What is Cluster Analysis in Market Segmentation?

Market segmentation is imperative for every brand in today’s competitive landscape. Although entrepreneurs can use several techniques to segment the market, one successful method is cluster analysis. But are you aware of it, or is this a mystery locked away?

If you are new to the concept and are a data-driven entrepreneur, cluster analysis can help you differentiate your ideal customers. Others may think it is too complicated without exploring how they can use this technique to gain business insights.

This article will briefly clarify cluster analysis as it applies to market segmentation so you can assess its relevance for your business.

Let us review!

What is Cluster Analysis?

“Cluster analysis in marketing is called market segmentation; consumers are clustered according to psychographic, demographic, and purchasing behavior variables,” according to Encyclopedia.com.

That means grouping your target audience into segments to understand who they are through indicators. Cluster analysis will provide you with meaningful data to help you get the right message across to the right group.

How is Cluster Analysis Important?

Cluster analysis will help you to classify customers with common behavior and dissimilarities across different segments and clusters. You will quickly identify who you want to engage with and who is in each cluster segment. 

To evaluate the clusters, you can use statistical methods, such as SPSS. Some methods will incur a cost. But Excel is a powerful tool you can use to evaluate up to 5 segments at no cost.  

Now, to make the most of the cluster analysis, you must understand your offer and the marketing mix. That will help you to select the right number of clusters, as there can be many, in addition to having pertinent information.  

When carrying out this technique, having an approved marketing budget is important and will direct you in selecting no more segments than your budget can afford.

Accordingly, cluster analysis is necessary for brands to gain actionable insights to compete in the marketplace.

How is Market Segmentation Important?

Since customers’ needs and preferences are different, it is best to segment the market based on behavioral similarities. Research shows that “Market segmentation is the science of dividing an overall market into customer subsets or segments, whose in segment sharing similar characteristics and needs.”

To effectively segment your audience, it is best to have a mixture of motivational and descriptive variables. When behaviors are clustered based on variables, such as loyalty or purchase frequency, you can identify different characteristics according to how they respond to your offer.

So, rather than using a heterogeneous approach — serving the market with the same offer, it is necessary to group the market into homogeneous groups, that is, similar group behavior. Importantly, your segments should react differently to the marketing mix. 

Market segmentation will therefore help you to position your offer, so you can cogently fulfill each segment’s needs with tremendous value and stand out from the rivalry.

Cluster Analysis in Market Segmentation 

For clarity, cluster analysis helps you identify differences in each group using the variables.  This enables you to easily differentiate the segments and clusters in the market. It distinguishes the homogeneous and heterogeneous groups. Further it will guide you to purposefully market the right message to the right audience.

Conclusion

For market segmentation to be conceivable, the behavior in each segment needs to be similar. The clusters will help you to make a distinction between the segments. Once you have identified your niche group of customers through cluster analysis, you can efficiently target these groups based on your approved marketing budget.

Now, are you ready to dive deeper into cluster analysis?

It is essential to learn about the sum of squared error (SSE) and how it can be interpreted to help you select the best number of segments for your cluster solution and marketing goals. The lower the overall SSE for the solution, the more similarities you will find.

Let us now examine Sum of Squared Error (SSE).

Please share your thoughts and comments.