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2 Business Intelligence in various business applications

Predicting Customer Behavior
In banking, data mining is employed to find profitable customers and patterns of fraud. It is
also used to predict bankruptcies and loan payment defaults. For example, when Bank of
America looked for new approaches to retain customers, it used data-mining techniques. It
merged various behavior patterns into finely tuned customer profiles. The data was
clustered into smaller groups of individuals who were using banking services that didn‘t
best support their activities. Bank employees contacted these customers and offered advice
on services that would serve them better. The result was greater customer loyalty (measured
in fewer accounts closed and fewer moves to other banks).
Companies selling mobile phone services face a growing challenge of customer churn
(switching to a competitor). Some surveys show that more than 50 percent of mobile phone
users consider switching to a competitor at any given time, and 15 percent plan to switch to
a competitor as soon as their contract expires. Mobilcom GmbH, a German company with
4.56 million customers and 1100 employees, uses data mining to identify such customers
and approach them with inducements to continue or renew their contract before they
switch. The company uses an application called DB Intelligent Miner from IBM. The
software periodically looks for patterns of customer churn and assigns each customer a
score representing the likelihood of canceling the contract. The software considers many
variables, among which are complaint history and the number of days to expiration.
Customer loyalty is extremely important because the cost of obtaining a new customer far
exceeds the cost of retaining an existing one, especially in a highly competitive market such
as mobile telephones.
To ensure a steady flow of customer data into their data warehouses, companies in almost
every industry—from airlines to lodging, dining, and gambling—operate customer loyalty
programs similar to the original frequent-flier programs. Membership is often free, and
customers leave a record every time they make a purchase even if they do not use a credit
card to pay. In many cases, mining such data provides business intelligence to target
individual customers.

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A large U.S. airline collects every possible piece of data on passengers in a central data
warehouse, from frequent-flyer numbers through reservations and flight details. The airline
uses data-mining tools to extract information that helps retain frequent flyers. For example,
the executives can query the data warehouse to see how many flight disruptions,
cancellations, or delayed arrivals its best customers experience in a given month. This helps
the airline to proactively contact these customers and offer them incentives to ensure their
continued business.
UPS has an organizational unit called Customer Intelligence Group. The group analyzes
patterns of customer behavior so it can make predictions that help the company enhance
services and retain customers. For example, the group is able to accurately predict customer
defections by examining usage patterns and complaints. When the data of a specific
customer indicates that the customer might defect, a salesperson contacts that customer to
review and resolve any problems. The software helped to significantly reduce the loss of
customers.
Identifying Profitable Customer Groups
Financial institutions, especially insurance companies, often dismiss high-risk customers.
Better analysis of such customers can yield good business, as Progressive Casualty
Insurance Company has proven. Progressive is the fourth largest U.S. insurance firm. The
company uses proprietary analytical software and widely available insurance industry data.
The company defines narrow groups or ―cells‖ of customers, for example, college-educated
motorcycle riders ages 35 and older whose credit scores are above 650 and who have no
accidents recorded. For each cell, the company performs a statistical regression analysis to
identify factors that most closely correlate with the losses that this particular group causes.
For each cell, the company then sets premiums that should enable the company to earn a
profit on its portfolio of customer groups. The company uses simulation software to test the
financial implications of accepting the analyzed groups as customers. This way,
Progressive can profitably insure customers in traditionally high-risk categories. Other
insurance companies reject such applicants and refuse to renew the contracts of customers
who became high-risk because of claims such as for car accidents. These companies do so
without bothering to analyze the data more deeply.

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Utilizing Loyalty Programs
Loyalty programs such as frequent flier and consumer clubs help organizations get huge
amounts of data about their customers. Some grocery chains, for example, issue discount
coupons only to the most loyal customers. Harrah‘s Entertainment, Inc., the casino and
hotel chain, uses its data warehouse to target individual customers, rather than groups. The
technique—whose specifics the company refuses to disclose for obvious reasons—enables
Harrah‘s to tailor lodging, dining, and gambling packages that are attractive to its
customers. It helps Harrah‘s discern the small spender from the big spender and decide how
to price those services according to individual spending patterns at the company‘s facilities.
This is an example of yield management or revenue management.
Inferring Demographics
Some companies use data-mining techniques to try to predict what customers are likely to
purchase in the future. Amazon.com is a leader in exploiting customer data. The company
registered U.S. Patent Number 6,865,546, titled ―Methods and systems of assisting users in
purchasing items.‖ The software developed by Amazon determines the age of the recipient
of an item purchased by a customer. The age range is estimated based at least in part on a
customer order history of gifts purchased for the recipient. The first gift is associated with
the first ―age appropriateness designation.‖ The second gift is associated with a second age
appropriateness designation. An age range associated with the recipient is estimated. The
software also captures and analyzes any data that may indicate the recipient‘s gender. The
recipient‘s age progression is calculated, and the company uses it to offer the customer gifts
for that person when the customer logs on to the site. So, if you purchase gifts from
Amazon.com for your baby niece, do not be surprised if Amazon entices you to purchase
items for a young girl, a young woman, and an older woman over the next few decades.
Here is another example of what this data-mining tool can do: if you purchased perfume a
week before Valentine‘s Day, it will infer that you bought the item as a Valentine‘s gift for
a woman and offer certain colors for the wrapping paper.

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10.3 Summary

This unit introduced the concepts of OLAP, Business Intelligence and its usage in Business
applications.

10.4 Keywords

OLAP, Business Intelligence, Customer Intelligence

10.5 Exercise

1. Explain OLAP.
2. Explain with examples usage of BI in various business applications.

10.6 References

1. Waman S.Jawadekar ,‖Management Information Systems‖,IIIrd Edition

2. Management Information System by James A O‘Brien
3. Management Information System by Effy Oz

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