Why Gut Feelings No Longer Fly

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Predictive analytics allow CFOs to bring more data into the decision-making process.

Most CFOs like to think that we’re driven solely by data, living by the objective numbers while spending far too much time in spreadsheets and dashboards. But the decisions we make are only as good as the data we have, especially when we’re trying to steer the business for the future. When Yogi Berra said, “It’s tough to make predictions, especially about the future,” he was talking about baseball. It’s even more true about business. In the absence of perfect data, we all rely on judgement calls, assumptions and hunches that have big consequences. So what if there was a way to squeeze out the guesswork and minimize the risks it causes?

Today’s innovative business models generate rich new forms of financial, behavioral and demographic data. Predictive analytics are giving the CFO more data points to rely on and taking the guesswork out of critical judgement calls. It’s giving us real-time insights into how the business is performing today and how to unlock growth for tomorrow. It tells us what behaviors lead to high lifetime value, who your best upsell candidates are or who is at risk of churn.

Predictive analytics are coming into their own just as a massive shift is occurring in consumer habits. The traditional product cycle that drives people to constantly buy more “stuff” is waning. Services, not products, are taking center stage. People are trading the burdens of ownership for the benefits of usership. Indeed, even as the pandemic ravaged many businesses last year, companies in Zuora’s Subscription Economy Index grew revenue by 11.6%, while that of product-based firms shrank by 1.6%. In Q4 of 2020 alone, subscription companies grew seven times faster than S&P 500 companies. I don’t see this trend stopping anytime soon.

Understanding your customers

Recurring services generate a stream of real-time data that feed forward-leaning metrics like usage and transaction volumes, time from first purchase to first add-on, or the number of changes to the customer’s account. The CFOs I talk to also often have a need to be more proactive in managing other advanced metrics like dollar-based retention, average customer value, monthly recurring revenue, churn and customer lifetime value, and predictive analytics is helping them identify problems and opportunities before they show up in their results.

It’s surprising how many companies can’t get a good understanding of what is driving their business because their platforms and technology just aren’t built for it. For example, take a company that sees a rise in new orders. Great news, right? That depends. Is the rise a result of net-new business? Or is it because existing customers cancelled old orders and then placed new orders? How the business responds hinges on knowing the difference. With predictive analytics, you can zoom in on just about anything and start to understand the underlying behavior.

This level of visibility into your customers helps you focus on where to invest with marketing, partnerships, and research and development. When you understand why your customers churn, you can be super-targeted and efficient with your offerings. As you get more data over time, you will get better with your opportunities for upselling, retention and more.

Unlocking opportunities for growth

Revenue is by far the last area where CFOs want to make assumptions and poor forecasts. Predictive analytics combined with automated revenue recognition enabled by a recurring services model means you can make more accurate financial projections based on data, not guesswork. People like to underpromise and overdeliver, and that’s doubly true for cautious finance types. When we don’t have complete data, we build in a bit of wiggle room. It’s a great way to keep investors happy, at least for a while.

But this sandbagging approach has two big pitfalls. First is that it locks you into the endless cycle of “beat and raise.” When you outperform, the market then expects that same margin of success every time. Second is that it can actually hamstring your ability to invest in your business and unlock new opportunities. Remember, any amount you overachieve by could have been used to invest back in the business. Those become lost opportunities if you’re not forecasting accurately.

Over time, data always beats the gut feeling. Predictive analytics gives you an unprecedented understanding of your customers, a better handle on the current and future state of your business, and the ability to unlock new growth opportunities for your business.

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