Describe the process of using cluster analysis for market segmentation.
Instruction: Explain how cluster analysis can be applied to segment a market and the steps involved in this process.
Updated
Official answer
Start with the intended action and unit, such as grouping customer accounts by permitted purchase behavior. Define a fixed observation window and choose relevant features; collecting every available personal attribute is unnecessary and can create privacy or fairness problems.
Check missingness and unusual records, then encode and scale features as appropriate to the distance. Keep the fitted preprocessing consistent. K-means suits some compact numeric clusters; mixed data or irregular densities may require different representations and methods.
Compare plausible segment counts using separation, stability under resampling and substantive interpretability. Large silhouette alone does not establish useful market segments. Profile clusters with uncertainty, assess sensitivity to feature choices, and avoid turning descriptive differences into stereotypes or causal claims.
Define how new accounts are assigned and when segments are refreshed. Test the proposed marketing action prospectively against a suitable control, with consent and operational constraints. Clustering identifies patterns; it does not establish that targeting those patterns will improve outcomes.