Segmentation

Segmentation, simply put, means grouping similar entities together. The entities of each group are similar to each other, that is, "the groups are homogenous," meaning the entities have similar properties. Before going further, we need to understand two key aspects here – entities and properties.

What entities can be segmented? You can segment customers, products, offers, vehicles, fruits, animals, countries, or even stars. If you can express, through data, the properties of the entity, you can compare that entity with other entities and segment it. In this chapter, we will focus on customer segmentation – that is, grouping and segmenting present/potential customers, an exercise that has tremendous utility in marketing.

Coming to the second key aspect, what properties are we talking about? We are talking about properties relevant to the grouping exercise. Say you are trying to group customers based on their purchase frequency of a product...