Data Mining – useful or not?

What distinguishes Data Mining from other methods of exploring data, and what is its usefulness? Critics might say that if you torture the data enough, it will eventually confess! Computers contain lots of data, but people need help to turn this data into intelligence. As Frawley (1992) nicely puts it, “Computers have promised us a fountain of wisdom but delivered a flood of data.” Data Mining can help us to move from data keepers to intelligence gatherers. There are lots of definitions out there, but I like the Gartner one best: “A broad category of applications and technologies for gathering, storing, analysing, sharing and providing access to data to help enterprise users make better business decisions.” Data mining is particularly useful when it can be applied to customer insight, and this blog will aim to apply DM to customer insight.

Customer insight is a cornerstone of the activity of any business. It is at the core of ensuring that the business continues to devise products and services that will entice new customers in addition to turning satisfied customers into long-term, profitable, repeat customers. Customer insight has different perspectives:

Demographics understanding the classifications of customers characteristics who purchase from the organisation. This includes location, age, sex and so on.
Behaviour classification understanding the classifications of customer behaviour and lifecycle in contact with the business. This can involve an analysis of their spend, and frequency of touchpoints with the business.
Propensity to Churn analysing of customers who have previously churned to discover patterns in their behaviour. In turn, these patterns can be applied to existing customers to pinpoint those who might churn early so that strategies can be put in place to avoid this.
Propensity to Buy analysing the characteristics of customers who purchase certain products, and searching for patterns amongst a set of customers in order to predict their probability of purchasing these products as well. These propensity models are useful for understanding which customers are most likely to purchase a given set of products. This model can assist in decision making and in focusing marketing efforts.

As a first step to customer insight, analytical tools can summarise and aggregate historical information about customers. One particular technology which is good for summarising and aggregating data is called OLAP (On Line Analytical Processing). This could provide analysts with information such as the top ten performing products for a given month, or the top customers who purchased most of a specific type of product.

Historical analytics can help to support the marketing process, which can also be augmented by predictive analytics, alternatively known as data mining, which can help to identify patterns in customer behavior. The customer behavior patterns found can be used to make more informed, quicker decisions about targeting customers. Thus, a customer data warehouse can progress from simply becoming a data store to becoming an intelligence tool which is used to inform decisions and direct marketing spend.

Historical and predictive analytics are not mutually exclusive, but instead work together to inform the marketing process. For example, in a marketing campaign scenario, it could be possible to evaluate the success and impact of a marketing campaign by looking at historical customer activity, and then looking at the end-to-end process of CRM analytics by using data mining to search for related patterns in the customer behaviour.

Data Mining (DM) offers three main activities: data exploration, pattern discovery and predictions. The key differentiator is that data mining performs predictions, by using predictive techniques to find patterns in data. Microsoft offers Data Mining at no extra cost as part of SQL Server 2005 and 2008, which is geared towards the average Excel user. It is proposed here that companies who already have SQL Server software could consider these tools for the purposes of starting to conduct predictive analytics, or data mining, on their customer data – a lot of companies already have SQL Server 2005/ 2008 already, so why not try the data mining functionality that comes with the software? Businesses already have a great deal of operational data about their customers, which could be leveraged in the predictive analytics process. In particular, the existing data could be analysed to discover patterns in customer behaviour using data mining. It can offer a different way of looking at the data; it may reveal patterns in the data that the consumer had not previously seen, thereby triggering new avenues of opportunity.

Data mining is useful since it can help to investigate the loss of customers; since it can cost a lot to get new customers, an area of interest is to retain existing customers by identifying which customers are most likely to ‘churn’, or leave service. If the business can understand the causes of customer churn, then they can start to try and prevent it from happening in the first place. The issue is that a customer who cancels a service has actually started a relationship with the competitor before they make the cancellation call. It is at this point that the customer has been lost already.

Data mining can help to investigate the propensity of customers to churn so that they can be distinguished and addressed. Reduction of customer churn has a number of business benefits: the lifetime value of the customer might be increased, and as an adjunct, marketing spend can be targeted more effectively. Further, this could help to reduce new customer churn, where the customer acquisition cost has not been recouped at the point where the customer leaves the service. In some cases, reducing customer churn could even promote growth in areas that are considered to be already mature.

Reduction in customer churn is particularly important for companies in the services industries. There is often a distinction made between voluntary and involuntary churn. Voluntary, or commercial, churn is the situation where the customer has decided to leave and take up a competitor’s service; involuntary churn is where the customer has had no choice to leave the company due to factors such as relocation or invalidity. The ‘Churn’ Rate can be expressed as a percentage, which can obtained by conducting the following formula:

  • Churn Rate: Lost Customers / Total Customers

It is possible to investigate the propensity of customers to churn by using data mining techniques to look patterns in the data that might distinguish customers with a propensity to churn, and the type of churn itself. The benefit here is that this group of potential ‘churn’ customers can be specially identified, and different approaches explored in order to retain these customers.

Understanding the patterns in customer data can have many different applications. For example, it is suggested here that the business team can use these pattern-generating techniques to discover any patterns found within the ‘customer churn’ group. These patterns can then help to predict the customers who are most likely to churn before they begin to develop relationships with competitors. These customers may become the target of focused campaigns and subject to a specific tailored marketing campaign. It could then be possible to explore ways in which to turn these customers from ‘nearly satisfied’ to ‘satisfied’, and then from ‘satisfied’ to ‘loyal’. The customer data set could be configured to actively exclude ‘involuntary’ churn customers from the set of data to be explored, so that the results are more accurate.

Reducing customer churn is a two-pronged fork:

  • Prediction – predicting the churn probability of customers
  • Discovery – discovering the root causes of churn

As part of the prediction process, it is important to understand the profitability of a certain group of customers; for example, if the customer is not very profitable, then perhaps it is possible to simply just let the customer go, and direct the marketing resources towards retaining a more profitable set of customers.

As a part of the discovery process, the business can start to understand what specific factors lead to the churn itself. These factors can then be addressed in order to reduce internal causes of churn.

Data mining techniques can be mapped to the processes of prediction and discovery. Data mining is quite new technology, and it can be difficult to know where to start. Microsoft assumes that the user has no prior knowledge of data mining algorithms, but the terminology might be a bit off-putting. To try and simplify it, here is a table which describes the main Microsoft data mining algorithms, along with a key which shows their main uses:

Algorithm Description Exploration Classification Estimation Association Segmentation Forecast
Decision Trees Finds the odds of an outcome based on values in a training set Yes Yes Yes Yes
Naïve Bayes Clearly shows the differences in a particular variable for various data elements Yes Yes Potential
Neural Nets Seeks to uncover non-intuitive relationships in data Potential Yes Yes
Association Rules Identifies relationships between cases Yes Potential Yes
Clustering Classifies cases into distinctive groups based on any attribute sets Yes Potential Potential Potential Yes
Sequence Clustering Groups or clusters data based on a sequence of previous events Yes Potential Potential Potential Yes
Time Series Analyzes and forecasts time-based data Yes Yes
Linear Regression Determines the relationship between columns in order to predict an outcome Potential Yes
Logistic Regression Determines the relationship between columns in order to evaluate the probability that a column will contain a specific state Potential Yes Yes

There are a number of different models to choose from, and the choice should be based on the type of data analysis that is being employed. In order to do data mining properly, it is also necessary to test and re-test results again to ensure the validity of the predictions and models in order to ensure rigorousness. Modelling exercises should look at using some of the different algorithms provided by Microsoft, in order to choose the best model by comparing results.

To summarise, Data Mining is a key technology for exploring data, and primarily Predictive Analysis. Here, it has been applied to customer churn. Specifically in terms of Microsoft, the data mining features are responsive and intuitive, and provided in a format that users trust: Excel. The Data Mining functionality in Microsoft allows users to turn data into intelligence, thereby making customer interactions more timely, focused and rewarding.

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