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    Predictive Analytics and Data Mining: Segmentation Using Clustering

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    Sonal Pwalia
    This document discusses automatic cluster detection techniques for segmenting customer data. It describes how k-means clustering works by assigning data points to clusters based on their distance from cluster centroids. Other automatic cluster detection algorithms mentioned include Gaussian mixture models, agglomerative clustering, and self-organizing maps. The document emphasizes that business data may require translating non-numeric attributes into distances and that domain expertise is important for determining the appropriate number of clusters. It also provides tips for evaluating and validating the resulting clusters.

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    Predictive Analytics and Data Mining: Segmentation Using Clustering

    Uploaded by

    Sonal Pwalia
    50 views25 pages
    This document discusses automatic cluster detection techniques for segmenting customer data. It describes how k-means clustering works by assigning data points to clusters based on their distance from cluster centroids. Other automatic cluster detection algorithms mentioned include Gaussian mixture models, agglomerative clustering, and self-organizing maps. The document emphasizes that business data may require translating non-numeric attributes into distances and that domain expertise is important for determining the appropriate number of clusters. It also provides tips for evaluating and validating the resulting clusters.

    Original Description:

    CLUSTERING

    Original Title

    PADM Clustering

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    This document discusses automatic cluster detection techniques for segmenting customer data. It describes how k-means clustering works by assigning data points to clusters based on their distance from cluster centroids. Other automatic cluster detection algorithms mentioned include Gaussian mixture models, agglomerative clustering, and self-organizing maps. The document emphasizes that business data may require translating non-numeric attributes into distances and that domain expertise is important for determining the appropriate number of clusters. It also provides tips for evaluating and validating the resulting clusters.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    50 views25 pages

    Predictive Analytics and Data Mining: Segmentation Using Clustering

    Uploaded by

    Sonal Pwalia
    This document discusses automatic cluster detection techniques for segmenting customer data. It describes how k-means clustering works by assigning data points to clusters based on their distance from cluster centroids. Other automatic cluster detection algorithms mentioned include Gaussian mixture models, agglomerative clustering, and self-organizing maps. The document emphasizes that business data may require translating non-numeric attributes into distances and that domain expertise is important for determining the appropriate number of clusters. It also provides tips for evaluating and validating the resulting clusters.

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    Predictive Analytics and Data Mining

    Segmentation using Clustering


    Automatic Cluster Detection

    DM techniques used to find patterns in data


    • Not always easy to identify
     No observable pattern
     Too many patterns

    Decomposition (break down into smaller pieces)

    Automatic Cluster Detection is useful to find “better behaved” clusters


    of data within a larger dataset
    Automatic Cluster Detection

    K-Means clustering algorithm – depends on a geometric interpretation of the


    data

    Other automatic cluster detection (ACD) algorithms include:


    • Gaussian mixture models
    • Agglomerative clustering
    • Divisive clustering
    • Self-organizing maps (SOM) - Neural Nets

    ACD is a tool
    • No preclassified training data set
    • No distinction between independent and dependent variables
    • Marketing clusters referred to as “segments”
    • Customer segmentation is a popular application of clustering

    ACD rarely used in isolation – other methods follow up


    Segmentation

    Organizing Customers into groups with similar traits, product


    preferences or expectations
    • Demographic Characteristics
    • Psychographics (interests, attitudes, opinions, personality, values,
    lifestyles…)
    • Desired benefits from products/services
    • Past-purchase or product use behaviors
    K-means Clustering

    “K” – circa 1967 – this algorithm looks for a fixed number of


    clusters which are defined in terms of proximity of data
    points to each other

    How K-means works (see next slide figures):


    • Algorithm selects K data points randomly
    • Assigns each of the remaining data points to one of K clusters
    • Calculate the mean of cases of each cluster and move the K data
    points/ cluster seeds to the mean of the cluster
    • Reassign cases closest to the new seed I as belonging to cluster I
    • Euclidean distance (dist. Between two points (u1,v1) and (u2,v2) is
    the sq. root (sq. (u1-u2) + sq. (v1-v2)
    K-means Clustering
    K-means Clustering

    Resulting clusters describe


    underlying structure in the
    data, however, there is no
    one right description of that
    structure
    Similarity & Difference

    Automatic Cluster Detection is quite simple for a software program to


    accomplish – data points, clusters mapped in space

    However, business data points are not about points in space but about
    purchases, phone calls, airplane trips, car registrations, etc. which
    have no obvious connection to the dots in a cluster diagram
    Similarity & Difference

    Clustering business data requires some notion of natural association –


    records (data) in a given cluster are more similar to each other than
    to those in another cluster

    For DM software, this concept of association must be translated into


    some sort of numeric measure of the degree of similarity

    Most common translation is to translate data values (eg., gender, age,


    product, etc.) into numeric values so can be treated as points in
    space

    If two points are close in geometric sense then they represent similar
    data in the database
    Similarity & Difference

    Business variable (fields) types:


    • Categorical (eg., mint, cherry, chocolate)
    • Ranks (eg., freshman, soph, etc. or valedictorian, salutatorian)
    • Intervals (eg., 56 degrees, 72 degrees, etc)
    • True measures – interval variables that measure from a meaningful
    zero point
     Age, weight, height, length, tenure are good examples
    Pattern Discovery

    “…the discovery of interesting, unexpected, or valuable structures in


    large data sets.”
    - David Hand, Professor of Statistics, Imperial College

    - “If you’ve got terabytes of data, and you’re relying on data mining to
    find interesting things in there for you, you’ve lost before you’ve
    even begun. You really need people who understand what it is they
    are looking for – and what they can do with it once they find it.”
    - Herb Edelstein, President of Two Crows Corporation
    Inputs (Desirable Charateristics)

    Meaningful to the analysis objective

    Relatively independent

    Limited in number

    Have a measurement level of Interval

    Have low kurtosis and skewness statistics


    What Value of K to Use

    Subject Matter Knowledge (there are most likely five groups)

    Convenience (It is convenient to market to 3 or 4 groups)

    Constraints (You have 5 products and need 5 segments)

    Arbitrarily (always pick 10)

    Based on the Data (Ward’s method or Elbow Criterion )

    (Elbow Plot – plot of ratio of within cluster variance to between cluster


    variance vs the no. of clusters)
    Ward’s Method

    Algorithm for Hierarchical cluster analysis

    In this method each observation is considered a cluster, and the


    clusters are hierarchically joined, based on minimizing the ratio of
    variation within clusters to between clusters

    Based on a statistical analysis, the number of clusters is selected

    This number of clusters is used for k-means cluster analysis


    Ward’s Method in SAS Enterprise Miner

    Preliminary k-means clustering on data to save many cluster centroids


    (default 50)

    Ward’s hierarchical clustering on saved cluster centroids (k, then k-1, k-


    2 etc) to determine ideal value of k (greater than minimum specified
    in selection criteria and has a CCC (cubic clustering criterion)
    statistic greater than threshold specified in selection criteria)

    K-means clustering on the original dataset using k from step 2


    Evaluating Clusters

    What does it mean to say that a cluster is “good”?


    • Clusters should have members that have a high degree of similarity
    • Standard way to measure within-cluster similarity is variance* –
    clusters with lowest variance is considered best
    • Cluster size is also important so alternate approach is to use average
    variance**

    * The sum of the squared differences of each element from the mean
    ** The total variance divided by the size of the cluster
    Evaluating Clusters

    Finally, if detection identifies good clusters along with weak ones it


    could be useful to set the good ones aside (for further study) and run
    the analysis again to see if improved clusters are revealed from only
    the weaker ones
    Validating Clusters
    Interpretation

    Goal: obtain meaningful and useful clusters

    Caveats:
    (1) Random chance can often produce apparent clusters
    (2) Different cluster methods produce different results

    Solutions:

    Obtain summary statistics

    Also review clusters in terms of variables not used in clustering

    Label the cluster (e.g. clustering of financial firms in 2008 might


    yield label like “midsize, sub-prime loser”)
    Desirable Cluster Features

    Stability – are clusters and cluster assignments sensitive to slight


    changes in inputs? Are cluster assignments in partition B similar to
    partition A?

    Separation – check ratio of between-cluster variation to within-


    cluster variation (higher is better)
    CLUSTERING USING SAS ENTERPRISE MINER
    Grocery Store Case Study
    Analysis goal:
    Where should you open new grocery store locations?
    Group geographic regions into segments based on
    income, household size, and population density.
    Analysis plan:
     Select and transform segmentation inputs.
     Select the number of segments to create.
     Create segments with the Cluster tool.
     Interpret the segments.

    47

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