Cluster Analysis

Session 9
Dr. Plavini Punyatoya
 Bases of Segmentation
For Consumer Markets:

1 2
Consumer Consumer
Characteristics Responses

Psychographics: Behavioral: occasions,

Geographic: Demographics:
Lifestyle or benefits, attitudes,
Region, City size, Age, family size,
Personality, usage rate, loyalty
Density,Climate, gender, income,
thought pattern status
Country, social class
 Bases of Segmentation
For business market:
 Demographic
 Company-related Variables
 Purchasing Approaches
 Situational Factors
 Personal Characteristics
Cluster Analysis
 It is used to classify objects into relatively homogeneous groups based
on the set of variables considered.

 Groups are called ‘clusters’. A cluster is a segment of potential buyers ,

who have the propensity to buy the same kind of product within a
product category.

 CA is also called ‘classification analysis’ & ‘numerical taxonomy’.

Cluster Analysis: Use
 2-dimensions(2-D): you can present in graphs/scatter-plot.

 But what about Multi-dimensions(multi-D)?

 So, CA is an important and a widely used tool/method in marketing.

 Use:
1.Market segmentation: based on the benefits consumers sought for Pr.
Purchase
2.Understanding buyer behaviour: segment buyers depending on choice
criteria
3.Identifying new product opportunity: cluster brands & products.
Competing brands in 1 cluster. Firms can offer new product looking at
competitor offering
4.Test market selection: Group cities to test various marketing strategies
Steps in CA
 Formulate the problem

 Collect the data

 Select a distance measure

 Select clustering procedure

 Form clusters based on closeness of cases

 Interpret result & name clusters

 Euclidean distance
 Euclidean distance between point p & q =

n
d ( p, q )   (
i 1
p  q ) 2

 Ed=square root of the sum of the squared differences in values for

each variable

 Most widely used distance measure

Clustering Procedure
1.Hierarchical clustering

2.Nonhierarchical clustering/K-means clustering

3.Twostep clustering
 Hierarchical clustering
 Characterized by development of a hierarchy or tree-like structure

 A good starting point

 2 Types
(a) Agglomerative clustering: start with 1 object in a separate cluster, then
build bigger clusters. More use in marketing research
(b)Divisive clustering: start from all objects in one giant cluster and then
break down

 Agglomerative clustering consist of

(i) Linkage method: 3 types
Single: minimum distance between objects (nearest neighbour rule)
Complete: maximum distance between objects (furthest neighbour rule)
Average: average distance between objects
 Hierarchical clustering cntd.
 Agglomerative clustering consist of
(ii) Variance method/Ward’s method: minimize within cluster variance
Sq Euclidean distance to cluster means is minimized

(iii) Centroid method: generate clusters based on maximum distance

between their centroid

 In Hierarchical clustering: no. of clusters is not pre-specified. We use

judgment to identify correct no. of clusters.
Nonhierarchical clustering/K-means clustering
 No. of clusters is pre-specified

 Run a Hier. 1st, then go for K-means

 Hier. & K-means both use Euclidean distance as a measure. But K-means
is iterative & so is more stable.

 3 types
(a) Sequential threshold: a cluster center selected and all objects within a
prescribed threshold value from centre are grouped together. Then
new centre created
(b) Parallel threshold: several cluster centre selected simultaneously &
objects within a prescribed threshold value grouped with nearest
centre
(c) Optimising Partitioning: Allows later reassignment of objects to
clusters to optimize an overall criterion
Case 1
Case 2
Thank You