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Business Problem :

Problem statement: The goal is to come up with a solution for the given questions:

  1. Can we categorize the customers in a particular segment based on their buying patterns? (Customer Segmentation)

  2. Can we predict which kind of items they will buy in future based on their segmentation? (Prediction)

** Input: ** We will be using e-commerce data that contains the list of purchases in 1 year for 4,000 customers.

** Output: ** The first goal is that we need to categorize our consumer base into appropriate customer segments. The second goal is we need to predict the purchases for the current year and the next year based on the customers' first purchase.


ML Problem Mapping.

  1. Given a dataset of transanctions (Online Retail dataset from UCI Machine Learning repository) get the segments i.e clusters/segments. (Find common patterns and group them)
  2. Predict what to display to what group of users

Additional Info.

What is Customer Segmentation ?

Customer segmentation is a process where we divide the consumer base of the company into subgroups. We need to generate the subgroups by using some specific characteristics so that the company sells more products with less marketing expenditure. Before moving forward, we need to understand the basics, for example, what do I mean by customer base? What do I mean by segment? How do we generate the consumer subgroup? What are the characteristics that we consider while we are segmenting the consumers? Let's answers these questions one by one.

Basically, the consumer base of any company consists of two types of consumers:

  1. Existing consumers

  2. Potential consumers

Generally, we need to categorize our consumer base into subgroups. These subgroups are called segments. We need to create the groups in such a way that each subgroup of customers has some shared characteristics. Example ->

Suppose a company is selling baby products. Then, it needs to come up with a consumer segment (consumer subgroup) that includes the consumers who want to buy the baby products. We can build the first segment (subgroup) with the help of a simple criterion. We will include consumers who have one baby in their family and bought a baby product in the last month. Now, the company launches a baby product that is too costly or premium. In that case, we can further divide the first subgroup into monthly income and socio-economic status. Based on these new criteria, we can generate the second subgroup of consumers. The company will target the consumers of the second subgroup for the costly and premium products, and for general products, the company will target consumers who are part of the first subgroup.

When we have different segments, we can design a customized marketing strategy as well as customized products that suit the customer of the particular segment. This segment-wise marketing will help the company sell more products with lower marketing expenses. Thus, the company will make more profit. This is the main reason why companies use customer segmentation analysis nowadays. Customer segmentation is used among other domain such as the retail domain, finance domain, and in customer relationship management (CRM)-based products.

How companies are making marketing strategies based on the customer segmentation analysis?

Companies are using the STP approach to make the marketing strategy firm.

What is STP ?

STP stands for Segmentation-Targeting-Positioning. In this approach, there are three stages. The points that we handle in each stage are explained as follows:

  1. Segmentation: In this stage, we create segments of our customer base using their profile characteristics as well as consider features provided in the preceding figure. Once the segmentation is firm, we move on to the next stage.

  2. Targeting: In this stage, marketing teams evaluate segments and try to understand which kind of product is suited to which particular segment(s). The team performs this exercise for each segment, and finally, the team designs customized products that will attract the customers of one or many segments. They will also select which product should be offered to which segment.

  3. Positioning: This is the last stage of the STP process. In this stage, companies study the market opportunity and what their product is offering to the customer. The marketing team should come up with a unique selling proposition. Here, the team also tries to understand how a particular segment perceives the products, brand, or service. This is a way for companies to determine how to best position their offering. The marketing and product teams of companies create a value proposition that clearly explains how their offering is better than any other competitors. Lastly, the companies start their campaign representing this value proposition in such a way that the consumer base will be happy about what they are getting.



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