The world of market research allows companies to become familiar with a variety of different terms and tools that can help them make critical decisions in regards to product development, marketing, and strategy. Two of the notable are segmentation and cluster analysis.

The following handy guide will help you understand segmentation and cluster analysis, why they’re used so prominently in market research, and how you can use them effectively to answer your retail organization’s most critical questions.

What is Segmentation?

“Segmentation” is a marketing term used primarily in research. It’s used to define how a brand divides its customers or target audiences into smaller market segments. This is usually done by grouping them based on characteristics such as demographics, income, psychographics or behavior, and values. These smaller groups, or “segments” help a band strategize ways in which they can effectively market or advertise to different customers in order to produce the most favorable results.

In a nutshell, market segmentation is a way to divide your target market into more specific and defined groups. It allows you to approach each group with a better understanding of who they are, so you can use this data to create more effective campaigns.

In a retail environment, segmentation can be used for:

  • Target markets – what segments should I aim my products at? Do certain segments have needs that certain products provide? What are those segments? And what are those needs?
  • Product positioning – how to create a brand identity or image in order to appeal to their segment or target market.
  • Product development – how to tailor products to meet the needs of the segment or target market.

What is Cluster Analysis?

Cluster analysis is a research tool used to help you segment your target market. It consists of grouping a set of data objects into clusters, which is most helpful in identifying data points that are similar to one another within the same cluster, while also unearthing how they’re dissimilar to the data points objects in other clusters. 

In regards to market research, a cluster analysis is typically used as a stand-alone tool to get insight into the market segmentation. It can help marketers define distinct niches in their customer base, so they can develop targeted marketing programs for optimal results.

What Are the Benefits

When used in tandem, segmentation and cluster analysis are effective tools at unearthing insight into your target market and customer base that allow you to unearth key differentiators. These key differentiators can allow you to tailor marketing campaigns, strategies, and other high-level decisions to effectively cater to each segment and optimize resources while driving your bottom line.

That’s not all. 

These two tools also lay the foundation for further research and data, particularly for when conducting a SWOT analysis. Unearthing your market segments via a cluster analysis allows you to determine the strengths, weaknesses, opportunities, and threats of each customer group.

How They Can Be Used in Retail Environments

Let’s say you’re an online clothing retailer. You have analytics regarding your daily site traffic the data of past customers. 

You have a social media ad that does okay luring in your target audience as you know it, but you feel as though the campaign isn’t optimized for all members of your target customer base. 

Using segmentation and cluster analysis, you discover a few different things:

  • The customers who purchase items from your swimsuit line are predominantly female, live in rural areas, and enjoy outdoor activities.
  • The customers who purchase items from your jewelry line are predominantly female, live in metropolitan areas, have a college degree, and have an income over the national average.
  • The customers for your accessories line, hats, belts, bags, etc. are predominantly high-school ages males in suburban areas who like skateboarding, biking, and surfing.

The segmentation and cluster analysis has allowed you to define three distinct groups of customers. Now, when you create social media for your products, you can effectively target these different groups in order to optimize your ad spend.