What Is the Clustering Technique Applied to Segmenting Markets?

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The clustering technique is a statistical method used to divide a sales market. The resulting groups are called clusters or segments. This research method is used in many fields, but in marketing, it allows companies to understand customers' needs better.

Clustering

Clustering is a technique used to identify different segments in a market. Each cluster represents a group sharing some kind of similarity. The purpose of clustering is to identify specific elements, perceptions or preferences in a market. The findings may help a company design marketing campaigns to appeal to specific market segments.

Techniques

There are several ways to divide a market into clusters. Although there are many different statistical methods used, they all fall under the broad headings of either hierarchical or "K-means" clustering. Hierarchical clustering involves grouping data by starting with many clusters and grouping them into a single cluster or by starting with a single cluster and breaking it down into multiple clusters. "K-means" clustering identifies cluster centers in a data set and calculates clusters around these center points.

Example

The process of applying a clustering technique to a market involves using specific math formulas to organize data, but the concept behind the process is easy to understand. If a motorcycle company wants to understand its customers' demands better, it could apply a clustering technique to discover specific consumer preferences. The company might find three distinct clusters in the motorcycle market: those who buy motorcycles for long-distance road trips, those who buy for the image a motorcycle conveys and those who buy based on performance.

Uses

Once a company performs a clustering technique, it can use the results to target its market more efficiently. If the motorcycle company finds three segments in its market, it may design advertisements emphasizing the freedom of the open road, the "cool" image achieved through owning a motorcycle or the performance advantages provided by its motorcycles compared with those of its competitors. Each advertising campaign targets a particular segment of the motorcycle market.

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