Potential: Revealed

Strategic Thinking, Innovative Ideas, Growth Marketing, and Revealing of Potential

Archive for Practical

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.

Advertisements

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

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.