Predicting the Future: Growth Modeling
One of the most common questions we try to answer using data is what will our business look like next month? Next quarter? Next year? The better you understand what your business will look like in the future the better you can prepare for it, or change it!
But, predicting the future of your business is difficult because real world data is complex. For example, given the following daily revenue data let us try and predict the revenue for each day next week:
Like most real world data there are patterns and trends hidden in this data, making extrapolation difficult. Basic techniques like Linear Regression would give us a general trendline, but not a prediction for every day next week. We could use more advanced techniques like Double Exponential Smoothing but they are difficult to implement if you aren’t familiar with them.
Luckily, there is an easier way to model the growth of cyclical real world data. Instead of trying to understand the data as a whole, we can realize that the repeating cycle means we can focus on each day of the week independently. For example, if we just take the Mondays the trend and pattern is actually a straight line!
By creating a separate trend for each day of the week, we can build a model for what we think revenue will be every day next week with a fairly high degree of accuracy:
Awesome! But I don’t care about days of the week.
Very few businesses care about predicting revenue for each day next week. However, the same technique can work with weekly, monthly or even quarterly data that follows common cycles. This is true for many types of business, especially seasonal businesses like tourism. If your data doesn’t have clear cycles or trends, then you can fall back to either general forecasting with trend lines or more advanced techniques like mentioned above!
Pro tip: As with many of the things we cover this week, you’ll likely use tools to help you predict the future values of your metrics. My hope is that by understanding the techniques these tools rely on you will be a better customer when selecting them!
Quote of the Day: “Life is divided into three terms – that which was, which is, and which will be. Let us learn from the past to profit by the present, and from the present, to live better in the future.” – William Wordsworth