A survey of the challenges and pitfalls of cluster analysis application in market segmentation

Michael N. Tuma, Reinhold Decker and Sören W. Scholz

Bielefeld University

Introduction

Many people believe that market segmentation is the key strategic concept in marketing today. It has been understood as the attempt to distinguish ‘homogeneous groups of customers who can be targeted in the same manner because they have similar needs and preferences’ (Wedel & Kamakura 2002, p. 181). A good segmentation solution will result in segment members that are as similar as possible within the segment, and as dissimilar as possible between the segments. Good market segmentations contribute to a full understanding of the market, the ability to predict behaviour accurately, an increased likelihood of detecting and exploiting new market opportunities, and the identification of the groups worth pursuing. Marketers generally agree that if segmentation is properly applied, it would guide companies in tailoring their product and service offerings to the groups most likely to purchase them.