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Market Segmentation - Cluster Analysis

Cluster analysis is a technique used to classify objects into homogeneous groups called clusters based on their similarities across multiple variables. It is commonly used for market segmentation to split customers into smaller, more similar groups. There are hierarchical and non-hierarchical clustering methods, with hierarchical starting by joining the most similar pairs and forming a tree structure of clusters, while non-hierarchical allows objects to change clusters. Key steps involve choosing distance measures, a clustering technique, determining the optimal number of clusters, and interpreting the results.

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39 views18 pages

Market Segmentation - Cluster Analysis

Cluster analysis is a technique used to classify objects into homogeneous groups called clusters based on their similarities across multiple variables. It is commonly used for market segmentation to split customers into smaller, more similar groups. There are hierarchical and non-hierarchical clustering methods, with hierarchical starting by joining the most similar pairs and forming a tree structure of clusters, while non-hierarchical allows objects to change clusters. Key steps involve choosing distance measures, a clustering technique, determining the optimal number of clusters, and interpreting the results.

Uploaded by

RAJARSHI VIKRAM
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MARKET SEGMENTATION

RESEARCH
Cluster Analysis
CLUSTER ANALYSIS
 A class of techniques used to classify objects or cases
into relatively homogeneous groups called clusters.

 Most often used for market segmentation analysis.

 Similarity is based on multiple variables

 Objects that are grouped in one cluster are homogenous


as compared to others
USAGE OF CLUSTER ANALYSIS

 Market segmentation – customers/potential customers can be split


into smaller more homogenous groups by using the method.
 Segmenting industries – the same grouping principle can be applied
for industrial consumers.
 Segmenting markets – cities or regions with similar or common
traits can be grouped on the basis of climatic or socio-economic
conditions.
 Identifying new product opportunities – brands and products can
also be clustered.
STATISTICS ASSOCIATED WITH CLUSTER
ANALYSIS
 Measure the distance and looks for similarity.
 Hierarchical methods: A step-wise process that starts with the most
similar pair and formulates a tree-like structure composed of separate
clusters.

 Non-hierarchical methods: Cluster seeds or centers are the starting


points and one builds individual clusters around it based on some pre-
specified distance of the seeds.
 Agglomeration schedule. An agglomeration schedule gives information
on the objects or cases being combined at each stage of a hierarchical
clustering process.
 Cluster centroid. The cluster centroid is the mean values of the variables
for all the cases or objects in a particular cluster.
STATISTICS ASSOCIATED WITH CLUSTER
ANALYSIS
 Cluster centers. The cluster centers are the initial starting points in
nonhierarchical clustering. Clusters are built around these centers, or seeds.
 Cluster membership. Cluster membership indicates the cluster to which
each object or case belongs.
 Euclidean distance: Measure of similarity; Square root of sum of squared
differences between the values of each variable.
 Dendrogram. A tree graph, that is used to graphically present the cluster
results. Vertical lines represent clusters that are joined together. the
horizontal represents the inter-respondent distance. The figure is to be read
from left to right.
STATISTICS ASSOCIATED WITH CLUSTER
ANALYSIS
 Proximity Matrix A similarity/distance coefficient matrix is a
lower-triangle matrix containing pairwise distances between objects
or cases.
 Icicle diagram: A graphical method to demonstrate the composition
of the clusters. At any given stage the columns correspond to the
objects being clustered, and the rows correspond to the number of
clusters. An icicle diagram is read from bottom to top.
STEPS TO PERFORM CLUSTER
ANALYSIS
STEP 1: PROBLEM FORMULATION
 Clustering consumers based on their attitude toward shopping or
shopping style

 Data
STEP 2: CHOICE OF AN APPROPRIATE DISTANCE OR
SIMILARITY MEASURE
 Euclidean distance or its square. The Euclidean distance is the square
root of the sum of squared differences between the values for each
variable.
SIMPLE EXAMPLE
 Suppose a marketing researcher wishes to determine market segments in a
community based on patterns of loyalty to brands and stores. a small
sample of seven respondents is selected as a pilot test of how cluster
analysis is applied. Two measures of loyalty- V1(store loyalty) and
V2(brand loyalty)- were measured for each respondents on 0-10 scale.
HOW DO WE MEASURE SIMILARITY?
Proximity Matrix of Euclidean Distance Between Observations
Observations
Observation
A B C D E F G

A ---
B 3.162 ---
C 5.099 2.000 ---
D 5.099 2.828 2.000 ---
E 5.000 2.236 2.236 4.123 ---
F 6.403 3.606 3.000 5.000 1.414 ---
G 3.606 2.236 3.606 5.000 2.000 3.162 ---
STEP 3: SELECTION OF AN APPROPRIATE
CLUSTERING TECHNIQUE
 Hierarchical clustering starts with all the subjects in one cluster
and then dividing and subdividing them till all the subjects
occupy their own single-subject cluster. A step-wise process that
starts with the most similar pair and formulates a tree-like
structure composed of separate clusters

 Non-hierarchical clustering allows subjects to leave one cluster


and join another in the cluster forming process if by doing so
the overall clustering criterion will be improved.
A CLASSIFICATION OF CLUSTERING
PROCEDURES
Clustering Procedures

Hierarchical Nonhierarchical Other

Agglomerative Divisive Two-Step

Linkage Variance Centroid Sequential Parallel Optimizing


Methods Methods Methods Threshold Threshold Partitioning

Ward’s
Method

Single Complete Average


Linkage Linkage Linkage
 Ward Method - For each cluster, the means for all the variables are
computed. Then, for each object, the squared Euclidean distance to the
cluster means is calculated These distances are summed for all the objects.
At each stage, the two clusters with the smallest increase in the overall sum
of squares within cluster distances are combined.
STEP 3: DECIDE ON THE NUMBER OF CLUSTER
 Few guidelines to select the number of clusters:

 Basis of theoretical considerations or experience of an executive

 Agglomeration schedule and dendogram can also be used to determine


the required number of clusters in cluster analysis in terms of the distance
measurement at which the clusters are combined.

 While reading agglomeration schedule, a sudden jump appears. The stage


just before the sudden jump point indicates the stopping point for merging
of clusters.
 The relative sizes of the clusters should be meaningful
STEP 5: SUBSTANTIVE
INTERPRETATION AND PROFILING
THE CLUSTERS
 For this purpose, cluster centroid can be a useful tool.
NON-HIERARCHICAL CLUSTERING
 K-Means Clustering

 It involves minimizing the within-cluster variation or,


equivalently, maximizing the between-cluster
variation ( Magidson & Vermunt, 2002).
K-MEANS CLUSTERING ALGORITHM
 Choose the number of clusters
 Generate k-random point as cluster centers

 Assign each object to the nearest cluster centers

 Re-compute the new cluster centers

 Repeat the two previous steps until some convergence


criterion is met

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