01 Cluster Analysis
Before performing cluster analysis, we must ensure that the data is standardised, especially if the The model uses a dependent and
Cluster analysis is a handy
method in the data science toolkit. Step 1: Select variables that are relevant to the market research problem on the basis of which
"Cluster analysis is a group of
multivariate techniques whose
needed to
primary purpose is to group
to pick a certain
objects (entities) based on their Hierarchical or Combination.
the most
characteristics" (S. Pour
Mohammad, 2022, slide 6). It is a
form of exploratory data analysis
(EDA) where observations are
divided into meaningful groups
that share common characteristics
(features) (Gorenshteyn et al.,
n.d., Chapter 1). It identifies
clusters with similar or identical
properties. These commonalities
can guide various business
decisions; for example,
organisations can use them to
moderate and target unique
customer segments through
segmentation analyses of
consumers.
02 Aims:
Cluster analysis aims to maximise
homogeneity within clusters
(reduce dissimilarity) whilst
maximising heterogeneity
between any 2 clusters.
Dissimilarity is given by the
distance between clusters
Here, Distance= 1 - Similarity.
The distance measured most
commonly is the Euclidean
distance, the length of the
hypotenuse of the Right triangle
formed between two points in a
plane. Done using dist() in R.
Distance is directly proportional to # Use clustering algorith hclust() to form clusters using different methods
dissimilarity - a more significant
distance between two
observations indicates a greater
dissimilarity between them and
vice versa.
03 Steps to conduct Cluster Analysis : 07 How it Works :
variables are on different measurement scales. this can be done with scale() function in R. an independent variable to estimate:
clusters are determined. 1. Each attribute's
Step 2: Identify a suitable similarity measure to assess how different the objects are. weight(coefficients)
Step 3: Select the appropriate clustering method – Hierarchical (Agglomerative/ Divisive), Non- cause customers
product. This reflects
Step 4: Determine an adequate number of clusters and visualise using plots or dendrograms such critical influences on customer
that clusters do not overlap. choice likelihood
Step 5: Examine cluster centroids and interpret cluster profiles.
2. Predictions: Using only product
Step 6: Test validity by performing cluster analysis with different distance measures. attributes and weights in the
Formation of clusters: Starting with each observation as its own "cluster", the two most model, we predict the most
similar(closest) observations are grouped together. probable choices by a new set of
customers. Then the firm can
04 Types of Clustering Methods 06 Choice Models segment and target customers
according to their choice likelihood
They can be boradly classified into 3
types: A Choice Model is a
mathematical/statistical model that 3. Simulated market share of a
Non- predicts how a firm's marketing product category. The model adds
Hierarchical Combination interventions, customer traits, and/or up product choices by all
Hierarchical
e.g k-means Can be further classified as environmental circumstances influence the customers faced with all products.
likelihood of an observed consumer choice The information can help
Marketing or response. Choice models can be used managers plan their marketing
Toolkit to make crucial marketing decisions by efforts.
Agglomerative Devisive predicting what... 08 Choice Modeling in R
Most popular Agglomerative approaches are: consumers are likely to choose based on the Choice modelling in R is done
features of the options available. It is also helpful using a type of regression analysis
Complete - Average - in determining the most important factors
Single - linkage called Multinomial Regression
linkage linkage influencing a customer's choice likelihood and analysis which is used when the
segment and target customers based on those exploratory variable has more than
Centroid - Method similarities. It can simulate the potential market two nominal categories. Binomial
share for various products based on customer regression is used if there are
choice. precisely two categories.
05 Execution in R - Cluster Analysis # Load the data
# Explore data using names(),
# Import data
# Explore data using functions like str(), names(), summary(), plot() etc. summary() or head() functions
# Cluster analysis can only be conducted on quantitative data. therefore, data must be # Optional : Visualise data using
graphs and plots
normalised first.
# Standardise dataset using scale(). # Call the glm.fit() function and
# Calculate distance(dissimilarity) using dist() function to get the proximity matrix pass your R formula as the first
argument
# Plot clusters on graphs using plot() to visualise clusters in a dendrogram. # Pass argument
# Use cutree() function to split into adequate number of clusters. family="binomial"
# Number of clusters can be verified using a scree plot. # Summarize data with
#Non-hierarchical clustering is conducted using kmeans() function on a normalised dataset. summary() function.