The term “analytics” encompasses an entire realm of thought about processing data. There are several different kinds of analytics, but all of them strive to gain some sort of understanding from data. Modern analytical methods tend to be lumped into four groups: descriptive, diagnostic, predictive, and prescriptive.
As with many other scientific fields, most of which have their own evolution of analytics, business analytics began as descriptive, simply chronicling events that had happened. Descriptive analytics answer “what happened?” They help businesses generate narratives, supported by charts and tables, to further market products or development as a company. This type of analytics helps uncover the reasoning behind prior successes or failures and can be used to prevent future failures or encourage future successes.
For example, as late as the mid-1800s, several European countries were offering state-owned insurance with no concept of actuarial science; policies were priced similarly for an 80-year-old as they were for a 10-year-old. When they eventually collected statistics seeking descriptive data about individuals, they came to realize that patterns appeared, describing subpopulations or reference classes. They then realized that they could use this descriptive data to predict the overall tendencies of a group of people. These days we likewise separate the population into reference classes, a discretized population, to make more personally relevant, individualistic predictions.
Zooming out to businesses in general, the types of descriptive analytics traditionally applied include simple numerical values such as returns on invested capital (ROIC, a single scalar value derived from net income, dividends, and total capital), net profit margin, and customer acquisition cost. Seasonal traffic analysis, website traffic, and lead conversion statistics are types of descriptive analytics that involve multidimensional data and more complex data views.
As we move toward more precise, focused data we keep statistics on keystrokes, user clicks, and time spent on a given webpage. With this data, businesses can track consumer trends and use it to take steps towards goals like more relevant advertising. However, descriptive analytics alone rarely produces meaningful insights. Descriptive analytics are used to determine what events have taken place within a reference class, but if we want to understand why these events have taken place, we must shift over to diagnostic analytics. We’ll do so in a subsequent post.
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