Decisions

Mean, median, and mode are three important statistical measures that can be used to understand how people buy things. These measures provide different insights into the data, and can be used together to gain a more complete understanding of consumer behavior.

Descriptive statistics summarize data. For instance, Spotify measures performance by understanding how often customers log in and for how long. They want to know how much usage changes month-to-month and year-over-year. The statistics tell them that their users played an average of 630 audio streams per month in 2017 which was up from 438 in 2015. Other companies such as Amazon use descriptive statistics to build profiles of average customer age and income.

There are numerous ways to describe data, so choosing the ones that matter is important. Central tendency statistics describe where the values in a data set land. The measures that matter are mean (add all the values in a data set and divide by the number of values), median (the value at the midpoint of the data set), and mode (the most common value). For example, Spotify cares about the most common genre (mode) while Amazon cares about the average number of purchases (mean).

The median is the middle value of a set of data. It is the value that separates the data into two equal parts, with half of the values being greater and half of the values being less than the median. The median can be used to understand the behavior of the majority of consumers. For example, if the median value for the amount of money spent on a particular product is $40, it means that half of the consumers spend less than $40 on that product, while the other half spend more.

The mode is the most common value of a set of data. It is the value that appears most frequently in the data. The mode can be used to understand the behavior of the minority of consumers who are outliers. For example, if the mode value for the amount of money spent on a particular product is $100, it means that some consumers are spending significantly more on that product than the typical consumer.

Here’s an example from Charles Wheelan’s popular book *Naked Statistics*. Imagine you are sitting at a bar in a middle class suburb of Seattle with nine friends from the neighborhood. Each of you earns $35,000 a year. Bill Gates walks in and, for the sake of the story, his income is $1 billion.

What should you think about wealth in this middle class bar now? The average income before Gates sat down was $35,000, then it went up to $91 million after he joined your group. But none of you or your friends are actually any richer. The median annual income doesn’t change. The mean is sensitive to outliers which is why the median is an important descriptive statistic.

Descriptive statistics can be used to understand how people buy things. The mean provides insight into the typical behavior of consumers, the median provides insight into the behavior of the majority of consumers, and the mode provides insight into the behavior of the minority of consumers who are outliers. By using these measures together, businesses can gain a more complete understanding of consumer behavior, which can be used to make better decisions and improve sales.