Cluster Analysis is the analytical equivalent of market segmentation analysis. The major part of a cluster analysis is to segment respondents based on their responses to a cluster variate ( a group of variables on which the clusters need to be formed). In most cluster analysis, the variate on which cluster analysis is performed is a set of questions designed to understand customer attitudes, opinions and lifestyles. The objective of the cluster analysis is to form groups of respondents which are homogeneous within the group with regards to the cluster variate and heterogeneous across groups.
The resulting segments are profiled on the individual variables to describe their characteristics in terms of attitudes, ideas, opinions, lifestyles or behavioral characteristics. They are then explored for systematic demographic differences. Demographic description is important if there is need to reach these segments physically through marketing material, promotions etc. However, the mere extraction of segments, if stable, is of immense value in designing marketing communications messages. For example, a health food manufacturer may reach out to a health conscious segment that is also high in their attendance to self-image as trendy and modern using appropriate advertising messages that appeal to these values.
Market Segmentation analysis is as much an art as a science and judgment exercised in determining the cluster variate, the number of clusters to be extracted, the detection of outlying clusters as outliers and not actual occurring small segments in the population etc. play an important part in the final interpretation and results. Where demographic distinction is present, external population data may be brought in to estimate overall size of segment in the population, growth rates in segment size and buying power and thus the segmentation provides a map for future marketing strategy aimed at the target segment.