Explain how cluster analysis can identify market segments.

Expert Solution

Cluster analysis is a tool that could be used by companies to analyze data that was classified and structured based on similarities and differences. In this method, a cluster is merely a similar group of data. We say that every single cluster is homogeneous, meaning the data is all alike. The clusters, however, are heterogeneous, or dissimilar compared to each other, which means that each cluster is distinct from other clusters.

Analysis of the clusters is used in various applications. It can be used for example to classify market segments, or competitive product sets, or asset classes whose prices co-move, or for geo-demographic segmentation, etc. In general, to develop (potentially more refined) segment-specific insights, it is often necessary to split our data into segments and carry out any subsequent analysis within each segment. That may be the case even if our data does not contain intuitively "natural" segments.

Practicality – It would be virtually impossible to use predetermined rules to reliably segment customers over several dimensionsHomogeneity – variances within each resulting category are very small in cluster analysis, while rule-based segmentation usually group customers who are actually very different from each other.

Rahul Sunny answered 8 months ago

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