Alternative Data: How You Can Leverage it

We’re amidst a data revolution.

Businesses in nearly all industries are now capable of utilizing data to become more nimble and agile while transforming operations. This leads to better decision-making and a competitive advantage for those who know how to use it properly.

While traditional data can take you far, some organizations are going even deeper and tapping into the power of alternative data. And they’re seeing great results.

What is Alternative Data?

Alternative data involves the process of extracting data from non-traditional sources to generate added insights to optimize your decision-making. Rather than tapping into mainstream analytics, you take a less conventional route.

Jennifer Belissent, Principal Analyst at Forrester, breaks it down into very simplistic terms.

“We all want to know something others don’t know,” she says. “People have long sought ‘local knowledge,’ ‘the inside scoop’ or ‘a heads up’ – the restaurant not in the guidebook, the real version of the story, or some advanced warning. What they really want is an advantage over common knowledge – and the unique information source that delivers it. They’re looking for alternative data – or ‘alt-data.’”

Whether you’re a small mom-and-pop business scouting a potential location for opening a brick-and-mortar store, or a multi-billion dollar lending institution, alternative data can be a tremendous asset.

Where Does Alternative Data Come From?

The Market Mogul predicts that there will be roughly 40 zettabytes (or 43 trillion gigabytes) of data in existence by 2020. So there’s no lack of sources for obtaining alternative data.

Some common sources include:

  • Mobile devices – As of 2017, six billion people had phones across the world
  • The Internet of Things (IoT) – McKinsey forecasts there will be 20-30 billion connected devices by 2020
  • Satellites – These can be used to generate satellite imagery
  • Online search – Klood reports there are 63,000 Google searches performed every second, which adds up to 167 billion per month or two trillion a year
  • Social media (e.g. analyzing brand popularity and consumer trends)
  • Sensors – These can be found on everything from smartphones and smart home devices to predictive maintenance systems from large-scale manufacturers

As the world becomes increasingly connected and technology more ubiquitous, the opportunities for alternative data will continue to grow.

Why is it Useful?

Traditional data offers some tremendous advantages. It allows you to identify errors and inefficiencies, improve services and stay current with industry trends.

But alternative data takes it one step further: by digging deep and going beyond mere surface-level intelligence, businesses can gain in-depth insights that much of their competition overlooks.

The true value of alternative data lies in its ability to stitch together separate strands of data from multiple sources. From there, you’re able to gain an overarching, all-encompassing vantage point.  

With many of today’s industries being highly saturated and hyper-competitive, it’s easy to see why so many companies would find this desirable.

It’s the ultimate one-up.

Potential Uses

To gain a better understanding of its value, let’s take a look at some specific examples of how alternative data could be used in a variety of real-life scenarios:

Example #1 – Equity Research

To gain the complete picture of how an investment may perform in the future, analysts need to understand the past. This includes not only traditional historical sources available through SEC reports and company financial statements, but also non-traditional, alternative data, such as customer sentiment trends in forums and reviews, search and keyword trends, purchases across an entire industry or bucket of goods.

In a recent article, a portfolio manager at GSAM said. “With the growth and availability of non-traditional data sources such as internet web traffic, patent filings and satellite imagery, we have been using more nuanced and sometimes unconventional data to help us gain an informational advantage and make more informed investment decisions.”

Analysts combine this data with financial data to make the best recommendations on where investors should put their money.

Example #2 – Lending Institutions

Lenders must be highly selective about who they approve for loans. They must be able to effectively assess the risk level of loan applicants and evaluate their creditworthiness.

While this is fairly straightforward for individuals who already have substantial credit, it can be troublesome for those with insufficient credit information. This is important because 10 percent of Americans are “credit invisible,” and another eight percent lack an adequate credit history or have one that’s too old to track.  

However, lenders can use alternative sources such as data from rent and utility payments to determine how creditworthy a person is. This is a win-win because it helps individuals who may lack the necessary credit to apply for a loan, and it helps lending institutions reduce their number of bad loans.

Example #3 – Business Owners

Location is one of the most critical factors that contributes to the success or failure of a brick-and-mortar business. Choosing a location is obviously something that shouldn’t be done on a hunch.

Another application of alternative data is to use satellite imagery to identify the optimal location for a store based on parking lot traffic. For instance, seeing a high volume of vehicles in a particular location could suggest that a business would benefit from good foot traffic.

Example #4 – Small Business Investing

Say that a potential investor is examining the current state of a business. Of course they’ll look at things like profitability, industry demand, etc.

But they could also use social media to gain a better understanding of market sentiment to better determine public perception of the brand, and in turn predict long-term performance. By analyzing something that’s usually regarded as intangible, an investor could move forward with greater confidence.

This benefits small business owners as well because they may be able to obtain capital even if their other metrics are lackluster.

Example #5 – Healthcare

Companies could monitor Google search trends as well as certain keywords on social media to track the spread of viruses such as the flu. This information could then be used to shape flu vaccine initiatives and distribution to more efficiently fulfill consumer demand.

By looking at these examples, there’s an underlying theme that emerges. You’re taking data that may have slipped through the cracks and using it to generate meaningful reports.

You can also get a sense of its flexibility. You’re by no means limited to just a handful of applications, and businesses in nearly every industry stand to benefit.

How to Access Alternative Data

At this point, you may be wondering how to access these obscure data sets. There are three main ways to go about it.

One is to hire a data scientist or someone who is capable of analyzing a large volume of unstructured data. Their expertise lies in “massaging the data” and drawing actionable conclusions from it.  

This, of course, comes at a cost with the average U.S. data scientist earning over $129,000 a year. However, the long-term payoff is often well worth it and can make sense for certain companies. You could even make the point that having a dedicated data scientist working in-house is the ultimate advantage.  

The second option is to partner with a third-party such as a research firm. They’ll do the heavy lifting and will be able to tap into the necessary resources to provide comprehensive intel.

For example, they might harvest trends from customer reviews and ratings to gauge current sentiment or analyze frequently-mentioned topics to bring transparency to your brand’s strengths and weaknesses.

Or if you were looking to track revenue growth, they may look at consumer transactions from product purchase data, credit card transactions and even PayPal and Square transactions.

This would help you keep a pulse on KPIs such as product performance, online and offline shopping habits and brand stability.

This too comes at a cost, but is typically less expensive than hiring a full-time data scientist.

Your third option is to use software that’s capable of full-fledged data extraction.

There are numerous tech firms that utilize sophisticated technology to generate the alternative data you need to implement into your business operations. The process basically involves using a software as a service (SaaS) product that’s capable of gathering the key insights necessary to thrive in your industry.

For instance, is a product that allows users to convert the mass of data on websites into structured, machine readable data without being tethered by a prerequisite knowledge of coding.  

This third option is usually the most cost-effective and often makes sense for companies that are looking to explore alternative data but don’t have a massive budget to work with. You’ll also find that there is a lot of flexibility in terms of pricing so you can find the right plan without overspending.  

The Next Wave of Insight

We’re experiencing exponential growth in data that shows no signs of slowing down. While most businesses are tapping into this data to some degree, very few are getting the most out of it.

That’s where alternative data comes in.

By amalgamating data from non-traditional and often disparate resources, businesses can truly see “the big picture” and gain a better understanding of the most critical aspects of operations.

What was once nebulous can now be lucid and intelligible – and the companies that capitalize on alternative data could have a decided advantage over their competitors that are limited to more traditional data sources.

Get alternative data with