Cluster Analysis Market Segmentation: Definition & Examples

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  • 0:03 Foundation of Cluster Analysis
  • 0:30 Basic Definitions
  • 1:15 Combining the Two
  • 1:47 Example
  • 3:27 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

Companies often want to see how well they are doing with their products and their customers, and sometimes they even want to look at the segmentation of the markets in which they participate. In this lesson, we'll learn how a company can do both.

Foundation of Cluster Analysis

Companies always want to know more about their customers. They may want to know who shops at their stores, why people shop at their stores, or what products and services customers are looking for. Knowing how to not only gather the data, but also how to interpret it, can help a company make necessary changes and decisions. In this lesson, we'll follow Brad, a furniture store owner, as he walks through a cluster analysis to make decisions about his business.

Basic Definitions

Let's begin with some basic definitions. Cluster analysis is a method businesses can use to analyze data that has been categorized and organized based on similarities and differences. In this system, a cluster is just a group of data that's similar. We say that each individual cluster is homogeneous, which means that its data is all alike. However, when compared to one another, the clusters are heterogeneous, or dissimilar, which means that each cluster is different from other clusters.

Many companies analyze data based on market segmentation, which is a method of grouping customers based on specific products or behaviors for purchasing products. Companies often use groupings like location or demographics, or they can organize by factors that are specific to their products.

Combining the Two

So how are cluster analysis and market segmentation related? Why are they used together?

Well, when a company wants to know which individuals to target, they can use cluster analysis to segment consumers based on similarities and dissimilarities. Once the company determines which type of consumer fits into each group, it can develop marketing strategies according to the needs of its target groups. Cluster analysis also allows a company to segment its market based on the products it carries. This can help a company understand who its competition is and identify any new market opportunities.

Example

Let's apply these concepts to an example with our friend Brad, who owns a large furniture store. Brad feels that, in addition to his normal customers, there are other potential customers that he has yet to reach. He believes that if he performs a cluster analysis, he will be able to understand the market segments that he is missing so he can better target those new potential customers. Here are the steps he will follow:

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