Although market segmentation and cluster analysis are sometimes used interchangeably, there are differences between the processes of segmenting markets and clustering data.
Cluster analysis is basically a stats tool that allows marketers to group data based on the similarities and statistical connections that they share. This means that data can be categorized and organized depending on the similarities and differences that they share. A cluster refers to a group of data that’s similar. Each Individual groups of clusters is homogenous and share similar data but when compared to one another, groups are heterogeneous because each cluster is different from the other clusters. Companies interpret data based on market segmentation, which is a way of grouping customers depending on certain products or purchasing behaviors. Some factors that companies use to create groups are location, demographics, geographic or socio-economic attributes, and factors pertaining to particular products.
An article by Agilone, puts it simply: Segmenting is the process of putting customers into groups based on similarities, and clustering is the process of finding similarities in customers so that they can be grouped, and therefore segmented. They seem quite similar, but they are not quote the same.
When a company needs to understand which target audience to focus on, they turn to cluster analysis in order to segment their customers depending on the similarities and differences they share. Cluster analysis is not only helpful in routing the development of functioning market segments, but it also provides useful statistical measures of likely target markets. Marketers want to be able to effectively segment markets. By just grouping data together, marketers may not reach their desired outcome. In order to best understand cluster analysis, think of it as a tool that allows for developing market segments much in the same way you would use excel to calculate and analyze data. Once a company decides how to segment and group consumers, they can begin to come up with marketing strategies depending on the needs of each target group.
A marketer should first understand what outputs are best to use and understand what an effective market segment looks like and whether or not the brand can use it as a probably target market. Cluster analysis becomes a bridge that allows marketers to better understand consumer data and therefore create strong market segments.