Methods for Market Segmentation

In business analysis, market segmentation is a technique used to classify existing and potential customers based on their similarities, which lays the foundation for the company to maximize their profits. The market can be divided into five subgroups, including demographic factors, geographic factors, psychographic factors, customers’ benefit, and behavioral factors. In order to build appropriate market segmentation, several approaches could be applied in the marketing process. Specifically in this article, we will cover K-means clustering through partitions and Principal Component Analysis through color differentiation. For these two methods, each has its own strengths and weaknesses. The benefits of K-means clustering can be reflected by its simplicity, flexibility, and adaptivity in a large dataset, but its defects are also straightforward- manually choosing k values, dependent on the initial values and the chosen k value, and sensitive to outliers. PCA enables people to better visualize and reduce overfitting while it makes independent variables become less interpretable and loss some data.