There are four types of data analysis that are in use across all industries. While we separate these into categories, they are all linked together and build upon each other. As you begin moving from the simplest type of analytics forward, the degree of difficulty and resources required increases. At the same time, the level of added insight and value also increases.
4 Types of Data Analysis
The four types of data analysis are:
- Descriptive Analysis
- Diagnostic Analysis
- Predictive Analysis
- Prescriptive Analysis
Below, we will introduce each type and give examples of how they are utilized in business.
The first type of data analysis is descriptive analysis. It is at the foundation of all data insight. It is the simplest and most common use of data in business today. Descriptive analysis answers the “what happened” by summarizing past data usually in the form of dashboards.
The biggest use of descriptive analysis in business is to track Key Performance Indicators (KPI’s). KPI’s describe how a business is performing based on chosen benchmarks.
Business applications of descriptive analysis include:
- KPI dashboards
- Monthly revenue reports
- Sales leads overview
After asking the main question of “what happened” you may then want to dive deeper and ask why did it happen? This is where diagnostic analysis comes in.
Diagnostic analysis takes the insight found from descriptive analytics and drills down to find the cause of that outcome. Organizations make use of this type of analytics as it creates more connections between data and identifies patterns of behavior.
A critical aspect of diagnostic analysis is creating detailed information. When new problems arise, it is possible you have already collected certain data pertaining to the issue. By already having the data at your disposal, it ends having to repeat work and makes all problems interconnected.
Business applications of diagnostic analysis include:
- A freight company investigating the cause of slow shipments in a certain region
- A SaaS company drilling down to determine which marketing activities increased trials
Predictive analysis attempts to answer the question “what is likely to happen”. This type of analytics utilizes previous data to make predictions about future outcomes.
This type of analysis is another step up from the descriptive and diagnostic analyses. Predictive analysis uses the data we have summarized to make logical predictions of the outcomes of events. This analysis relies on statistical modeling, which requires added technology and manpower to forecast. It is also important to understand that forecasting is only an estimate; the accuracy of predictions relies on quality and detailed data.
While descriptive and diagnostic analysis are common practices in business, predictive analysis is where many organizations begin show signs of difficulty. Some companies do not have the manpower to implement predictive analysis in every place they desire. Others are not yet willing to invest in analysis teams across every department or not prepared to educate current teams.
Business applications of predictive analysis include:
- Risk Assessment
- Sales Forecasting
- Using customer segmentation to determine which leads have the best chance of converting
- Predictive analytics in customer success teams
The final type of data analysis is the most sought after, but few organizations are truly equipped to perform it. Prescriptive analysis is the frontier of data analysis, combining the insight from all previous analyses to determine the course of action to take in a current problem or decision.
Prescriptive analysis utilizes state of the art technology and data practices. It is a huge organizational commitment and companies must be sure that they are ready and willing to put forth the effort and resources.
Artificial Intelligence (AI) is a perfect example of prescriptive analytics. AI systems consume a large amount of data to continuously learn and use this information to make informed decisions. Well-designed AI systems are capable of communicating these decisions and even putting those decisions into action. Business processes can be performed and optimized daily without a human doing anything with artificial intelligence.
Currently, most of the big data-driven companies (Apple, Facebook, Netflix, etc.) are utilizing prescriptive analytics and AI to improve decision making. For other organizations, the jump to predictive and prescriptive analytics can be insurmountable. As technology continues to improve and more professionals are educated in data, we will see more companies entering the data-driven realm.
As we have shown, each of these types of data analysis are connected and rely on each other to a certain degree. They each serve a different purpose and provide varying insights. Moving from descriptive analysis towards predictive and prescriptive analysis requires much more technical ability, but also unlocks more insight for your organization.