Predictive Analytics Guide for 2023: Meaning, Different Model Types, and Examples by Industry

Predictive analytics is a method that uses statistics and modeling techniques to forecast future outcomes and performance. By analyzing current and past data patterns, it predicts the likelihood of those patterns occurring again. This helps businesses and investors optimize resource allocation to leverage potential future events. Additionally, predictive analysis can enhance operational efficiencies and minimize risks.

Understanding Predictive Analytics

Predictive analytics

Predictive analytics is a technology that predicts future outcomes using various techniques like AI, data mining, machine learning, modeling, and statistics. For example, data mining and text analysis analyze large sets of data to identify patterns.

Predictive models find applications in weather forecasts, video games, voice-to-text translation, customer service, and investment portfolios. These models use existing data to make predictions about future data.

Businesses benefit from predictive analytics by managing inventory, developing marketing strategies, and forecasting sales, particularly in competitive industries like healthcare and retail.

Investors and financial professionals use this technology to create investment portfolios and reduce risks.

Predictive models identify relationships and patterns in data to draw conclusions about how changes in underlying processes will affect future outcomes. By analyzing past data, these models determine the likelihood of specific future outcomes under current or expected conditions.

Predictive Analytics Examples by Industry

By harnessing advanced technologies like machine learning, data mining, statistics, and modeling, companies can anticipate future events. This valuable insight is used to address business challenges, discover new opportunities, and make forecasts.

In the past, It was considered niche and limited to a few users, but nowadays, it is becoming increasingly common in everyday business operations.

To illustrate its impact, let’s begin by highlighting one of the most prominent users of predictive analytics today – the retail industry.

1. Retail: To forecast buying behavior

Given the retail industry’s massive annual sales of nearly $4 trillion, it’s no surprise that major companies like Amazon and Walmart make extensive use of predictive analytics to understand their customers better.

For instance, Walmart analyzed transaction data to uncover buying habits during specific times. They discovered that before hurricanes, sales of strawberry Pop-Tarts and beer significantly increased, prompting Walmart to stock up on these items. Amazon, on the other hand, uses predictive analytics to offer personalized product recommendations based on customers’ buying patterns.

Even if you’re not an enterprise, predictive analytics is accessible through modern retail POS software. These tools collect and combine customer data from various sources like e-commerce sites, mobile apps, stores, and social media. By analyzing this data, retailers can gain deeper insights into their customers and predict their behaviors, allowing for more personalized and effective marketing strategies.

2. Healthcare: To detect illnesses

The healthcare industry deals with an enormous amount of health data due to the millions of patients in U.S. hospitals. Instead of focusing solely on the consumer journey, healthcare professionals analyze this data to improve diagnoses and predict outcomes based on various health factors.

A practical example of this is how AlayaCare worked with Element AI to develop an algorithm that predicted negative health events in seniors receiving care at home. The algorithm combined daily vitals, such as weight, with the patients’ age, gender, and diagnosis to forecast potential health issues. As a result, they significantly reduced hospitalizations and emergency room visits among chronically ill patients by 73% and 64%, respectively.

This approach helps healthcare systems save money and provide more personalized and proactive care to patients. Predictive analytics and AI continue to be used in various ways to enhance healthcare outcomes.

3. Entertainment: To curate content

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The digital entertainment industry, especially platforms like Netflix, greatly benefits from using predictive analytics. They gather data from millions of active accounts, including preferences, search keywords, ratings, preferred devices, and viewing habits, to build predictive models. This helps them keep their viewers satisfied by recommending relevant shows and improving their overall streaming experience.

For instance, Netflix used this data to create the show House of Cards, confident that it would be a success based on predictive data analysis. These metrics play a crucial role in the success of entertainment streaming services and shape the viewer experience in a more personalized way.

4. Manufacturing: To predict maintenance requirements

This specific example is closely related to the internet of things (IoT) because the manufacturing industry is becoming more automated. One significant application of predictive analytics in manufacturing is predictive maintenance.

Predictive maintenance aims to alert manufacturers about potential issues with industrial equipment. For instance, if a conveyor belt in a distribution center is at risk of breaking down or malfunctioning, it could disrupt production and lead to financial losses for the manufacturer.

To prevent such breakdowns, manufacturers use large amounts of data collected from IoT-embedded sensors on the equipment. By analyzing this data, they can intervene and address the problem before a breakdown actually happens.

5. Cybersecurity: To detect and prevent fraud

In 2018, over 3 billion fraud reports were submitted to the FTC, leading to a total loss of $1.48 billion. This marked a significant increase of 38 percent in just one year.

To combat the massive financial losses caused by fraud each year, the cybersecurity industry has increasingly turned to predictive analytics as a solution.

This involves analyzing common fraudulent activities, teaching predictive models to identify patterns in such behavior, and detecting anomalies. By closely monitoring suspicious financial actions, early detection of fraud can be achieved.

6. HR: To forecast employee growth

Can we use analytics to predict employee success? The answer is yes, although the HR industry is relatively new to leveraging the advantages of predictive analytics.

There are several ways to achieve this. One approach is by gathering data to manage workflows and enhance productivity. Employee data reveals patterns of productivity and challenges they face in their daily tasks, and this data improves over time.

Using a performance management system to collect this data can help businesses forecast future employee performance. With more data, companies can establish benchmarks for employees at different career stages.

It’s also valuable during the hiring process. By gathering data from company review sites, social media, job growth rates, and evolving skill sets, recruiters can find suitable candidates faster and more efficiently. This can ultimately reduce employee turnover rates.

For instance, Greenhouse, an applicant tracking software, utilizes predictive analytics and machine learning to achieve this very goal.

7. Sports: To predict performance outcomes

In the world of professional sports, franchises are constantly seeking ways to gain a competitive advantage. Nowadays, predictive analytics has become the trendiest method to achieve this goal.

Baseball has been a pioneer in using predictive analytics in professional sports. It is commonly used to predict a player’s future value and performance regression based on a complex set of metrics. This information is valuable for teams when negotiating expensive player contracts.

Because of the potential benefits, professional sports teams are actively seeking data analysts and scientists with knowledge of sports to harness the power of predictive analytics.

For more insights on how small-market baseball teams have maximized their budgets using predictive analytics, you can read Wharton’s blog.

8. Weather: To forecast weather patterns

Weather forecasts have significantly improved in accuracy compared to 40 years ago, and this is all thanks to predictive analytics.

Using satellite images and historical data, weather patterns are carefully analyzed, allowing us to make precise weather forecasts up to 30 days ahead.

Beyond better forecasts, this data is also crucial for understanding the effects of global warming. By using predictive models and data visualization, we can observe rising sea levels and increasing carbon dioxide levels and predict their future trends. This knowledge empowers us to take action and address the potential negative impacts of climate change.

Different Types of Predictive Analytical Models

Predictive analytics employs three common techniques: Decision trees, neural networks, and regression. Let’s delve into each of these methods.

Decision Trees If you want to understand the factors influencing someone’s decisions, decision trees come in handy. This model organizes data into sections based on specific variables, like price or market capitalization. Just like a tree with branches and leaves, it illustrates available choices as branches and individual decisions as leaves.

Decision trees are simple to grasp and analyze, making them useful for quick decision-making.

Regression Statistical analysis predominantly uses regression models. It’s suitable when you seek patterns in vast datasets and there’s a linear relationship between inputs. This method derives a formula that represents the connection between all the inputs in the dataset. For example, you can use regression to determine how price and other factors impact the performance of a security.

Neural Networks Inspired by the human brain, neural networks are a form of predictive analytics that deals with intricate data relationships using artificial intelligence and pattern recognition. This model proves valuable when facing complex challenges, such as handling large amounts of data or making predictions without having a clear formula to establish input-output relationships in the dataset.

Ways Businesses Can Benefit from Predictive Analytics

Predictive analytics offers various applications that businesses can leverage to enhance their operations. One significant use is in improving customer service and engagement.

Business executives can utilize predictive models to gain insights into customer behavior. For example, a business owner can use these techniques to identify loyal customers who might be at risk of switching to a competitor.

In advertising and marketing, It plays a crucial role. Companies can use these models to identify customers who are likely to respond positively to marketing campaigns, allowing them to save money by targeting the right audience instead of using broad and costly campaigns.

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Advantages of Predictive Analytics

Predictive analysis offers numerous benefits. It becomes especially valuable when you need to make predictions in situations where clear answers are not readily available.

Investors, financial professionals, and business leaders can use models to minimize risk. For example, an investor and their advisor can use specific models to create an investment portfolio with low risk by considering factors like age, capital, and goals.

Predictive analytics also significantly reduces costs. Businesses can assess the chances of success or failure of a product before its launch. It allows them to allocate funds for production improvements by using predictive techniques before starting the manufacturing process.

Critique of Predictive Analytics

Predictive analytics has faced criticism and even legal restrictions because of concerns about unfair outcomes. Some predictive models have been accused of creating statistical biases against certain racial or ethnic groups in areas like credit scoring, home lending, employment, or assessing the risk of criminal behavior.

One well-known example of this is the practice of redlining in home lending by banks, which is now illegal. Even if the predictions from such analytics are accurate, their use is generally disapproved, and data explicitly including a person’s race is often excluded from predictive analytics to avoid potential biases.

How Does Netflix Utilize Predictive Analytics?

For Netflix, data collection is crucial. They gather information from their customers based on their viewing habits and past behaviors. This data is used to offer personalized recommendations, leading to the “Because you watched…” lists on your account.

What Are the Three Main Aspects of Data Analytics?

Data analytics relies on three key pillars: the needs of the organization using the models, the data itself, and the technology used to analyze it. The insights and actions derived from this analysis are also essential.

What Are the Applications of Predictive Analytics?

Predictive analytics has various applications, including forecasting future trends, managing risks, analyzing customer behavior, detecting fraud, and optimizing operations. It helps organizations make better decisions, improve efficiency, and boost profitability by leveraging data to predict future events.

Which Model Is Best for Predictive Analytics?

The ideal predictive analytics model depends on factors like the type of data, the analysis’s objective, the complexity of the problem, and the desired accuracy. Options include linear regression, neural networks, clustering, and decision trees. The best choice varies based on the specific context and requirements.

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