How Predictive Analytics is Changing the Retail Industry

In this special guest feature, Dean Abbott of  SmarterHQ discusses how data science and predictive modeling have become the holy grail for the retail industry. Dean is the Co-Founder and Chief Data Scientist of SmarterHQ, a customer intelligence driven cross-channel marketing platform which enables retailers to leverage customer insights and experiences to create and execute the industry’s most profitable cross channel marketing programs. Dean has been named one of the 10 Most Influential People in Data Analytics, one of the 200 Big Data Thought Leaders to Follow, and is a leading Data Science, Big Data and Analytics Blogger.

Ideally, a retailer’s customer data reflects the company’s success in reaching and nurturing its customers. Retailers built reports summarizing customer behavior using metrics such as conversion rate, average order value, recency of purchase and total amount spent in recent transactions. These measurements provided general insight into the behavioral tendencies of customers.

However, reports summarizing average behavior don’t provide the useful insights needed to determine how individual customers are likely to behave because general behavior tendencies are simply too broad. In order for retailers to create a meaningful dialogue with customers that honors the shopper’s preferred level and mode of engagement, it takes more than summarized reports, which is why customer intelligence and predictive analytics provide the opportunity to significantly change the retail marketing industry.

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Customer intelligence is the practice of determining and delivering data-driven insights into past and predicted future customer behavior. To be effective, customer intelligence must combine raw transactional and behavioral data to generate derived measures. The process can best be described using the saying, “It’s not the data that is collected, it’s the data that is created.” Put into a predictive modeler’s perspective, the team not only collects a large amount of data, but also contextualizes that data by building derived attributes that provide additional insight into customer intent.

But how do data scientists and predictive modelers determine which derived attributes are relevant? Usually data scientists lack the deep domain expertise needed to clarify and prioritize their efforts. Therefore, a collaboration with domain experts is essential. This collaboration is like a three-legged stool. Each leg is critical to the stool remaining stable and fulfilling its intended purpose. When it comes to generating customer intelligence, the three legs of the stool are retail experts, data geeks and coders, and predictive modelers or data scientists.

Retail experts have domain expertise and can best frame the problem customer intelligence is aiming to solve. They suggest derived attributes that will provide value to both the brand and the company’s marketing campaign. Data geeks are needed to program these ideas and store them in a suitable database, which can often lead to greatly increased data storage requirements for the retailer. However, if the data can only be used to create solutions or make key marketing decisions if it’s properly stored and accessed.  Inaccessible data means useless data and a wasted opportunity.

Predictive modelers and data scientists are then needed to use the stored data to build models that achieve those business objectives originally set by the retail expert. Predictive models find relationships between historic data and subsequent outcomes so that near-term and long-term customer behavior can be predicted. This leg of the stool aims to answer problems such as the likelihood of when a shopper will make their next purchase and what the value of that purchase will be. Sometimes, these relationships are so complex that only machine learning techniques will find them.

In a real world example, consider a retailer that would like to appropriately message high-valued, loyal shoppers who appear to be disengaging from the brand. A predictive model built from stored data could identify which shoppers are likely to purchase again with seven days, allowing the retailer to let them be the loyal customers they truly are. The predictive model can also show if certain shoppers are unlikely to purchase within seven days but have a high average order value. For these shoppers, the retailer could provide an incentive to bring the shoppers back to the brand. In either case, predicting what shoppers are likely to do is critical to understanding how best to complete the dialogue with them.

Moving forward, retailers will need to big data augment marketing decisions using insights gained from customer intelligence and predictive analytics. Each retailer’s data team must bring in elements from all aspects of the business, including retail experts, data geeks and predictive modelers. These key elements will set retailers up for success as we move forward into the era of big data.

Download the insideBIGDATA Guide to Retail