Tech Corner

Predictive analytics and algorithm: How Netflix & Spotify use it!

Engati Team
.
Mar 31
.
9-10 mins

Table of contents

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Predictive analytics

Would you be amazed if food delivery apps like Zomato or Ubereats suggest what you want to eat on a specific day, keep a check on your food cravings and cheat-day plans?  Well, it's a matter of a couple of years and this would be a real phenomenon.  

With customer expectations touching the sky to increased competition, businesses seek an edge in bringing products and services to stand apart in the market and deliver incredible customer experiences.

Where customers expect businesses to read their minds and surprise them with something new, businesses are always one step ahead to do so. With the emergence of companies such as Netflix and Spotify that deliver personalized insights daily, customers expect to have recommendations catered to their needs.  Customers expect other companies also to meet the expected standards and bring something unique to their table, how can businesses jump to this level of proactivity? How can you anticipate needs, trends, and behaviors? By delving into predictive analytics. 

What is predictive analytics?

Predictive analytics analyzes current and historical data to make predictions using various statistical techniques- usually data mining, predictive modeling, and machine learning. Historically, it has helped brands understand customers and is also used to identify risks and opportunities and guides decision-making. 

Companies today are swamped with data stored and collected from various mediums and sources. To gain insights from this data, data scientists use deep learning and machine learning algorithms and make predictions about future events, and plan necessary strategies.  Learnings gained through predictive analytics can be used further within prescriptive analytics to drive actions based on predictive insights.

87% of customers require active communication from companies. ~ inContact

What does predictive analytics offer?

Predictive analytics allows businesses to look into the future with more accurate and reliable insights. At a macro-level, predictive analytics provides a lens into consumer behavior and purchase patterns, but businesses use it at a micro-level as well.

For example, retailers use predictive analytics to forecast inventory requirements and manage shipping schedules. Airlines use predictive analytics to set ticket prices based on past ticket trends. Marketing departments used predictive analytics to optimize product development, advertising, distribution and retailing, or marketing research. Predictive analytics can help attract, retain, and nurture customers at the most opportune moments.

It can also be used as a preventative measure. For example, in her interview with Engati CX, Tyler Cohen Wood mentioned that predictive analytics detects and halts malicious activities and criminal behavior in cyberspaces. When the model notices an unusual behavior pattern from the cybercriminal attempting to infiltrate a system, it fires an alert to cybersecurity teams immediately to resolve the issue.

In a similar sense, predictive analytics can also do the same when a customer turns into a detractor. It goes much deeper than saying “doing X will result in Y.” It can detect abnormal behavior before a customer turns away from your brand for good.

‍What are the types of predictive analytics algorithms/models? 

Predictive analytics adopters have easy access to a range of statistical algorithms designed for these models. These models range from being simple to as complex as data-mining and machine learning algorithms. The algorithms are typically used to solve either a specific business problem or a series of questions. It all depends on the algorithm. 

For example, clustering algorithms are best suited for customer segmentation models or other community-related tasks. Clustering is when the data set is divided into groups, called clusters. The objective is to sort through the data and to group similar clusters together amongst unlabeled data.

predictive analytics - clustering algorithms
Clustering algorithms Source

Classification Model

For improving customer retention, a classification algorithm is what comes to many analysts’ minds. Classification refers to categorizing the data into separate labels based on specific parameters.

Regression Model

While a regression algorithm predicts continuous outputs. It’s used to predict numbers instead of labels based on both real-time and historical data. It’s typically selected to create a credit scoring system or to predict the outcome of many time-driven events.

Clustering Model

The clustering model sorts data into individual groups based on similar attributes and characteristics. For example, grouping car insurance targets from a city based on the sales and launch of a new car variant. 

Outliers Model

The outliers model works around the abnormal data entries within a dataset. It is particularly useful for predictive analytics in retail and finance. It notifies and groups activities that are unusual, like identifying fraudulent transactions or purchases. 

Time Series Model

The time series model contains a sequence of data points captured, using time as the input parameter. It uses the last year's data to develop a numerical metric and predicts the next three to six weeks of data using that model. 

Which are the best examples of predictive analytics in action?

Netflix predictive analytics

We’ve mentioned that Netflix uses predictive analytics to deliver personalized recommendations, but how is the question?

Netflix is constantly collecting data. Netflix uses AI-powered algorithms to make predictions based on the user’s watch history, search history, demographics, ratings, and preferences. These predictions shows with 80% accuracy what the user might be interested in seeing next.

Spotify predictive analytics

When you sign up for a Spotify account, your first instinct is to search for your favorite song and listen to it, right? Well, Spotify uses this information to make recommendations to you every week. Their Discover Weekly playlist allows users to listen to songs of a similar genre based on what the user listens to daily, what they’re “heart-ing” on the app, and what other listeners of the same genre listen to. The more users use Spotify, the more personalized their playlists get. It’s an excellent example of the predictive analytics segmentation model. 

Sephora predictive analytics

Sephora understands how overwhelming finding new makeup and beauty products can be for a beginner. So, it uses a combination of tools and techniques to guide its customers through its catalog. Based on interests, purchases, preferences, and also Color-ID and Skin-ID technologies, Sephora can create personalized profiles for each customer and curate an almost accurate “Recommended for you” page. 

Where do we begin and what’s the predictive analytics process?

The foundation of predictive analytics is models. They allow you to turn historical and real-time data into actionable insights that promote growth. The models we typically see are:

  • Customer Lifetime Value Model that identifies customers who are likely to invest more in products and services
  • Customer Segmentation Models that segment customers based on similar purchasing behaviors and other characteristics

However, once the models are identified, businesses face another challenge. How can they implement and apply these predictive models into their workflow? 

Predictive analytics process
Source: eZigurat

Step 1 - Define your project

Many predictive models are doomed to fail because no one has defined the purpose or the objective of creating this model. This lack of clarity can be detrimental, and this is where a majority of people tend to get lost. So, identify your objectives and outcomes and then communicate them with your teams.

These projects demand collaboration amongst yourself, your analytics modeler, and other departments to nail down goals, timelines, operational costs, how the model will be used, and more. 

Step 2 - Explore

The next step is to determine which data and model-building approach is best suited for your defined objectives and purposes. It’s time to explore.

Models are only as good as the data you feed them, so it’s your job to ensure that the sources of your data are clean, accurate, and extensive. Good sources of data have a high number of records, history, and variables. This is key to identifying patterns and relationships.

Modelers use a variety of tools and techniques to explore and analyze data. Basic tools provide valuable yet vague insights, while more sophisticated tools provide detailed, actionable insights. The sophistication of your tools depends entirely on your objectives, but it is an avenue worth exploring. 

Step 3 - Preparing your data 

The fact is, most of the data we receive is highly unstructured, making it impossible for your tool to give you quality insights on time. Once you’ve explored and identified your data set, you have to prepare your data. This involves selecting, extracting, and transforming your data into a different format to be read by your tool. 

This exercise dreads many analysts as the process of cleansing the data of any errors is time-consuming- especially when businesses deal with data sets of over a thousand fields. 

Step 4 - Model building

Now it’s time to build your model. First, you have to run your algorithms against a data set with known values for the variable you’re trying to predict. You split the data in half, one for training the model and the other is for testing the training model. Then run both models against each other to see how effective they are at predicting, and test for validity by testing the model against live data. 

Of course, identifying trends isn’t simple. As we all know, correlation does not represent causation. There are many combinations of variables to test against to understand and identify which key trends and patterns carry the most impact. 

Step 5 - Model deployment 

Now, you can build the most precise model in the world, but it could provide no value to your company, which circles back to the 1st step. You have to understand what your objectives for creating this model are. 

Most times, models fail when businesses ignore or misunderstand the results. The example they used in this paper involved a grocery store that noticed a correlation between sales of beer and diapers. Since the business users saw a pattern between the two, they decided to display both in the same area at the front of the store to welcome buyers. But of course, correlation doesn’t equate to causation. 

While the model converts information to knowledge, you have to take the time to understand what kind of information the model’s feeding you. Because at the end of the day, the decision you make based on these insights will drive growth, not the insights themselves. 

Step 6 - Model management

To improve performance accuracy, you have to keep an eye on your models. This is another step that many businesses often neglect. Building a model for predictive analysis is not a one-time event. You have to monitor it; you have to continue creating iterations to improve performance accuracy and minimize risk.

Remember that the more data you feed the model, the more accurate it becomes, and that these machines continue to learn and adapt based on the data being fed to them. While yes, these models can increase operational efficiency within the organization, their learning needs to be supervised at every stage. This is why it is essential to have teams dedicated to developing and enhancing these analytical models.

How can predictive analytics be used in business?

Now that you know how to create predictive analytic models, here’s how they can drive business performance. 

Image result for predictive analytics business performance
The power of Predictive Analytics: Source

Highly-personalized marketing

Imagine using a model that can monitor customer behavior at both a micro and macro level. Customers expect this kind of service as it makes the experiences more convenient and enjoyable. Predictive analytics enables you to carry this out. Personalization can only be effective when it’s based on quality data. Use this data and these insights to deliver hyper-personalized messages to the right customer at the right time and place. Analytics consulting services or agency can help organizations with this in an efficient way.

Forecasting needs

Building on this, predictive analytics can anticipate the needs of your customers before your customer does. Predictive analytics makes it possible for businesses to forecast customer needs based on purchase history, search history, interests, demography, and more. This is what makes Netflix so successful.

Reduces churn

As we’ve mentioned above, predictive analytics is marvelous at identifying malware and abnormal, risky behavior. But this mechanism can also be applied to flighty customers. Leaders can use analytics to predict when a once-promoter may turn into a detractor before your agents can. Once the abnormal behavior is detected, the model can alert your customer service leaders to pay extra attention to these customers. It enables businesses to take a proactive approach to reduce churn and customer attrition. 

Better efficiency and resource allocation

Predictive analytics can significantly improve internal operations efficiency to enhance the customer experience. The smoother the operation, the faster the service. Having efficient internal operations can help ensure that the customer receives quality service without any fuss. The model can help staff within the contact center by forecasting inventory needs, for example. 

By introducing a predictive analytics model, you can further boost employee productivity to give you an edge over your competitors.

Pre-emptive support

The model can predict significant events in the customer life cycle to increase revenue in these critical times. For example, an insurance company will send out alerts for car insurance or driver’s tests when they’re aware of a family’s child coming of age. Providing recommendations at these turning points of a customer’s life can give you an edge. 

Handling feedback 

As the model becomes more sophisticated with the data being fed into it, it can act on real-time feedback to deliver ultra-personalized recommendations. The customer’s actions, such as jumping from one category to another on an e-commerce website, immediately impact the model and will affect the following recommendations they receive. These trends can easily be identified and acted on by the model. 

Developing pricing models

Insurance companies typically use predictive models to determine the optimal pricing model for their clients. There’s a telematics program called Snapshot that uses in-car sensors to determine to price. The data from the model personalizes the rate for each customer based on their skill level when it comes to driving. Someone who drives less often and stays close to home is likely to have a lower rate than someone who’s always on the road and likes to speed.

Providing a lens into the future

We’ve spoken about predictive intelligence at a fairly micro-level, but its scope is endless. Organizations can use it to track and predict customer behavior trends to create an experience like never before. The current trends suggest that because of the forced digital transformation and migration into our devices, customers demand speed and agility, and care. Customer experience is going to dominate each industry. So, how can you get started?

What are the predictive analytics use cases? 

Banking

Banking and financial services use machine learning and quantitative tools to predict credit risk, detect fraud and speculation. 

Healthcare

Predictive analytics is used in the healthcare industry to detect and manage the care of chronically ill patients and take preemptive measures.

Human resources (HR)

HR teams use predictive analytics to identify, hire employees and gauge their performance, determine labor markets, and predict an employee’s performance level and appraisals.

Marketing and sales

Predictive analytics can be used for marketing campaigns throughout the customer lifecycle and in cross-sell strategies and to predict the success of promotions and advertisements.

Retail

Retailers use predictive analytics to identify product recommendations, forecast sales & demand, analyze markets and manage seasonal inventory.

Supply chain

Businesses use predictive analytics to make inventory management more efficient, helping to meet demand while minimizing stock for smooth outflow and inflow of products and materials.

What are predictive analytics techniques? 

With the rapid tech evolution in today's industries like healthcare, life sciences, oil and gas, insurance, etc, the need for predictive analytics has increased and its valued anticipations help business strategies and deliver better customer service/offerings. 

Data Mining

Data mining is used in predictive analytics to understand and recognize the hidden patterns and relationships among variables in large data sets. These correlations and patterns help in deriving the meaning and defining the usability of the provided data sets. 

Statistical Modelling

Statistical modeling works parallel with the data mining process, where data analysts develop models to give meaning or context to the present data sets. These models help in deriving future outcomes from the data correlations and patterns.

Machine Learning

ML can deploy advanced techniques to identify patterns from large data sets and build models. For example, recommendation engines are widely used for online shopping recommendations as predictions derived from customers' prior purchasing and browsing behavior.   

The future is now!

  • Businesses use predictive analytics to come up with product recommendations and offers. 
  • 45% of businesses rely on PA for offering optimum customer services. 
  • Predictive analytics can help utilize collected data for predictions and strategies that generally go unused. 
  • It can enhance the effectiveness of the marketing efforts with hyper-personalized marketing. 
  • It also enables businesses to provide pre-emptive customer support/service for a delightful customer experience. 
  • Industries like healthcare use PA to take preemptive measures to avoid fatalities.

Customers demand a hyper-personalized, omnichannel experience, and we have the tool that can help you deliver it.

If you register with Engati right now, you can get started with Engati’s integrated engagement platform with unlimited live chat agents for up to 45 days!

Engati Team

At the forefront for digital customer experience, Engati helps you reimagine the customer journey through engagement-first solutions, spanning automation and live chat.

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