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The process of market segmentation is one in which a firm breaks its market into segments and markets its products to each of those segments in different ways. In order to do this, the firm must first determine what segments exist in its market. This is where cluster analysis comes in.
Cluster analysis is a statistical technique that is used to determine what sort of clusters exist in a set of data. It tries to determine if there are groups within a population with members who are similar to one another in important ways and whose members are different from those of other groups.
A firm will use cluster analysis to determine what segments exist in its market. It can then practice market segmentation and market its products differently to the members of the various groups.
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