current results, and continual tuning of analytical models. We can foresee a gap forming where confidence in what is being developed and sold to clients falters due to lack of basic understanding of predictive analytics.
So, I thought I’d put together a brief series of posts (sort of like I did on “Practical Strategy” a little while ago) to explain predictive analytics.
The essential building block of predictive analytics is the predictor. It is a value calculated for each entity to be predicted – for instance the recency, in months, since a customer’s last purchase. Typically, the higher the calculated recency the more recent was the last purchase. As you’d expect, a good predictor is usually a reliable variable that consistently improves accuracy of some decision or action. Such as “customers with a high recency value typically have a higher response rate to marketing programs.”
There are other predictors that might work better with certain actions or decisions. For example, if you have an online subscription-based service, customers who spend less time logged on are less likely to renew annually. Tuning attrition or churn reduction campaigns by targeting customers who have low usage predictor values can boost effectiveness.
To make prediction even more precise you can use more than one predictor at a time. In doing so you are creating a model. Models are the heart of predictive analytics. Some simple models that might predict likelihood of a customer to renew their subscription:
- Linear – adding predictors together. For example: Recency + Household Income.
- Behavioral Rules – joining two or more behaviors with rules defining predictions of another behavior. For example: Usage (high or low) and Responded to Offer in Past 3 Months.
The best predictors will be predictive models that combine multiple aspects of a customer (e.g., demographics) and their behavior. A predictive model characteristically must be deeper and more complex than the above examples – uniting sometimes dozens of predictors. More on determining the best predictive model and harnessing rich sources of data to create powerfully predictive analytics in the next post. Thanks for reading and let me know if you have comments or can share your own experiences.
Where do we want to go?
This is the third in a series on developing a “practical strategy”. So far we’ve looked at two of the five basic questions that can be used as a framework for building and testing the strategy of an organization. The last three questions we’ll cover in this post.
The first two questions are “what business are we in?” and “where is the market going?” These questions serve to both build upon the vision which was developed (described in the first post ) and to test it in a practical way. The final three are “Where do we want to go?”, “How will we win?”, and “How will we get there?”. If the vision and the first two questions are for framing and testing then these last three are to useful for building out the details and getting ready to launch.
Picking up from the last post where the market landscape and strategic choices were developed the next step is to make those choices and identify the possible outcomes in order to be precise with the strategy. It is easy to be wishy-washy (sorry for use of such a jargon-laden term!) or settle for being too-high level. After all this is just the “strategy” and details can come later, right? Not right! Sure more details will come later in iterative execution phases and over time but forcing out specificity at this point is very valuable. Otherwise you can easily develop an elegant and logically sound strategy that still fails in the real world.
For example, while developing long term strategy at CheckFree, the leading provider of outsourced online banking and bill pay to U.S. financial institutions, the market — of both consumers who used it and the banks who provided it to them — was rapidly coming to accept such applications as mainstream (a classic sign of market “maturity”). But there was clear difference in the states of the two key market segments that made up the value chain for CheckFree. One segment, the bank market, was more mature and the competition was likely to force price into being a key competitive issue. Consumers, the other key segment, were still in the early stages of mainstream adoption. Plus a key variable was not simply adoption (what % of households were paying bills online) but penetration (what % of all household bills were being paid online — a sort of share of “bill payment wallet”).
The adoption metric was headed to and beyond 15% (and was at 30% at the leading bank in the U.S.) but the share of wallet was less than 5%. A clear choice on “where do we want to go?” was made: focus on the consumer. Clearly it seemed that there was both a significant unanswered challenge – how to get adopting households to pay all of their bills online through their bank — plus significant upside (increasing penetration offered a rich pool of latent, recurring revenue).
Turning to “how will we win?”: as with all of these questions they are best used in companion and with one another in an iterative manner. For instance, if we had chosen, instead, to give primacy to the bank market’s needs and compete on dimensions of traditional IT outsourcing — such as low cost, scale and quality — we felt we could win yet these were more mature areas and risk of commoditization was high (and price being a likely, and recurring, battleground). When we thought through our choice to compete with a consumer-focused strategy we were betting on this “pulling” through the banks and positioning us as clearly differentiated and preferred option in any competitive situation. The thinking was: if we could be the world-class experts in consumer adoption we were purposely choosing a more difficult yet competitively defensible path. We believed this competitive stratgegy would further raise switching costs and lock in market share with banks who chose us — and serve to help us avoid competing on price.
The last question, “How will we get there?” seems a little anticlimatic. This is by design. As I’ve mentioned previously a risk in developing strategy (amongst many!) can be that it is not practical (e.g., too high level, non-specific, hedges or is wishy-washy). If we’ve been thorough in answering and iterating through the vision and the first four questions the we’ll combat the impractical through the explicit development of a plan to accomplish the chosen strategy. The plan must include a clear set of discrete steps, time-phased and integrated across necessary functional or other organizational boundaries, assign specific accountable owners, and designate expected outcomes which become goals and metrics upon which to review and judge progress of the strategy execution and success of its outcomes. Wrappered around this methodology for developing practical strategy should be some sort of on-going strategic review, discussion and revision process (which I might blog about some other day). I like developing a 2 to 3 year strategy and then reviewing it every quarter on a rolling basis.
That’s it. I would welcome Comments from friends of my blog and from those just passing by and here for the first time. Randy
What business are we in?
Following on from the previous post, and the second in this series on developing a “practical strategy”, there are five basic questions that can be used as a framework for building and testing the strategy for an organization. I will cover two of them in this post and the rest in a post or two over the next few weeks.
The first two are “what business are we in?” and “where is the market going?” These questions serve to both build upon the vision which was developed (described in the first post ) and to test it in a practical way. The thinking being: the vision has to not just read nicely and seem logical but you should be able to deconstruct it and determine its practical applicability.
For example, here’s a real-world vision statement: We help mid-size businesses improve their Pipeline-to-Profitability (“P2P”) cycle. Our business intelligence solutions are easy to use, offer immediate value and require minimal investment, using existing systems and data sources. For this company, it was a significant turning point to re-define their business in this way. Previously they were more me-too as a business intelligence software provider delivering custom solutions in the “small to medium” (SMB) market. This was a good business but to grow it and to develop efficient marketing strategy and execution behind it was actually difficult because “what business are we in? “ resulted in an answer that was too broad and undifferentiated.
Above I underlined some key elements of their new vision. Each of these were chosen carefully and were backed by analysis, discussion and judgment to test whether they gave clear guidance about what business are they really in and whether data could be gathered which indicated where the market was going. As a product and marketing professional, having clear sets of facts and decisions about these two elements is a big advantage – and too-often they are not clearly available as marketing strategy is developed.
I’ll discuss just a couple of the key elements of the new vision from above to illustrate:
Mid-size – depending upon the definition of “small to medium size (SMB) business” there are at least 6.6 million (and some reports put the number at 20+ million if you include part time, SOHO and cash-only businesses) in the U.S. There’s a fair amount of hype about the potential for pursuing and selling to this somewhat untapped and very large B2B segment. Some iterative analysis and pondering of readily available data on this market showed us that the larger revenue size (what we came to call “mid-size”) businesses were more readily identifiable (e.g., segmented into industry categories) and still represented a significant market (625,000 in the U.S.).
Pipeline to Profitability – the company had developed some good off-the-shelf analytics that could be used by sales management to better understand their sales performance and provide insight that can improve effectiveness and results. The sales cycle though is a generic concept and varies widely across businesses due to product mix, complexity, price, market segments and channels. Some study of the marketplace indicated though that the sales pipeline – the narrow set of sales steps used to move a “qualified” prospect through to final sale – was a universal issue and the heart beat of any sales process. It was also well-defined and lent itself to simple analytics that yielded significant (i.e., high value) insights. Most importantly it was generally poorly served in terms of linking the management of the sales pipeline to profitable outcomes. Most solutions on the market totally ignored this critical component.
Immediate Value – later on you’ll learn that this was the chosen “key differentiator”. Every business or organization needs a key differentiator – ideally just one (that is so powerful that if well chosen and executed it is sufficient) to anchor the focus of the business, including technology and product investments, marketing messages and delivery or supply chain operations, as those apply. Much of what happens, or more accurately doesn’t happen, in business intelligence solutions and particularly in the CRM or sales arena is that value is not immediately delivered. Rather data (e.g., reports, alerts) is delivered slowly after much effort (and investment) and typically is not exactly (in form or content) what is needed by end users such as busy sales managers and executive managers. So rounds of iterations and alterations take place in search of the value and satisfaction required to ensure the solution will actually be deployed and used. This lag in achieving value – some call it ROI — and reasons for the lag are too numerous to go into here. It simply became clear that if value could be delivered “immediately” (the initial goal is within two days and long term goal is truly immediate) there was a void in the market and competitive differentiation could be clearly articulated and achieved.
Using these two questions in an iterative fashion is the best approach. Take each key element of the vision, ask: “what business are we in?” if we use that element. Then gather some external market data to ask further: “where is the market going?” relative to this key element – and you will rather rapidly shape, focus and finalize the business vision and also build up the fact-base behind it. This should give any business confidence that it is on the right track and once we are done with our five questions, should give the business confidence to pursue the entire vision with high energy and the proper amount of investment to achieve success.
Practical Strategy
True to my intent, I have written somewhat eclectically about discovering potential, looking ahead, thinking critically and objectively and wanted to get back to a business-oriented mode for a few posts.
Many organizations (and individuals!) are scratching their heads trying to figure out how to deal with our current, unique and challenging circumstances. But they are also trying to plan for the future (with optimism that “this too shall pass” and wanting to be ready for the next set of opportunities and challenges). I applaud any form of optimism! And so, I have a practical tool for use in getting some strategic thinking and planning done, which seems especially useful in these times as an overdone, over-wrought approach will be overkill when “directionally correct” might be all that is needed until some of the uncertainties and issues of the current time pass. I would argue though that even in more certain times, the approach I’ll write about in this and subsequent posts is useful and gets most any organization beyond being stuck in the present and looking ahead with a critical and purposeful eye.
The approach I advocate is squarely focused on getting a specific vision and strategy down on paper – and will serve as a very powerful tool to also use in successive iterations (a critical component of the strategy process as a one-time vision and strategy exercise might not even be worth the effort).
What I also like about this approach is that it uses language and key words that were not “strategy double-speak” and won’t put off the executives and other participants who often tune out of a strategy exercise because of preconceived notions about strategy, consultants, etc. (i.e., ”too complicated”, “too high level”, “not executable”).
The approach also ensures completeness without being overly complex and strenuous as a management team exercise. I often say when about to embark on this process that I want the team to “work out”, not “wear out”, their thinking capacity.
I call it Practical Strategy because of the definition of the word “practical”: \ˈprak-ti-kəl\, adj., useful and no-nonsense.
There are two basic steps to the process, with the second working through and answering a series of questions. I’ll summarize the first step in this post, and then work through the second part and the questions in a couple of subsequent posts. The first step is to articulate a long range vision for the business. This can sound too simple on the surface. A good vision is not just a statement that gets put onto posters, inside annual reports, or laminated on cards handed out to employees and customers. Getting it right is hard work but needn’t be a too-long effort. It must be clear, specific and define the place for the business to aspire reaching (but with no set time horizon). A test will be that a good vision statement can be decomposed and set the boundaries for and guide the answering of the subsequent questions in this exercise. If it fails this basic test, the vision is not practical and should be refined.
I’ll give an example. The practical vision for Domino’s Pizza: “Make and deliver a fresh, hot, high-quality pizza to the customer’s home within 30 minutes or less.” Several things:
- this makes clear what value is to be delivered – fresh, hot and high-quality. Any one of these may be sufficient, why choose all three? Knowing why make subsequent decisions about business model, operational strategies and so forth quite clear
- a key differentiator is articulated – 30 minutes or less (and in their advertising they backed this with a guarantee-or-free offer)
- a key operational characteristic is defined – to the customer’s home. If taken literally (which they did), this kept them focused on the home delivery model and away from building sit-down or walk-in or stores, and has clear direction for their location and logistics strategies.
- even the omission of something can be useful — the vision only mentions pizza. No mention of other products or open-ended placeholders for other foods or items that could be thrown in. It is about pizza, plain and simple.
Not all businesses are as simple as Domino’s. Or is it that not all businesses go to trouble of defining their businesses in such clear and practical ways? I’m sure the answer is in the middle somewhere but I will argue it falls toward the latter.
As always I welcome your feedback and look for a post soon on the first of the questions that must be answered to complete the rest of the Practical Strategy process.
Data is not the plural of anecdote
Following the recent election season I heard a pundit comment that, as usual, winning candidates from both sides had mastered the art of successfully positioning themselves – and their opponents – through powerful use of anecdotes. They found anecdotes that resonated with the electorate and used them to either effectively portray themselves positively or their opponents negatively. The power came from repeating these anecdotes in speeches, campaign literature, political advertisements, and those much-hated automated campaign telephone calls such that people began to believe them simply because the repetition gave them an air of being factual.
Now, I looked up the definition of the word anecdote. An-ec-dote \ˈa-nik-ˌdōt\, noun, “short account of a particular incident or event of an interesting or amusing nature, often biographical.”
I wasn’t sure how this could be so powerful – sounds sort of innocuous. Then I looked at synonyms of the word – I often find synonyms to be interesting perspective on word definitions. Here’s what I found:
Story
Tale
Yarn
Fish story
Fairy tale
Ah ha! Now I get it – tell a story that is rooted in some specific truth but with an edge of humor and human interest, repeat it often enough and it becomes accepted fact!
Now, I do NOT want to make my blog into a political one. I use the above to set up a simple point that I think is important in personal and business situations and has nothing necessarily to do with politics. Often in my business career and in my consulting work in the area of data-driven decision making (for strategic planning or in marketing), I have used interviews with an organization’s associates and executives to get a baseline on the current environment from various stakeholders. Without fail, a common thing I hear is “we have lots of data, we are drowning in data, but we make most decisions based on opinion or conventional wisdom”. Probing a little further I find that what happens is one or a small set of facts become favored (sometimes for pure but often for political reasons) and then repeated and re-used until it becomes the rationale for many decisions.
A great quote I just recently found is: ““data is not the plural of anecdote”. I think I’ll use it going forward to help me make the point about breaking away from opinion-based decision making and moving to data-driven decision making. As in politics, we often fall prey to simply repeating – and believing – what we’ve heard before rather than demanding data-supported facts, particularly fresh ones and from multiple sources that clearly support recommendations and decisions.
Trust, Integrity, Accountability
Recently I was working with a client on preparations for an important meeting. The exact details of the meeting and the content are unimportant. What my client sponsor was wrestling with was concern that his peers would not act on the recommendations we were making. As I asked him more probingly about the root of his concerns he blurted out something about “our leadership team often agrees in a meeting but follow through is poor.”
Through further discussions I came up with a framework for the meeting that he seemed to like and gave him confidence that his concern about follow through could be overcome. I described the framework like this:
- ultimately establishing clear Accountability for decisions and actions is required in order for follow-through to be ensured. I said we should start off with asserting this to the meeting attendees (all of them S and E level VPs, along with the GM of the overall business unit) and giving a definition of accountability that everyone could agree to: “a willingness to be held to account for one’s promises and actions“.
- next we would say that accountability requires two foundations, first is Trust. Trust can be simply defined as ”a relationship of reliance“. The team of executives, we would say, would see in a few moments that our recommendations revealed the clear interdependencies between each of their respective areas of the business. They were reliant upon each other and their teams to achieve success. While this may go without saying, we would invite them to openly discuss any areas where they felt they could not indeed “rely” upon each other or where weaknesses existed between business area linkages. Those areas would be addressed in the meeting and cleared up or an action plan would be devised to address them as output from the meeting.
- the second foundation element for accountability was “Integrity. Integrity can be defined as an undivided or unbroken completeness or totality with nothing wanting“. We would say that often accountability is desired and trust exists yet ultimately accountability falters because what someone or some group is held accountable to lacks integrity. Sometimes this is personal integrity but more often it is the integrity of — or the lack of a factual, fact base for — what is recommended and decided to be implemented. So our final activity before dealing with the recommendations was to spend more-than-usual time on the facts behind the business problem and opportunity we were dealing with. We said grounding all the participants equally and giving all a chance to develop a solid “fact base” was critical for them to hold one another accountable for follow through. If during our discussion, we said, the facts did not hold up, additional facts were needed or more clarity was required, it was better that we postponed final decisions and reconvened with the missing data ready to present.
What was interesting was that A) everyone seemed to appreciate the open recognition of the accountability issue. It had clearly become a sort of “elephant in the room” problem, which led to B) a reasonably candid discussion of some real, but solvable trust and integrity questions and challenges, and resulted in C) a preliminary acceptance of the facts and recommendations but request for the postponment of final decisions until a few important additional facts and factors could be brought to the table for consideration at a subsequent meeting. That follow up meeting was, I’m told, one of the most productive they’d had in quite some time which they attributed to the framework my client presented and used faithfully throughout the discussions.
As most of us have learned, often it is not just what we say but how we say it that can ultimately matter. Revealing and capturing the true potential of an idea or recommendation, in this case, depended upon it.
Yes, and…
A little while back I took a management development class (at Duke, with props to their exec ed team) that was unique and continues to have impact on my work and management thinking. It was an “improv for business” course, taught by an great full time b-school prof plus a colleague of his who is a member of 2nd City, the famous improv troupe out of Chicago (John Belushi, Bill Murray, John Candy, Bonnie Hunt, and many othersn are alumni). Some surprises from that experience:
Improv while looking chaotic and without form (and at a given moment it may be) is actually governed by some clear rules and norms.
Rather than being at odds with business improv provides a framework and method for breakthrough thinking.
Improv is first about listening, then about acting. Intense listening with the intent to truly understanding the sender’s message is the key to being a good improv player.
While there are others, and for the experienced improv player many additional and deeper levels to the world of improv, here are the most basic of rules:
1. Say yes, and. That is, agree with your stage partners, and expand from there. On a superficial level this agreement can be literal, eg. “let’s go to the gym”, “yes, and I’m going to get you RIPPED for your wedding”, but on a more fundamental level it’s about agreement between the players that if they are truly open to knew information — and trust one another — they can create something unique by building upon each others input and ideas.
2. Treat everything your partner says/does like manna from heaven. Everything is a gift, and if you take the time to really listen to/explore what he/she has said/done, there is a bounty of treasure there for you to use.
3. Make bold choices. New improvisers tend to put the onus on the other improviser to add information to the scene rather than you putting it out there themselves. You learn however that it is more productive — and more fun — to be bold and add as much to the scene every chance you have.
4. Don’t try to control the scene. Look after your own character, and trust that your scene partners are doing the same. The best scenes emerge from your interactions with others, rather than any singularly funny or outrageous thing you or another character says or does.
We did many fun group exercises over three days where we practiced listening — ensuring we truly received the message from our partners. This is not easy and revealed all of our weaknesses in this area. We also did many exercises to practice being “bold”. This rule (#3) stretches — and hopefully breaks — your natural defense against experimentation and failure. If you are going to be bold you will fail ocassionally (and a lot, at the beginning). And lastly, rule #4 played itself out over and over as we worked together and practiced improv scenarios, reminding us that the most beautiful tapestry comes from the weaving of many threads.
