CCW331-BUSINESS ANALYTICS

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Introduction to Business Forecasting and Predictive
analytics
Business forecasting is a projection of future
developments of a business or industry based
on trends and patterns of past and present
data.
This business practice helps determine how to
allocate resources and plan strategically for
upcoming projects, activities, and costs.
Forecasting enables organizations to manage
resources, align their goals with present trends,
and increase their chances of surviving and
staying competitive.
The purpose of forecasts is to develop better
strategies and project plans using available,
2 relevant data from the past and present to
secure your business's future. Good business
Important business forecasting
methods
There are several business forecasting
methods. They fall into two main approaches:
 Quantitative forecasting
 Qualitative forecasting

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Quantitative and qualitative forecasting
techniques use and provide different sets of
data and are needed at different stages of
a product's life cycle.
Note that significant changes in a
company, such as new product focus, new
competitors or competitive strategies, or
changing compliance requirements
diminish the connection between past and
future trends. This makes choosing the
right forecasting method even more
important.
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Quantitative business
forecasting
Use quantitative forecasting when there is accurate
past data available to analyze patterns and predict
the probability of future events in your business or
industry.
Quantitative forecasting extracts trends from existing
data to determine the more probable results. It
connects and analyzes different variables to establish
cause and effect between events, elements, and
outcomes. An example of data used in quantitative
forecasting is past sales numbers.
Quantitative models work with data, numbers, and
formulas. There is little human interference in
quantitative analysis. Examples of quantitative
models in business forecasting include:
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 The indicator approach: This approach depends on the
relationship between specific indicators being stable over time,
e.g., GDP and the unemployment rate. By following the
relationship between these two factors, forecasters can estimate a
business's performance.
 The average approach: This approach infers that the predictions
of future values are equal to the average of the past data. It is
best to use this approach only when assuming that the future will
resemble the past.
 Econometric modeling: Econometric modeling is a
mathematically rigorous approach to forecasting. Forecasters
assume the relationships between indicators stay the same and
test the consistency and strength of the relationship between
datasets.
 Time-series methods: Time-series methods use historical data
to predict future outcomes. By tracking what happened in the
past, forecasters expect to get a near- accurate view of the future.
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Qualitative forecasting
Qualitative business forecasting is
predictions and projections based on
experts' and customers' opinions. This
method is best when there is insufficient
past data to analyze to reach a quantitative
forecast. In these cases, industry experts
and forecasters piece together available
data to make qualitative predictions.

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Qualitative models are most successful with short-
term projections. They are expert-driven, bringing up
contrasting opinions and reliance on judgment over
calculable data.
Examples of qualitative models in business
forecasting include:
Market research: This involves polling people –
experts, customers, employees – to get their
preferences, opinions, and feedback on a product or
service.
Delphi method: The Delphi method relies on asking
a panel of experts for their opinions and
recommendations and compiling them into a forecast.

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Business forecasting
technique
Choosing the right business forecasting
technique depends on many factors. Some
of these are:
Context of the forecast
Availability and relevance of past data
Degree of accuracy required
Allocated time to conduct the forecast
Period to be forecast
Costs and benefits of the forecast
Stage of the product or business needing
the forecast
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Managers and forecasters must consider
the stage of the product or business as this
influences the availability of data and how
you establish relationships between
variables. A new startup with no previous
revenue data would be unable to use
quantitative methods in its forecast.
The more you understand the use,
capabilities, and impact of different
forecasting techniques, the more likely you
will succeed in business forecasting.
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Importance of business
forecasting
 Any insight into the future puts your organization at an
advantage. Forecasting helps you predict potential issues,
make better decisions, and measure the impact of those
decisions.
 By combining quantitative and qualitative techniques,
statistical and econometric models, and objectivity,
forecasting becomes a formidable tool for your company.
 Business forecasting helps managers develop the best
strategies for current and future trends and events. Today,
artificial intelligence, forecasting software, and big data
make business forecasting easier, more accurate, and
personalized to each organization.
 Forecasting does not promise an accurate picture of the
future or how your business will evolve, but it points in a
direction informed by data, logic, and experiential reasoning

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Integral elements of business
forecasting
 While there are different forecasting techniques and methods, all forecasts
follow the same process on a conceptual level. Standard elements of business
forecasting include:
 Prepare the stage: Before you begin, develop a system to investigate the
current state of business.
 Choose a data point: An example for any business could be "What is our sales
projection for next quarter?"
 Choose indicators and data sets: Identify the relevant indicators and data
sets you need and decide how to collect the data.
 Make initial assumptions: To kick start the forecasting process, forecasters
may make some assumptions to measure against variables and indicators.
 Select forecasting technique: Pick the technique that fits your forecast best.
 Analyze data: Analyze available data using your selected forecasting
technique.
 Estimate forecasts: Estimate future conditions based on data you've gathered
to reach data-backed estimates.
 Verify forecasts: Compare your forecast to the eventual results. This helps
you identify any problems, tweak errant variables, correct deviations, and
continue to improve your forecasting technique.

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 Review forecasting process: Review any
deviations between your forecasts and actual
performance data.
 Data collecting data from two main sources:
 Primary sources: These sources are gathered first-
hand using reporting tools — you or members of
your team source data through interviews, surveys,
research, or observations.
 Secondary sources: Secondary sources are
second-hand information or data that others have
collected. Examples include government reports,
publications, financial statements, competitors'
annual reports, journals, and other periodicals.

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Business forecasting examples
Some forecasting examples for business include:
Calculating cash flow forecasts, i.e., predicting your
financial needs within a timeframe
Estimating the threat of new entrants into your market
Measuring the opportunity of developing a new product or
service
Estimating the costs of recurring bills
Predicting future sales growth based on past sales
performance
Analyzing relationships between variables, e.g., Facebook
ads and potential revenue
Budgeting contingencies and efficient allocation of
resources
Comparing customer acquisition costs and customer
lifetime value over time
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Limits of business forecasting
• You can follow the rules, use the right
methods, and still get your business
forecast wrong. It is, after all, an attempt to
predict the future. Some limits to business
forecasting include:
• Biases and errors by the forecasters
or managers
Incorrect information from employees,
experts, or customers
Inaccurate past numbers
Sudden change in market conditions
New industry regulations
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Business Forecasting Process

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 Choose an issue to address
 The first step in predicting the future is choosing the problem
you’re trying to solve or the question you’re trying to answer. This
can be as simple as determining whether your audience will be
interested in a new product your company is developing. Because
this step doesn’t yet involve any data, it relies on internal
considerations and decisions to define the problem at hand.
 Create a data plan
 The next step in forecasting is to collect as much data as possible
and decide how to use it. This may require digging up some
extensive historical company data and examining the past and
present market trends. Suppose your company is trying to launch
a new product. In this case, the gathered data can be a
culmination of the performance of your previous product and the
current performance of similar competing products in the target
market.

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3. Pick a forecasting technique
After collecting the necessary data, it’s
time to choose a business forecasting
technique that works with the available
resources and the type of prediction. All the
forecasting models are effective and get
you on the right track, but one may be
more favorable than others in creating a
unique, comprehensive forecast.

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For example, if you have extensive data on
hand, quantitative forecasting is ideal for
interpretation. Qualitative forecasting is
best if you have less hard data available
and are willing to invest in extensive
market research.

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 4. Analyze the data
 Once the ball starts rolling, you can begin identifying
patterns in the past and predict the probability of their
repetition. This information will help your company’s
decision-makers determine what to do beforehand to
prepare for the predicted scenarios.
 5. Verify your findings
 The end of business forecasting is simple. You wait to
see if what you predicted actually happens. This step is
especially important in determining not only the success
of your forecast but also the effectiveness of the entire
process. Having done some forecasting, you can
compare the present experience with these forecasts to
identify potential areas for growth.

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Business forecasting
technique
Choosing the right business forecasting
technique depends on many factors. Some
of these are:
Context of the forecast
Availability and relevance of past data
Degree of accuracy required
Allocated time to conduct the forecast
Period to be forecast
Costs and benefits of the forecast
Stage of the product or business needing
the forecast
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Business Forecasting Methods
• As stated above, there are two main types of
business forecasting methods, qualitative and
quantitative. We’ve compiled some of the more
common forecasting models from both sides below.
• Delphi Method
This qualitative business forecasting method
consists in gathering a panel of subject matter
experts and getting their opinions on the same
topic in a manner in which they can’t know each
other’s thoughts. This is done to prevent bias,
which makes it possible for a manager to
objectively compare their opinions and see if there
are patterns, consensus or division.
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 Market Research
 There are many market research techniques that evaluate
the behavior of customers and their response to a certain
product or service. Some of those market research
methods collect and analyze quantitative data, such as
digital marketing metrics and others qualitative data, such
as product testing, or customer interviews.
 Time Series Analysis
 Also referred to as “trend analysis method,” this business
forecasting technique simply requires the forecaster to
analyze historical data to identify trends. This data analysis
process requires statistical analysis as outliers need to be
removed. More recent data should be given more weight to
better reflect the current state of the business.

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 The Average Approach
 The average approach says that the predictions of all future
values are equal to the mean of the past data. Past data is
required to use this method, so it can be considered a type of
quantitative forecasting. This approach is often used when you
need to predict unknown values as it allows you to make
calculations based on past averages, where one assumes that
the future will closely resemble the past.
 The Naïve Approach
 The naïve approach is the most cost-effective and is often used
as a benchmark to compare against more sophisticated
methods. It’s only used for time series data where forecasts are
made equal to the last observed value. This approach is useful
in industries and sectors where past patterns are unlikely to be
reproduced in the future. In such cases, the most recent
observed value may prove to be the most informative.

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Types of business forecasts
 General business forecasting predicts overall market
trends and external factors that affect your business’
success.
 Accounting forecasting creates projections of future
business costs.
 Budget forecasting makes predictions for allocating
the budget needed for future projects or addressing
potential issues. Budgeting and forecasting software is
an indispensable tool if you’re looking to forecast for
budgeting your business activities.
 Financial forecasting projects a company’s monetary
value as a whole. You can use the current assets and
liabilities from your balance sheet to help you make a
prediction.
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 Demand forecasting predicts the future needs of your target customer
base.
 Supply forecasting works with demand forecasting to allocate the
necessary resources for fulfilling upcoming customer demands.
 Sales forecasting predicts the expected success of the company
offerings and how it’ll affect future sales and cash flow.
 Capital forecasting makes predictions about a company’s future assets
and liabilities.
 Benefits of business forecasting Foresee upcoming changes
 Decrease the cost of unexpected demand by preparing ahead of time.
Business forecasting is a great starting point for demand planning.
 Increase customer satisfaction by giving them what they want, when
they want it.
 Set long- and short-term goals by tracking your progress.
 Learn from the past by analyzing it. With this new information, your
company can make the necessary adjustments to avoid similar
mistakes in the future.

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Business forecasting challenges
You can’t always expect the unexpected.
It takes time to create an accurate forecast.
Historical data will always be outdated.

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Business forecasting vs.
scenario planning
 Business forecasting focuses on a problem at hand and uses
historical data to predict what might happen next. It emphasizes
predictive analytics and the need to eliminate existing uncertainties.
 While built on tangible data, forecasting is essentially a guess of the
future and you need to make assumptions ahead of time to prepare
for any predicted issues. Forecasting is an all-hands-on-deck
approach that involves many departments, including analysts,
economists, managers, and more.
 Scenario planning creates multiple scenarios to help prepare for the
future. With these scenarios in mind, a company can begin planning
a course of action to achieve the desired outcome. This includes
creating step-by-step strategies and timelines for achieving
objectives.
 While business forecasting focuses on past information, scenario
planning takes the past, present, and future into consideration with
learnings from the past, understanding the capabilities of the
present, and aspiring for future success.

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Predictive Analytics
 The term predictive analytics refers to the use of statistics and modeling
techniques to make predictions about future outcomes and performance.
Predictive analytics looks at current and historical data patterns to
determine if those patterns are likely to emerge again. This allows
businesses and investors to adjust where they use their resources to take
advantage of possible future events. Predictive analysis can also be used to
improve operational efficiencies and reduce risk.
 Predictive analytics uses statistics and modeling techniques to determine
future
 performance.
 Industries and disciplines, such as insurance and marketing, use predictive
techniques to make important decisions.
 Predictive models help make weather forecasts, develop video games,
translate voice-to-text messages, customer service decisions, and develop
investment portfolios.
 People often confuse predictive analytics with machine learning even though
the two are different disciplines.
 Types of predictive models include decision trees, regression, and neural
networks.

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Understanding Predictive
Analytics
 Predictive analytics is a form of technology that makes
predictions about certain unknowns in the future. It draws on a
series of techniques to make these determinations, including
artificial intelligence (AI), data mining, machine learning,
modeling, and [Link] instance, data mining involves the
analysis of large sets of data to detect patterns from it. Text
analysis does the same, except for large blocks of text.
 Predictive models are used for all kinds of applications,
including:
 Weather forecasts
 Creating video games
 Translating voice to text for mobile phone messaging
 Customer service
 Investment portfolio development
 All of these applications use descriptive statistical models of
existing data to make predictions about future data.
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They're also useful for businesses to
help them manage inventory, develop
marketing strategies, and forecast sales.4 It
also helps businesses survive, especially
those in highly competitive industries, such
as health care and retail.5 Investors and
financial professionals can draw on this
technology to help craft investment
portfolios and reduce the potential for
risk.6

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These models determine relationships,
patterns, and structures in data that can be
used to draw conclusions about how
changes in the underlying processes that
generate the data will change the results.
Predictive models build on these
descriptive models and look at past data to
determine the likelihood of certain future
outcomes, given current conditions or a set
of expected future conditions.

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Uses of Predictive Analytics
 Predictive analytics is a decision-making tool in a variety of
industries.
 Forecasting
 Forecasting is essential in manufacturing because it ensures the
optimal utilization of resources in a supply chain. Critical spokes of
the supply chain wheel, whether it is inventory management or the
shop floor, require accurate forecasts for functioning.
 Predictive modeling is often used to clean and optimize the quality
of data used for such forecasts. Modeling ensures that more data
can be ingested by the system, including from customer-facing
operations, to ensure a more accurate forecast.
 Credit
 Credit scoring makes extensive use of predictive analytics. When a
consumer or business applies for credit, data on the applicant's
credit history and the credit record of borrowers with similar
characteristics are used to predict the risk that the applicant might
fail to perform on any credit extended.

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 Underwriting
 Data and predictive analytics play an important role in underwriting.
Insurance companies examine policy applicants to determine the
likelihood of having to pay out for a future claim based on the current
risk pool of similar policyholders, as well as past events that have
resulted in payouts. Predictive models that consider characteristics in
comparison to data about past policyholders and claims are routinely
used by actuaries.
 Marketing
 Individuals who work in this field look at how consumers have
reacted to the overall economy when planning on a new campaign.
They can use these shifts in demographics to determine if the current
mix of products will entice consumers to make a purchase.
 Active traders, meanwhile, look at a variety of metrics based on past
events when deciding whether to buy or sell a security.
Moving averages, bands, and breakpoints are based on historical
data and are used to forecast future price movements.

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Predictive Analytics vs.
Machine Learning
A common misconception is that predictive
analytics and machine learning are the
same things. Predictive analytics help us
understand possible future occurrences by
analyzing the past. At its core, predictive
analytics includes a series of statistical
techniques (including machine learning,
predictive modeling, and data mining) and
uses statistics (both historical and current)
to estimate, or predict, future outcomes.

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Types of Predictive Analytical
Models
 There are three common techniques used in predictive
analytics: Decision trees, neural networks, and regression.
Read more about each of these below.
 Decision Trees
 If you want to understand what leads to someone's
decisions, then you may find decision trees useful. This
type of model places data into different sections based on
certain variables, such as price or market capitalization.
Just as the name implies, it looks like a tree with individual
branches and leaves. Branches indicate the choices
available while individual leaves represent a particular
decision.
 Decision trees are the simplest models because they're
easy to understand and dissect. They're also very useful
when you need to make a decision in a short period of time
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Regression
This is the model that is used the most in
statistical analysis. Use it when you want to
determine patterns in large sets of data
and when there's a linear relationship
between the inputs. This method works by
figuring out a formula, which represents the
relationship between all the inputs found in
the dataset. For example, you can use
regression to figure out how price and other
key factors can shape the performance of a
security.
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Neural Networks
Neural networks were developed as a form
of predictive analytics by imitating the way
the human brain works. This model can
deal with complex data relationships using
artificial intelligence and pattern
recognition. Use it if you have several
hurdles that you need to overcome like
when you have too much data on hand,
when you don't have the formula you need
to help you find a relationship between the
inputs and outputs in your dataset, or when
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you need to make predictions rather than
Predictive modeling is the heart and soul of
business decisions.
Building decision models is more of an art
than a science. Creating good decision
models requires:
- solid understanding of business
functional areas
- knowledge of business practice and
research
- logical skills
It is best to start simple and enrich models
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The process of Predictive Analytics
includes the following steps

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 Defining the project : This is the first step of the Predictive
Analytics model. Here you will have a clear-cut definition of
the outcome of the project, the business objectives, the scope
of the effort, identifying data sets and more.
 Collecting the data : This is the second step of the process
wherein you will be mining for the data from multiple sources
and prepare the Predictive Analytics mode and provide a
complete overview of the entire process.
 Analyzing the data : This is the process that includes the
various steps of inspection, cleaning, modeling of the data for
discovering the objective and help to reach at a conclusion.
 Deploying the statistics : Here you will be working on
validating the assumptions
 and hypothesis and testing it using the standard statistical
models.

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Data Modeling : This is the process that
provides the ability to create automatic
predictive models of the future. You can
also create a set of models and choose the
most optimal one.
Model Deployment : This is the step in
which you will be deploying the analytical
results into your everyday business
operations helping to get results, reports
and the output of the automated decisions.
Monitoring the Model : The models are
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reviewed in order to ensure the
Predictive Analytics
Techniques
 [Link] Mining: In order to manage large amounts of data
sets either structured or unstructured to recognize
hidden patterns and relationships among variables
provided, data mining is aimed to. Once identified, these
relationships can be used to understand the behaviour of
the event from which data is compiled.
 [Link] Modelling: In parallel to the data mining
process, statistical data models can be developed
depending on the context of what needs to be
anticipated using the same collected data as for data
mining. Once the model built, the new data is fed to
models to predict future outcomes. For example, a
business expert can build a cross-selling model using
current customer data and predict what other items they
will likely to purchase from the same company.
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3. Machine learning: ML can deploy
iterative methods and techniques to
identify patterns from large data sets and
build models.
For example, recommendation engines are
widely used for online shopping
recommendations as predictions are made
from using customers' prior purchasing and
browsing behavior.

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Why is Predictive Analytics
Important?
Fraud detection
In general, multiple analyzing methods are
combined to analyze data that improve
accuracy of patterns detection and catch
criminal behavior, preventing frequent
fraud occurrence. With the growing concern
of cyber security, conducting high
performing behavioral analytics is
demanding that examines all the suspicious
behavior/activities across a network in a
real-time to detect fraud actions, zero- day
vulnerabilities and underlying threats.
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 Marketing campaigns optimization
 Predictive analytics is beneficial in optimizing marketing
campaigns and promotions’ events. To determine
purchasing response of customers and publicizing cross-
sell opportunities, predictive models help in businesses to
attract, retain and increase valuable customers.
 Minimization in risks
 Consider a simple example of reducing risks, Credit Scores,
that is highly employed to recognize the likelihood of
defaulters from the user's purchasing behavior. In practice,
credit score is the amount generated by a predictive model
via analyzing the data relevant to a person’s credit history.
Other risk- related examples count as insurance claims and
fraud claim collections.

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Improvements in business operations:
Predictive analytics enables organizations
to make smarter decisions by smoothing
operations and functions more efficiently.

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Advantages of Predictive
Analytics
 Deploying analytics for analyzing past, present and
projected future outcome Choosing the right step to
drive the action in the most optimal manner
 Predictive Analytics includes both decision
optimization and advanced analytics
 Supporting action and recommended actions are
sent to the decision-makers It helps to take
proactive risk management measures
 Testing iterative actions for the intended and
unintended consequences
 Process improvement, cost reduction and revenue
generation are all possible

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Top 5 Predictive Analytics
Models
 Classification Model
 The classification model is, in some ways, the simplest of the
several types of predictive analytics models we’re going to
cover. It puts data in categories based on what it learns from
historical data.
 Classification models are best to answer yes or no questions,
providing broad analysis that’s helpful for guiding decisive
action. These models can answer questions such as:
 For a retailer, “Is this customer about to churn?”
 For a loan provider, “Will this loan be approved?” or “Is this
applicant likely to default?”
 For an online banking provider, “Is this a fraudulent
transaction?”
 The breadth of possibilities with the classification model—and
the ease by which it can be retrained with new data—means it
can be applied to many different industries.
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2. Clustering Model
The clustering model sorts data into
separate, nested smart groups based on
similar attributes. If an ecommerce shoe
company is looking to implement targeted
marketing campaigns for their customers,
they could go through the hundreds of
thousands of records to create a tailored
strategy for each individual. But is this the
most efficient use of time? Probably not.
Using the clustering model, they can
quickly separate customers into similar
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groups based on common characteristics
Other use cases of this predictive modeling
technique might include grouping loan
applicants into “smart buckets” based on
loan attributes, identifying areas in a city
with a high volume of crime, and
benchmarking SaaS customer data into
groups to identify global patterns of use.

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Forecast Model
One of the most widely used predictive
analytics models, the forecast model deals
in metric value prediction, estimating
numeric value for new data based on
learnings from historical data.
This model can be applied wherever
historical numerical data is available.
Scenarios include:
A SaaS company can estimate how many
customers they are likely to convert within
a given week.
A call center can predict how many support
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calls they will receive per hour.
Outliers Model
 The outliers model is oriented around anomalous data entries
within a dataset. It can identify anomalous figures either by
themselves or in conjunction with other numbers and categories.
 Recording a spike in support calls, which could indicate a product
failure that might lead to a recall
 Finding anomalous data within transactions, or in insurance
claims, to identify
 fraud
 Finding unusual information in your NetOps logs and noticing the
signs of impending unplanned downtime
 The outlier model is particularly useful for predictive analytics in
retail and finance. For example, when identifying fraudulent
transactions, the model can assess not only amount, but also
location, time, purchase history and the nature of a purchase (i.e.,
a $1000 purchase on electronics is not as likely to be fraudulent
as a purchase of the same amount on books or common utilities).

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Time Series Model
The time series model comprises a
sequence of data points captured, using
time as the input parameter. It uses the last
year of data to develop a numerical metric
and predicts the next three to six weeks of
data using that metric. Use cases for this
model includes the number of daily calls
received in the past three months, sales for
the past 20 quarters, or the number of
patients who showed up at a given hospital
in the past six weeks. It is a potent means
of understanding the way a singular metric
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If the owner of a salon wishes to predict
how many people are likely to visit his
business, he might turn to the crude
method of averaging the total number of
visitors over the past 90 days. However,
growth is not always static or linear, and
the time series model can better model
exponential growth and better align the
model to a company’s trend. It can also
forecast for multiple projects or multiple
regions at the same time instead of just
one at a time.
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Common Predictive Algorithms
 Overall, predictive analytics algorithms can be separated
into two groups: machine learning and deep learning.
 Machine learning involves structural data that we see in
a table. Algorithms for this comprise both linear and
nonlinear varieties. Linear algorithms train more quickly,
while nonlinear are better optimized for the problems
they are likely to face (which are often nonlinear).
 Deep learning is a subset of machine learning that is
more popular to deal with audio, video, text, and images.
 With machine learning predictive modeling, there are
several different algorithms that can be applied. Below
are some of the most common algorithms that are being
used to power the predictive analytics models described
above.

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1. Random Forest
Random Forest is perhaps the most popular
classification algorithm, capable of both
classification and regression. It can
accurately classify large volumes of data.
The name “Random Forest” is derived from
the fact that the algorithm is a combination
of decision trees. Each tree depends on the
values of a random vector sampled
independently with the same distribution
for all trees in the “forest.” Each one is
grown to the largest extent possible.
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Predictive analytics algorithms try to
achieve the lowest error possible by either
using “boosting” (a technique which
adjusts the weight of an observation based
on the last classification) or “bagging”
(which creates subsets of data from
training samples, chosen randomly with
replacement). Random Forest uses
bagging. If you have a lot of sample data,
instead of training with all of them, you can
take a subset and train on that, and take
another subset and train on that (overlap is
60 allowed). All of this can be done in parallel.
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 While individual trees might be “weak learners,” the principle
of Random Forest is
 that together they can comprise a single “strong learner.”
 The popularity of the Random Forest model is explained by
its various advantages:
 Accurate and efficient when running on large databases
 Multiple trees reduce the variance and bias of a smaller set or
single tree
 Resistant to over fitting
 Can handle thousands of input variables without variable
deletion Can estimate what variables are important in
classification Provides effective methods for estimating
missing data
 Maintains accuracy when a large proportion of the data is
missing
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Logic and Data Driven Models
Logic driven models remain based on
experience, knowledge and logical
relationships of variables and constants
connected to the desired business
performance outcome situation.
2. Data-driven Models refers to the
models in which data is collected from
many sources to qualitatively establish
model relationships. Logic driven models is
often used as a first step to establish
relationships through data-driven models.
Data driven models include sampling and
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estimation, regression analysis, correlation
Logic-Driven Model
 It leverages statistics to predict outcomes. Most often the event one
wants to predict is in the future, but predictive modeling can be
applied to any type of unknown event, regardless of when it
occurred. For example, predictive models are often used to detect
crimes and identify suspects, after the crime has taken place.
 In many cases the model is chosen on the basis of detection theory
to try to guess the probability of an outcome given a set amount of
input data, for example given an email determining how likely that
it is spam.
 Models can use one or more classifiers in trying to determine the
probability of a set of data belonging to another set, say spam or
‘ham’.
 Depending on definitional boundaries, predictive modeling is
synonymous with, or largely overlapping with, the field of machine
learning, as it is more commonly referred to in academic or
research and development contexts. When deployed commercially,
predictive modeling is often referred to as predictive analytics.

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Usage
 Predictive models can either be used directly to estimate a
response (output) given a defined set of characteristics (input), or
indirectly to drive the choice of decision rules.
 Depending on the methodology employed for the prediction, it is
often possible to derive a formula that may be used in a
spreadsheet software. This has some advantages for end users or
decision makers, the main one being familiarity with the software
itself, hence a lower barrier to adoption.
 Nomograms are useful graphical representation of a predictive
model. As in spreadsheet software, their use depends on the
methodology chosen. The advantage of nomograms is the
immediacy of computing predictions without the aid of a
computer.
 Point estimates tables are one of the simplest form to represent a
predictive tool. Here combination of characteristics of interests
can either be represented via a table or a graph and the
associated prediction read off the y-axis or the table itself.
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 Tree based methods (e.g. CART, survival trees) provide one of
the most graphically intuitive ways to present predictions.
However, their usage is limited to those methods that use
this type of modeling approach which can have several
drawbacks. Trees can also be employed to represent decision
rules graphically.
 Score charts are graphical tabular or graphical tools to
represent either predictions or decision rules.
 A statistical model embodies a set of assumptions concerning
the generation of the observed data, and similar data from a
larger population. A model represents, often in considerably
idealized form, the data-generating process. The model
assumptions describe a set of probability distributions, some
of which are assumed to adequately approximate the
distribution from which a particular data set is sampled.

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The Economic Value of a
Customer
A restaurant customer dines 6 times a year
and spends an average of $50 per visit.
The restaurant realizes a 40% margin on
the average bill for food and drinks.
• Annual gross profit on a customer =
$50(6)(0.40) = $120
• 30% of customers do not return each
year.
• Average lifetime of a customer = 1/.3
= 3.33 years
• Average gross profit for a customer =
67 $120(3.33) = $400 L
V = value of a loyal customer
R = revenue per purchase
F = purchase frequency (number visits per
year)
M = gross profit margin
D = defection rate (proportion customers
not returning each year)

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Data Driven Modeling
 Data Driven Modeling (DDM) is a technique using which the
configurator model components are dynamically injected into
the model based on the data derived from external systems
such as catalog system, Customer Relationship Management
(CRM), Watson, and so on.
 The Omni-Configurator engine constructs the model
components including optional classes and option items during
runtime based on the service request parameters, and
populates associated properties before executing business
logic contained inside the configurator model.
 Using the DDM technique, a modeler can define a configurator
model by using the Visual Modeler tool with DDM properties
that defines the data source and selection criteria for injecting
the catalog items into the model. The data is retrieved from
the system or data source by using the data source adapters
implemented for each system or data source.

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Based on the data source defined in the model, the
corresponding data source adapters are invoked to
fetch the data. Model components are dynamically
created in the configurator model based on the data
returned by the data source adapter.
The DDM technique provides the following benefits
over the static modeling technique: It reduces the
Total Cost of Ownership (TCO) by eliminating manual
construction of model components by the modeler
that represents products within configurator models.
It reduces the time to market since the model is
dynamically updated with changes in the catalog
system.

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Differences between Static and Dynamic
(using DDM) modeling techniques
Static
Each time a new item gets added to the catalog, the
modeler had to manually update the model for making the
new option items available in the UI.
Multiple data sources are not supported. Model can
receive data from a single data source only.
Dynamic
There is no need to manually update the model. Modeler
creates the DDM- based model with placeholders for
dynamic options. Therefore, whenever a new item gets
added to the catalog, the application dynamically updates
the model and displays the new option items in the UI.
Multiple data sources are supported. Data from multiple
data sources can be injected into a DDM- based model.

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A Profit Model
 Develop a decision model for predicting profit in
face of uncertain demand.
 P = profit
 R = revenue
 C = cost
 p = unit price
 c = unit cost
 F = fixed cost
 S = quantity sold
 D = demand
 Q = quantity produced

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Cost = fixed cost + variable cost C = F +
cQ
Revenue = price times quantity sold R = pS
Quantity sold = Minimum{demand,
quantity sold} S = min{D, Q}
Profit = Revenue − Cost
P = p*min{D, Q} − (F + cQ)
p = $40 c = $24
F = $400,000

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D = 50,000
Q = 40,000
Compute:
R = p*min{D,Q} = 40(40,000) = 1,600,000
C = F + cQ = 1,360,000 • = 400,000 +
24(40,000)
P = R − C = 1,600,000 – 1,360,000 =
$240,000

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New-Product Development
 Moore Pharmaceuticals needs to decide whether to conduct clinical
trials and seek FDA approval for a newly developed drug.
 Estimated figures:
 R&D cost = $700 million
 Clinical trials cost = $150 million
 Market size = 2 million people
 Market size growth = 3% per year
 Additional estimated figures
 Market share = 8%
 Market share growth = 20% per year (for 5 years)
 Revenue from a monthly prescription = $130
 Variable cost for a monthly prescription = $40
 Discount rate for net present value = 9%
 Moore Pharmaceuticals wants to determine net present value for the
next 5 years
 and to determine how long it will take to recover fixed costs.
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