Research Report

Subject: Pros and Cons of Analytics

in Business

Prepared By

Ritesh Anand

Date: 1st June, 2008

Table of Contents Page
No

What is Analytics 3

Retail Analytics 5

Supply chain management

5
Customer management
6

Internal benefits
7

Web Analytics
7

Monitor visitors
7

Planning better marketing strategy

8

Regular optimization of Website

8

Internal benefits
9

Banking Analytics
9

Pricing Analytics
10

Customer Segmentation Analysis

10

Customer Lifetime value Analysis

10

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 Churn Analytics
10

Improving Hiring process

11

Stopping Fraud
11

The down side of analytics

12

What is Analytics

In a nut shell it’s the tool or application which helps in making

decision through detailed analysis. It could be use of statistical
tools or econometric analysis to gain more knowledge or insight
on a particular situation and make a fact based decision.

Analytics is gaining popularity by the day; today the business

wants to make any decision based on fact rather than gut. The
business of today has become very challenging, the world is
becoming flat and the competition could be from any part of the
world.

The consumers have also become very demanding as they have

plenty of option to choose from, this has forced the businesses to
understand their customers thoroughly to serve them better.
Acquiring a new customer would cost 5-6 times more than
retaining an existing customer. This has encouraged the
organizations to dig deeper and gain more customer insights to
satisfy their needs.

One more reason why customer analytics is gaining importance is

because it’s making the marketing department more accountable.

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In marketing we say that you waste half of your spending but
don’t know which half. It’s very difficult to keep track of
advertising expenditure, because it’s hard to measure customer
communication and also its affect on the profitability of the
organization.

The use of analytics varies in different industries. Some industries

have adopted it more than others, for example banking and
telecom industries have adopted more than construction or
cement industry. The application of analytics is not only limited to
customer data analysis but can be used for suppliers or even
internally with other functions like manufacturing, finance,
research & development and Human resources.

In manufacturing one area of application could be to identify

which product can give more profitability, so a company can work
on different product assortment and analyze the different
quantities to arrive at the right product with optimum quantity
which can be produced to maximize the profitability of the firm.

In finance, the area of cost management is one area where

analytics has been used extensively. Activity based costing is used
to identify the actual cost incurred in any department or cost
centre. This helps us exactly in understanding the organization
resource cost on products and services provided to its customers.
This analysis helps the firm in understanding areas of cost
reduction and improves profitability.

In research and development the use of analytics is to predict the

chances of success of the particular experiment. The importance
of past data and its analysis is very critical for the success of
future products. This helps the R&D to reduce the chances of
failure and ultimately reduce cost and expedite the process of new
product development.

In human resources, one area where analytics is used is in the

hiring process. The organization uses various hiring tools like
psychometric tests, aptitude tests, case interviews, assessment
centres to identify the right candidate for the job. Google for
example have almost 8 rounds in their selection process which
helps them in hiring the right candidate. This is one of the reasons
why the attrition rate of Google is much below the industry
standards.

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In order to be an analytical organisation and get the competitive
advantage the support from top management is mandatory.
Harrah Entertainment success which is the classic story of
turnaround through the use of analytics is because of Philip Satre
and Gary Loveman. Philip understood the importance of analytics
in the entertainment business and hired Gary to lead the
organisation wide initiative to turnaround Harrah.

Gary didn’t focus at the unit level but his initiatives were
organisation wide, so in order for an analytic initiative to be
successful it has to be an organizational level rather than at the
unit level or department level.

The organisation also have to understand the kind of strategy its

adopting, is it of product differentiation or of cost leadership. So if
the organization has taken a cost leadership strategy its primary
focus on analytics would be to reduce cost in the areas of
manufacturing by improving process efficiency, reducing supply
chain or distribution cost or any other cost associated with the
delivery of product.

On the other hand, if the strategy is of product differentiation then

primary usage of analytics in understanding customer behaviour
would be important as the positioning or perception of the product
in the customer mind would be the winning factor.

Though the usage of analytics is across industries but as

mentioned above some industries uses more analytics and are at
the advance stage. We will focus on some of these industries
where the usage of analytics is quite high, these are retail, online
and banking industry.

Retail Analytics

Retail is one industry which has adopted analytics at the early

stage and most of the retailers are using analytics not only to
understand customers but also to improve their supply chain
management. We all are aware the core strength of the world’s
largest retailer which is Walmart. Their supply chain management
system is unique and so is their understanding of customers, their
technology plays a major role in their success. Let’s discuss some
of the areas in retailing where analytics is used extensively:

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• Supply Chain Management: Supply chain management is
one important aspect of retailing, each retailer has
thousands of suppliers who supplies goods to the retailer
warehouse. The retailers then move the product to their
retail outlets. The retailers have to make sure that the
products are always available for the customers and they
should not stock out. The cost for stock out is huge and
could lead to loss of customer permanently.

As the number of vendors is huge it’s important to track

their products and its reorder level, different products have
different lead time so it’s important for the supply chain to
manage it to the core. The supply chain could be almost 40
– 70% of the retailers operating cost and it’s important for
the retailer to have an efficient supply chain as they operate
at a very thin margin.

Suppliers don’t work in isolation, it’s important for the

retailers to understand their customer behaviour and keep
updating their product assortment as per the needs of their
customer segment.

For a retailer like Walmart it’s important to have low prices

of their products, as the target customer for Walmart look
for low prices. Walmart has close to 20,000 suppliers in over
eighty countries and it’s a huge task to manage the
communication with its suppliers on a regular basis.

To manage such a huge network, all the suppliers of

Walmart have to use its system to track its product
movement, so that the suppliers can act on the reorder level
without any human interaction and the process remains
smooth.

Suppliers can use the system to track their daily sales,

shipments, purchase orders, invoices, claims, returns,
forecast etc. So the IT system here leaves very little scope
for human interaction and saves huge cost for the retailers.
It also provide huge insight which not only help in making
decision like product assortment but also helps in by
reducing lead time, reducing labour cost, fast reaction to
market demand etc.

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• Customer Management: Customer management is
another important analysis done to find out more about
customer behaviour pattern. The POS (point of sale) data
generated at the billing counter not only provides different
buying habits of the customers, but also help them
understand their lifestyle, particular life stage, their needs
and wants.

Detailed analysis of customer data helps the retailers in

category management, which is identifying the best selling
product to optimize the shelf space and SKU (Stock Keeping
Unit) assortment. This also helps them to relook at their
supplier base and assess if there is any scope to update it.

Analysing demographic and behavioural data helps further

in refining segments creating micro segments for specific
targeting. It can also help in understanding the market
basket, which is the process of analyzing what customers is
buying together, based on large amount of data gained over
time, as customers make additional purchases.

It can also help us in distinguishing the high profit customers

from others, which helps the retailers to grow their number
of high profit customers which ultimately increases the
overall profitability of the business.

Pricing is another area which is decided through the

collection and analysis of past data. Today the world is
moving towards dynamic pricing. Airline industry was the
pioneer in devising the dynamic pricing; today like many
other industry retailing has also adopted it.

Analyzing past data can provide certain pattern for any

product category or SKU. The demand for any seasonal
product can peak at any time and goes down other time.
Understanding these patterns the retailer can change the
price to optimize the profitability of the store.

Another area of customer management which is addressed

through customer analytics in retail is increased ROI on
advertising spend. As the understanding of customer
segment grows the advertising message becomes more and
more explicit and clearly communicates particular product
offerings, services, and benefits to individual target

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 segments. This not only helps in increasing the response
from any promotions but also guides investment in
marketing mix.

• Internal benefits: Apart from some of the external benefits

in the area of supply chain management and customer
management, using analytics has some internal benefits as
well.

Some of the benefits for finance department could be to

analyse the ROI at store level and decide the pattern of high
performing stores. It could be location of the store, size of
the store, type of store or others. This information can help
them in analysing any new store opening which can reap
long term profits.

As the attrition level is high in retail the HR department can

identify the key behavioural competency of successful
employees and map their competency at various levels. This
competency mapping can then become a benchmark for
future hiring and prospective employees can be hired based
on successful competency defined through existing
employees.

Web Analytics

Web analytics is the behavioural study of online visitors. Through

web analytics one can clearly track the visitor history and exactly
know from where they are visiting. Web analytics also helps the
organization know the features of the website which is working
well and the areas of websites which needs improvement. There
are certain applications and benefits of web analytics and these
are:

• Monitor Visitors: Web analytics will help you to know how

long your visitor is spending time on your website, their
details like where they are coming from etc. web analytics
can also tell their clickstream, the key word they used and
their source page (referral page, search engine). You can
also focus on a group by the content they prefer and the
actions they take.

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 Through the use of web analytics one can provide the details
of the visitor till the last specifics. We can find out details
like their nationality, their city, gender and the IP address
the visitor is associated with.

As mentioned earlier we can track the referral source of the

visitors this can help us to find out the highest browse to
buy ratio and highest revenue potential. This information
also helps in monitoring the business or marketing strategy,
we can find out whether the email marketing is working or a
banner at a particular website is working. This will help us to
either continue the existing strategy or terminate a
particular campaign.

• Planning better marketing strategy: As web analytics

provide detailed information about the user or visitor group
it helps the marketing team to clearly define the user
segment, and further drill down to a much smaller segment.
With such micro level segmentation it helps the organization
to design specific creative and landing pages for the defined
segments. This result in achieving better ROI on their
marketing spend as the conversion rate for subscription,
membership would be high.

Ad network is another new phenomenon in the internet

marketing world, so a particular ad network dispays the
advertisement of their client in their network of publishers
and charges the clients either on cost per acquisition (CPA)
basis or cost per impression (CPM) basis.

Web analytics here can help the marketing team in

analysing the ad network data and decide which category of
advertising is working best for them, is it gaming, social
networking, technology or other. This will further help them
in segmenting their target customers and achieve higher
ROI on their marketing spend.

• Regular optimization of Website: As the visitor group

segment and their action pattern are identified the
organizations can use this information to continually
upgrade their website to suite their visitor taste and needs.
Detailed report of web analytics can also point out which
section of the website is most viewed and which one is
ignored.

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 We can link up the ecommerce intelligence of visitor to their
click stream behaviour i.e., we can find out the pattern or
route preferred by the visitor to ultimately shop on our
website, this can be huge insight as the page layout and
linking pages can be customized accordingly.

We can also benefit by enhancing our revenue sources by

cross selling the products online, by identifying the traffic
source and also the keywords which the visitors are using.
We can also track frequent visitor or returning customer
which can allow us to provide them with special treatment
and keep them loyal to us.

The site can also be upgraded to achieve search engine

optimization, so there are certain keywords and technical
aspect which helps the site to be pop up on the first page of
any search, through a detail information the organization
can always upgrade their website to the market
requirements which keeps their website on the first page
and keep the hits on the higher level.

• Internal Benefits: There are lot of internal benefits as well

for the organization, the analytical system of online can
provide us some insight of the mass customer base and can
also help us in improving ROI for other marketing
campaigns.

As percentage of online sales increases it brings more

profitability to the organization because the expenditure on
online sales is less, there is very low labour cost and other
administrative expenses are also low. In general increased
online sales would encourage organization to reduce their
sales force and use online as a potent channel of
distribution.

Web analytics can also help us in deciding the expansion

strategy. So the web data revealed that the demand for the
organization product is huge in a particular geographical
region but they don’t have any other sources of product
distribution in that area. The company can expand in those
locations by having their office or tying up with a store or
distribution channel to sell their products and increase
revenue through the demand shown by the online medium.

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For some category of organization online selling has been a great
boom and has developed as the sole distribution channel for their
business. Industry like theatres, gifting (flowers), etc, online is the
prominent distribution channel. Earlier people use to visit movie
theatres and then came to know if the tickets are available or not
but now we go to their online site to find out the status and then
buy the ticket online.

This helps the movie theatres to target their customers with the
movie of their choice, so if a customer prefers action movie he will
receive an email update for any new action movie that is been
screened in that theatre or any of the group theatres. These
activities directly help the organization to increase their bottom
line and maintain the customer loyalty.

Banking Analytics

Banking industry is one of the major users of analytics; the

reasons could be high availability of data, low margin and intense
competition among the players. High acquisition cost and
availability of a wide range of products (which provides enormous
upsell and cross sell opportunities) could be other reasons for
extensive use of analytics in the banking industry. Some of the
benefits of using analytics in the banking industry are:

• Pricing Analytics: The use of analytics in banking industry

helps them in identifying the right pricing for their products.
It would vary from market to market and the use of analytics
helps the organization to have the right price point for that
market. Having the right price point helps the organization
to get the right volume from their target segment.

• Customer Segmentation Analysis: The range of

customers for a banking industry is quite wide; it may range
from a student to a billionaire or a small SME to a large
conglomerate. The transaction value differs from customers
to customers, and so is the requirement for their products.

This has led to a need to identify the customer segment

appropriately and offer a targeted product. Analytics helps
the banks to identify the customer segment based on their
demographic, financial capability, etc. After the target

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 audience is identified the banks can tailor the product
offering to meet their specific customer needs.

• Customer Lifetime value Analysis: Another benefit for

the banks with the use of analytics is the estimation of the
revenue stream for a customer over its lifetime. It helps the
banks in differentiating their most profitable customers with
the low profitable ones.

So the banks have customer acquisition and target models

along with the models for attrition, these models helps the
banks to decide for which geographies or channels it should
increase or decrease the advertising spend so as to
maximize their profitability.

In the chase for higher investment returns, customers are

more likely than ever to move their money from one
institution to another, making identifying and retaining the
most profitable customers more challenging and more
important than in the past. Analytics helps the banks in not
only identifying these customers but also helps them in
reacting to each customer demand and retain the most
profitable customers ultimately increasing the customer
lifetime value.

• Churn Analytics: Through churn analytics the banks would

be able to know when the customer is likely to discontinue
the usage of our products and services; they would also be
able to know the likely timeframe of the customer attrition.
This information will help the banks in working out the right
retention strategies (loyalty program, customer service etc)
for their customers.

This would also help the banks in putting the right resources
to take care of the dissatisfied customers and stop them
from discontinuing.

• Improving Hiring process: Recruitment process is another

area where analytics can make a difference especially in
banking industry where the number of employees recruited
is a lot and the competition among industry to attract talent
is huge. Recognizing the importance of staff personalities
and capabilities, analytics can help by having an online tool
which can preselect the job applicants.

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 It can help in improving hiring accuracy by setting clear
criteria for potential candidates and eliminating arbitrary
decision-making. So with analytics the managers ultimately
spend less time in interviewing and reviewing applications
from unsuitable candidates, which makes the recruitment
process much efficient and it also helps a lot in reducing the
employee turnover.

• Stopping Fraud: Another benefit of analytics is to identify

the frauds in banking or insurance industry. So in insurance
industry the analytics can be useful at the time of making
claims, here the system can track any similarities between
the claim received and any past claim which was a fraud.
The can help the insurers to dig deeper into the claim and
find out the real truth behind the claim.

In the retail banking industry the analytics is also used to

detect fraud in the case of stolen debit or credit card. In
credit card for example it’s the pattern analysis or anomaly
detection which is used.

Through this the banks track the type of transaction the

customers are executing and from where are they logging.
This information is then compared with each customer
transaction pattern and if there is any anomaly, then the
system flags that transaction, where the action can be
taken.

Pattern analysis is also very useful in securities services, it’s

also very useful to track the hackers who hijack customers
account to buy and sell stocks fraudulently online.

The down side of analytics

Though we have cited many positives about analytics there are

some negatives as well about using analytics. The first thing which
we can think of is that the data on which the analytics is based is
compiled, sifted, sorted, filtered, and presented in a manner in
which the original customer intent, words and emotions are
missing from the final “customer data report.” So we may get the

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insight into what happened, but the thing which is missing is why
it happened.

So in order to find out the Why it happened, the marketing

managers and others involved should interact with the customers
on a regular basis. Face to face interaction is a must because the
insight which can be derived from face to face interaction is
precious. But since these days more and more sophisticated
software’s are coming to dig the data and produce results, the
marketing managers are getting distanced from customers and
relying too much on the data.

Another problem is that the metrics used could be correct at times

is calculated inaccurately. So let’s take a case for web analytics
where generally the organization have indicators like number of
hits daily or monthly, number of page views etc to assess the
interest of the customer on their website. The problem here is that
some of the hits may not be because of customer interest; the
customers may have just clicked it or due to some other reason.
Another problem of inaccurate data could be sited through an
example of an online campaign by an organisation, where the
company made users registered to play online game, and rather
than using the email id as the unique id, the company demanded
unique login ids.
So as soon as the company had substantial data, the company
wanted to use these data for their email campaign but to their
shock most of the email data were duplicate’s. The problem was
that the customers forgot their id and created a new id every time
they visited which created lot of duplicate ids.
Another issue with analytics is the way metrics are chosen after
data analysis, so the calculation for the metrics would be right but
the metrics itself would not be correct. Say for example in a call
centre one of the parameter to measure the performance of a CSR
(call centre representative) is by tracking how quickly the CSR
responds to a call from a customer.
The representative may be picking up a call instantaneously but
after that he may be putting the customer on hold for 2-3 minutes,
but as we are measuring how fast he picks up the phone, even if
he is putting the customer on hold after picking it, it’s not tracked
by the system.
Another issue with analytics could be that the customers may
know the company strategy and can act in such a way that they
get the benefits of loyalty program or other marketing campaigns.

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Let’s take an example of a super market and a customer who is
aware of most of the analytics used by the supermarket. The
customer is aware that the supermarket tracks the regular visit of
the customer.
At this point in time if the customer shifts it’s shopping to the
competitor and reduces its frequency at the regular supermarket.
The supermarket will track this and to retain its loyal customer
may offer some discount or any additional benefits to the
customer.
So the point is that the use of analytics and its results can be
predictable and going forward as the customers become more
knowledgeable can manipulate with organization actions which
can benefit them. The same thing can be applied to a banking
product, credit card usage etc.
So as the organization would be using more and more of analytics,
one of the actions which would be performed by the organization
would be differential pricing. So if a particular customer segment
gets aware of the fact that they are paying more for the same
product compared to other segment. They may start concealing
their information or change their buying pattern. This will make it
difficult for the marketing managers to collect data and will make
it difficult to execute focussed marketing campaign.

References:
Competing on Analytics (The new science of Winning) – Thomas Davenport / Jeanne Harris

HBR case Study – The dark Side of analytics – Thomas H. Davenport / Jeanne G. Harris

www.enhancedretailsolutions.com

www.fractalanalysis.com

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www.mezocon.com

www.dmsretail.com

www.zensar.com

www.Centaur.co.uk

Web analytics and web content Management – Tont Byrne

Intelligence Service – Jeffery Rubin, Ravind Buddhiraja – Network Computing

www.tsmg.com

At war with the dark side: Predicting and preventing customer attrition with defection defense –
Kelly Hlavinka, colloquy

www.grokdotcom.com

www.dmreview.com

www.salientmarketing.com

Getting the right mix – The Hindu, Businessline

Are you transforming or just transacting The model for 21st century – Peter Nikonovich, Edward
Blomquist (Banking System and technology)

Oracle marketing analytics

Strategies and Solutions for customer analytics – K M World

Marketing Science: The new chemistry in middle market commercial banking – Michael Rice,
Stephen Baird, William Klarkin (Commercial lending Review)

http://en.wikipedia.org

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