Segment Customers For Marketing Using Cluster Analysis

Marketing managers are constantly working to differentiate their product offerings and marketing efforts in order to appeal to different segments within their customer population. This type of customization, called segmentation marketing, allows a company to extract additional revenues from customers whose needs may not have been met by the firm�s previous offerings.

Marketers have two different types of data to use to segment their customer base. The first type relies on observed choices, where a customer indicates a preference by making a purchase decision. Results are then combined with known information about the customer, including demographics such as age, gender, and income level, as well as preferences indicated in past purchase behavior. But for many businesses, particularly those in the business-to-business arena, it is often extremely difficult if not impossible to collect such information.

The second type of data that marketers can use to segment their customers relies on stated choices, such as responses to a customer satisfaction questionnaire.�This type often presents a more practical and affordable solution for businesses to tailor their marketing mix to customer segments they were not previously aware existed.

Cluster analysis is a statistical technique that researchers use to classify a set of observations into mutually exclusive groups. Advanced statistical analysis software allows marketing researchers to compare respondents� answers to a questionnaire, and put them into groups, where members share properties in common. These �islands� contain actual or potential customers who can be expected to respond in a similar way to a product or a service offering.

With the information gained from cluster analysis, companies can tweak their marketing messages, customize sales tactics, modify product offerings, and better address the underlying value propositions that are most likely to appeal to a given customer set.

Cluster Analysis in Action

A well-known company that manufactures equipment used in power plants decided to conduct a customer satisfaction survey. One of the goals of this study was to group respondents into segments where they can be best targeted with a unique marketing message. To create these segments, the company grouped respondents according to their general attitudes towards the company, as well as their receptiveness towards various marketing approaches.

The results of the cluster analysis allowed the company to group their population into four segments:

  • One percent of the customer base was found to be extremely unlikely to ever do business with the sponsoring company ever again. This group is labeled �never agains� in the graph below, and will not be actively targeted with future marketing efforts.

  • The company labeled the next group �hostages� because they were reluctant customers, only purchasing product because a particular offering met their specific needs. The companies were mostly locked into a long-term contract for a specific product line, and were not very satisfied overall.

  • The third segment of customers was given the name �leery� because their common attribute was a certain discomfort in doing business with the sponsoring company. This group consisted of smaller customers within a particular niche of the power plant industry who had mediocre overall satisfaction with the sponsoring company.

  • The largest customer segment, or �acolytes,� contained the firm�s core customers who had been targeted with the company�s traditional marketing message. This group showed the highest overall brand loyalty and satisfaction.

Based on the results of the cluster analysis, the sponsoring company realized that its marketing message was not being received favorably by about a third of its customers. To address the concerns of the �hostage� segment, the company overhauled the messaging behind the product line that segment members had in common, and began de-emphasizing long-term contracts. For the �leery� segment, the company decided to restructure its sales force and product offerings to cater to the needs of smaller customers.

The benefits of these reforms will take time to materialize, but the company can be confident that through its research it has better addressed the needs of its customers.

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