Introduction 

The market is witnessing an unprecedented shift in business intelligence (BI), largely because of technological innovation and increasing business needs. The latest shift in the BI market is the move from traditional analytics to predictive analytics. Although predictive analytics belongs to the BI family, it is emerging as a distinct new software sector.

Analytical tools enable greater transparency, and can find and analyze past and present trends, as well as the hidden nature of data. However, past and present insight and trend information are not enough to be competitive in business. Business organizations need to know more about the future, and in particular, about future trends, patterns, and customer behavior in order to understand the market better. To meet this demand, many BI vendors developed predictive analytics to forecast future trends in customer behavior, buying patterns, and who is coming into and leaving the market and why.

Traditional analytical tools claim to have a real 360 degrees view of the enterprise or business, but they analyze only historical data—data about what has already happened. Traditional analytics help gain insight for what was right and what went wrong in decision-making. Today's tools merely provide rear view analysis. However, one cannot change the past, but one can prepare better for the future and decision makers want to see the predictable future, control it, and take actions today to attain tomorrow's goals.

What is Predictive Analytics?

Predictive analytics are used to determine the probable future outcome of an event or the likelihood of a situation occurring. It is the branch of data mining concerned with the prediction of future probabilities and trends. Predictive analytics is used to automatically analyze large amounts of data with different variables; it includes clustering, decision trees, market basket analysis, regression modeling, neural nets, genetic algorithms, text mining, hypothesis testing, decision analytics, and more.

The core element of predictive analytics is the predictor, a variable that can be measured for an individual or entity to predict future behavior. For example, a credit card company could consider age, income, credit history, other demographics as predictors when issuing a credit card to determine an applicant's risk factor.

Multiple predictors are combined into a predictive model, which, when subjected to analysis, can be used to forecast future probabilities with an acceptable level of reliability. In predictive modeling, data is collected, a statistical model is formulated, predictions are made, and the model is validated (or revised) as additional data become available.

Predictive analytics combine business knowledge and statistical analytical techniques to apply with business data to achieve insights. These insights help organizations understand how people behave as customers, buyers, sellers, distributors, etc.

Multiple related predictive models can produce good insights to make strategic company decisions, like where to explore new markets, acquisitions, and retentions; find up-selling and cross-selling opportunities; and discovering areas that can improve security and fraud detection. Predictive analytics indicates not only what to do, but also how and when to do it, and to explain what-if scenarios.

Predictive analytics employs both a microscopic and telescopic view of data allowing organizations to see and analyze the minute details of a business, and to peer into the future. Traditional BI tools cannot accomplish this functionality. Traditional BI tools work with the assumptions one creates, and then will find if the statistical patterns match those assumptions. Predictive analytics go beyond those assumptions to discover previously unknown data; it then looks for patterns and associations anywhere and everywhere between seemingly disparate information.

Let's use the example of a credit card company operating a customer loyalty program to describe the application of predictive analytics. Credit card companies try to retain their existing customers through loyalty programs. The challenge is predicting the loss of customer. In an ideal world, a company can look into the future and take appropriate action before customers switch to competitor companies. In this case, one can build a predictive model employing three predictors: frequency of use, personal financial situations, and lower annual percentage rate (APR) offered by competitors. The combination of these predictors creates a predictive model, which works to find patterns and associations.

This predictive model can be applied to customers who are start using their cards less frequently. Predictive analytics would classify these less frequent users differently than the regular users. It would then find the pattern of card usage for this group and predict a probable outcome. The predictive model could identify patterns between card usage; changes in one's personal financial situation; and the lower APR offered by competitors. In this situation, the predictive analytics model can help the company to identify who are those unsatisfied customers. As a result, company's can respond in a timely manner to keep those clients loyal by offering them attractive promotional services to sway them away from switching to a competitor. Predictive analytics could also help organizations, such as government agencies, banks, immigration departments, video clubs etc., achieve their business aims by using internal and external data.

On-line books and music stores also take advantage of predictive analytics. Many sites provide additional consumer information based on the type of book one purchased. These additional details are generated by predictive analytics to potentially up-sell customers to other related products and services.

Predictive Analytics and Data Mining

The future of data mining lies in predictive analytics. However, the terms data mining and data extraction are often confused with each other in the market. Data mining is more than data extraction It is the extraction of hidden predictive information from large databases or data warehouses. Data mining, also known as knowledge-discovery in databases, is the practice of automatically searching large stores of data for patterns. To do this, data mining uses computational techniques from statistics and pattern recognition. On the other hand, data extraction is the process of pulling data from one data source and loading them into a targeted database; for example, it pulls data from source or legacy system and loading data into standard database or data warehouse. Thus the critical difference between the two is data mining looks for patterns in data.

A predictive analytical model is built by data mining tools and techniques. Data mining tools extract data by accessing massive databases and then they process the data with advance algorithms to find hidden patterns and predictive information. Though there is an obvious connection between statistics and data mining, because methodologies used in data mining have originated in fields other than statistics.

Data mining sits at the common borders of several domains, including data base management, artificial intelligence, machine learning, pattern recognition, and data visualization. Common data mining techniques include artificial neural networks, decision trees, genetic algorithms, nearest neighbor method, and rule induction.