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Email: tom.brijs@luc.ac.be
Todays retail environment is characterized by increased competition: retailers are fighting over
the consumers share of wallet and satisfying the diverse wants and needs of the consumer
forces the retailer to offer a wide variety of products in an environment where shelfspace is
limited and there is a pressure to stock new products every day. This is a continuous balancing
act and the extent to which a retailer understands and is able to satisfy the wants and needs of
the consumer better than his competitors will ultimately determine his success. It is in this
context that most supermarket retailers have quickly understood the need to fathom consumer
behaviour. Since the late 70s, this has resulted in large investments in retail information
systems to collect shoppers data. Today, most retailers possess electronic scanner systems
and offer customers frequent shopper programs in order to collect customer data to better
understand consumer shopping behaviour.
However, according to Corstjens [5] the FMCG retailer is highly limited in his ability to
segment the market and to focus on the most promising segments. Indeed, the typical
attraction area of the retail store is too small to afford neglecting a subgroup within the stores
attraction area. In fact, a supermarket should appeal to as many of the heterogeneous public
in its attraction area as possible.
Despite this limitation, the availability of huge amounts of transactional data about
customers purchases offers retailers some excellent opportunities for in-store segmentation.
Indeed, knowledge about how different customers tend to use the store enables a more
customized treatment of these customers, for instance in terms of targeted promotions or
services. In fact, the retailer involved in this study is currently evaluating a segmentation
strategy based on customer purchase behaviour in the store. The idea is that segmentation
places customers in groups on the basis of their similarity on a chosen set of variables.
Afterwards, members of different segments will be treated differently in marketing strategies to
achieve different marketing objectives with greater overall effect.
In this paper, we will propose a behaviour-based customer segmentation methodology.
More specifically, we will use the purchase history of supermarket shoppers to discover groups
of shoppers who show similar purchase rates in a number of product categories by means of
latent class cluster modelling. Segmentation based on shopping data has the advantage of
grouping customers having similar shopping patterns. Information of this kind can be useful for
retailers to target customers with more personalized marketing actions.
The remainder of the paper is organized as follows. Section 2 provides an overview of
popular bases for segmentation and justifies the use of behavioural based segmentation in this
paper. In section 3 the technique of latent class cluster models will be introduced and a
specific model for clustering customers based on their purchase rates in different product
categories will be developed. Subsequently, section 4 will illustrate the empirical results of the
developed latent class clustering model on sales transaction data that were obtained from a
major supermarket in Belgium. Finally, section 5 is reserved for conclusions and limitations of
this research.
The measures most frequently used for segmentation are typically drawn from either one or a
combination of the following: (geo-)demographics, behaviour, benefits, and psychographics
[21]. However, the concrete choice for one or a combination of these segmentation bases
largely depends on the business question under study [28].
In latent class (LC) cluster models [19, 24, 25, 26], the observed data is assumed to arise from
a number of apriori unknown segments or latent classes that are mixed in unknown
proportions. The objective of LC cluster models is then to unmix the observations and to
estimate the parameters of the underlying density distributions within each segment. The idea
is that observations (in our case supermarket shoppers) belonging to the same class are similar
with respect to the observed variables in the sense that their observed values are assumed to
come from the same density distributions, whose parameters are unknown quantities to be
estimated. The density distribution is used to estimate the probability of the observed values of
the segmentation variable(s), conditional on knowing the latent class from which those values
were drawn. Therefore, it is critical to choose an appropriate density distribution depending on
the type of variables being analysed. Some popular distributions include the normal distribution
for continuous variables, the multinomial logit or multinomial probit for multichotomous
variables, and the Poisson distribution for frequency data.
S S
(yn|) =
s
=1
s s(yn|s) with
s
=1
s = 1 and s 0 for s=1, , S (1)
From the above formulation, it can be observed that the unconditional distribution of yn is equal
to the product of the conditional probability given S times the probability of S and that
expression summed over all values of S. denotes the vector of all unknown parameters
associated with the specific form of the density distribution being chosen, which in this case, is
the collection of s, i.e. the segment-specific average purchase rates for the product category
under consideration, and the segment sizes 1, , S.
S K
(ynk|) =
s =1
s
k
=1
s(ynk|ks) with k=1, , K (product categories) (2)
The assumption of conditional independence implies that we assume that the observed
purchase rates for the different product categories are mutually independent within each latent
class, such that the joint densities can be expressed in terms of the product of the independent
marginal densities. This assumption may be too restrictive. However, allowing for correlations
between the observations would lead to the specification of a multivariate Poisson distribution
and would make the estimation of the LC cluster model much more complex. Indeed, clusters
would not only differ with respect to their segment-specific average purchase rates for each
product category, but also with respect to the correlations between the observed variables.
This leads to a rapid increase in the number of parameters to be estimated, specifically the
number of free parameters in the variance-covariance matrices, and makes the estimation of
this kind of LC cluster models computationally very complex.
N
L( ; ynk) =
n
=1
(ynk|) (3)
The likelihood (3) is thus expressed as the product over the densities of the N supermarket
shoppers, for which the observation vectors are assumed to be mutually independent. In other
words, the objective is to find the optimal values for the parameter vector, say opt , such that
the observations ynk are more likely to have come from (ynk|opt) than from (ynk|) for any
other value of .
In order to maximize (3) most software tools either use Newton-Raphson [18] or
expectation maximization (EM) [7], or a combination of both. Although the Newton-Raphson
algorithm requires fewer iterations compared with the EM algorithm, convergence to a local
optimum is not guaranteed [19]. Furthermore, because of its computational simplicity, the EM
algorithm is the most widely used [24]. The EM-algorithm will not be discussed in detail in this
paper, but it is an interactive algorithm that sequentially improves upon sets of starting values
of the parameters, and enables simultaneous estimation of all model parameters [26], in our
case both the average product category specific purchase rates for each segment, and the
respective segment sizes. More details about the EM computation can be found in [7, 19, 26].
Once an estimate for the optimal value of has been found, the estimates of the posterior
probability pns , i.e. the posterior probability for subject n to belong to latent class s, can be
obtained for each observation vector ynk according to Bayes rule. Indeed, after estimation we
know the density distribution s(yn|s) for each product category k within each latent class s and
we know the segment size s of each latent class such that we can calculate the posterior
probability as
K S K
Pns = s
k=1
s(ynk|ks) /
s =1
s
k
=1
s(ynk|ks) (4)
The problem however with EM-estimation is that the procedure may converge to a local but not
a global optimum. The best way to prevent a local solution is to use multiple sets of starting
values for the EM-algorithm.
Information criteria to evaluate the quality of a cluster solution include BIC (Bayes
information criterion), AIC (Akaike information criterion) and CAIC (Consistent AIC, which
penalizes for sample size as well as model complexity) [2]. These are goodness of fit measures
which take into account model parsimony (that is, it penalizes for number of parameters in
relation to maximum possible number of parameters). The lower the BIC, AIC or CAIC values,
the better the model in comparison with another. Other methods for evaluating LC cluster
models are based on the separation of the clusters and measure how well the segmentation
variables are able to predict class membership. The entropy statistic is such a statistic and will
be used in this paper.
4 Empirical work
The multivariate latent class cluster model, identified in (2), was fitted on purchase frequency
data on the 30 most frequently sold product categories for a random sample of 1962
households of a Belgian supermarket store. Hereto, individual product purchase frequency data
were collected over a period of 17 weeks and aggregated into product categories according to a
product taxonomy provided by the retailer. As such, we obtain a vector of purchase rates of
length 30 for each subject, representing the total number of times a supermarket shopper has
purchased within each product category.
330000,00
325000,00
320000,00
315000,00
310000,00
305000,00
300000,00
295000,00
Statistics
290000,00
285000,00
280000,00
275000,00
270000,00
265000,00
260000,00
255000,00
250000,00
2 3 4 5 6 7 8 9 10 11 12 13 14 15
Class es
GLIMMIX 2.0 ProGAMMA
Similar conclusions can be drawn from examining the evolution of the likelihood for the
different cluster solutions against the EM-iterations, as illustrated by figure 2. This figure
illustrates that the maximum likelihood is obtained for 13 latent classes or higher, with only
slight differences in the likelihood after 20 iterations.
p lo t of th e like lih oo d ag a in st E M -ite ra tio n s Clas s e s : 2
Clas s e s : 3
Clas s e s : 4
- 1 2 4 0 0 0 ,0 0 Clas s e s : 5
- 1 2 6 0 0 0 ,0 0 Clas s e s : 6
- 1 2 8 0 0 0 ,0 0 Clas s e s : 7
- 1 3 0 0 0 0 ,0 0 Clas s e s : 8
Clas s e s : 9
- 1 3 2 0 0 0 ,0 0
Clas s e s : 10
- 1 3 4 0 0 0 ,0 0 Clas s e s : 11
- 1 3 6 0 0 0 ,0 0 Clas s e s : 12
- 1 3 8 0 0 0 ,0 0 Clas s e s : 13
- 1 4 0 0 0 0 ,0 0 Clas s e s : 14
- 1 4 2 0 0 0 ,0 0 Clas s e s : 15
- 1 4 4 0 0 0 ,0 0
- 1 4 6 0 0 0 ,0 0
- 1 4 8 0 0 0 ,0 0
- 1 5 0 0 0 0 ,0 0
Function
- 1 5 2 0 0 0 ,0 0
- 1 5 4 0 0 0 ,0 0
- 1 5 6 0 0 0 ,0 0
- 1 5 8 0 0 0 ,0 0
- 1 6 0 0 0 0 ,0 0
- 1 6 2 0 0 0 ,0 0
- 1 6 4 0 0 0 ,0 0
- 1 6 6 0 0 0 ,0 0
- 1 6 8 0 0 0 ,0 0
- 1 7 0 0 0 0 ,0 0
- 1 7 2 0 0 0 ,0 0
- 1 7 4 0 0 0 ,0 0
- 1 7 6 0 0 0 ,0 0
- 1 7 8 0 0 0 ,0 0
- 1 8 0 0 0 0 ,0 0
- 1 8 2 0 0 0 ,0 0
- 1 8 4 0 0 0 ,0 0
1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 16 1 7 1 8 1 9 2 0 2 1 2 2 2 3 2 4 2 5 2 6 2 7 28 2 9 3 0 3 1 3 2 3 3 3 4 3 5 3 6 3 7 3 8 3 9 4 0 4 1 4 2 4 3 4 4 4 5 4 6
Ite r a tio n
G L IMMIX 2 .0 P ro G AMMA
Given the range of latent classes within which the optimal segmentation can be found (i.e. 13
to 15 classes), the second phase consists of rerunning the experiments for this range of latent
classes, but with a larger number of random starting values. Indeed, the first stage consisted
of a rough approximation of the neighbourhood where the optimal segmentation can be found.
The second stage then consists of a more careful search of this neighbourhood (i.e. fine-tuning)
by investigating each cluster solution more in detail.
Therefore, experiments for 12 to 15 latent classes with different sets of random starting
values were carried out to identify the most optimal segmentation solution. Table 1 shows the
likelihood values, the entropy statistic, the R and the CAIC statistic for each cluster solution for
3 different restarts with random starting values of the EM-algorithm.
Table 1 shows that the optimal clustering can be found for 15 latent classes, although the
average CAIC and likelihood values for 14 and 15 segments across multiple runs of the EM-
algorithm are not significantly different. In general, the separation between the clusters is
excellent, as shown by the entropy statistic.
4.2 Model description
Given the optimal cluster solution of 15 latent classes, we are interested in the differences
between the clusters, both in terms of their size and in terms of the average purchase rates for
the product categories being included in the analysis. Table 2 below shows the size of the
different clusters.
From table 2 it can be observed that three clusters (i.e. cluster 3, 4 and 11) add up for more
than 57 per cent of the instances, whereas most of the clusters have sizes between three and
eight per cent of the total number of instances. Two clusters contain an extremely low
percentage of instances, namely cluster 10 and cluster 14, with respectively 0.76 per cent and
0.05 per cent of the total number of instances. Detailed analysis of cluster 14 revealed that it
contained just one instance with extremely high purchase rates in most of the product
categories compared with the overall sample average purchase rates. A closer look at the
loyalty card data about this instance in turn revealed that it represents a large household with 5
children and 2 parents, which may explain its extremely high purchase rates. Cluster 10
contains 15 instances in total and is separated as a result of its extremely high purchase rates
of Dutch cheese. A closer look revealed an extremely high purchase rate of Dutch cheese and
quark by an independent/tradesman and by one large family with 4 children. It is likely that
the tradesman runs a business where he needs large amounts of cheese (e.g. restaurant), but
unfortunately we cannot verify this by means of the loyalty card. The other households in the
cluster also have higher than average purchase rates of Dutch cheese, but not as high as the
tradesman and have more than average number of children per household, which again may
explain their higher consumption rates of Dutch cheese.
By examining the product category segment specific average purchase rates in table 2,
some interesting differences between the clusters can be discovered. The observations in table
2 illustrate that segments differ significantly in terms of the average purchase rates of the
product categories being studied. However, besides the segmentation variables, which can be
used to describe the differences between the discovered clusters, we also possess descriptor
variables to profile the segments. Indeed, the loyalty card data about the customers provides
some interesting socio-demographic and lifestyle information that can be used to analyse the
profile of each segment. More specifically, we will use the following descriptor variables per
customer:
Profession: employee, labourer, self employed, housewife, retired, unemployed;
Car ownership: Boolean variable;
Pets owned: dog, cat;
Club membership: Boolean;
Ownership of a freezer: Boolean;
Ownership of a microwave: Boolean;
Ownership of a garden: Boolean.
Furthermore, the purchase history information of each customer enables the creation of
aggregate shopping characteristics, such as:
The average number of items purchased per ticket;
The average amount paid per ticket;
The average number of store visits per week;
The distribution of shopping visits over the week.
Table 2: product category segment specific average purchase rates (ks)
Cluster nr 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Fresh fruit&vegs. 58.7 59.8 44.4 33.2 88.6 55.0 40.4 99.5 31.9 124.1 13.4 27.7 33.9 171.6 40.7
Fresh meat 26.8 24.2 24.9 15.9 52.9 25.4 19.4 41.4 20.4 54.6 9.6 22.5 13.7 62.3 36.8
Milk 14.4 20.8 12.3 14.9 33.8 42.0 13.9 17.6 10.8 13.8 7.0 9.6 15.2 53.1 16.9
Bake-off 4.7 13.0 12.5 2.4 83.6 17.9 13.2 9.9 95.1 81.6 3.9 10.1 6.1 44.2 18.1
Dutch cheese 1.0 14.2 0.4 0.3 1.3 1.1 1.0 0.5 0.9 185.0 0.1 0.4 164.1 17.7 1.2
Dry Biscuits 8.3 10.9 7.7 11.8 21.9 33.5 6.8 14.6 9.8 11.9 4.0 9.4 9.4 49.7 12.9
Candy 7.7 12.4 6.3 7.9 24.5 27.9 12.6 19.9 10.8 22.9 4.1 15.1 7.9 37 11.8
Soft drinks 7.0 6.0 3.5 8.7 27.7 24.2 12.7 13.5 9.9 8.8 4.2 21.3 8.3 50.5 21.0
Chocolate 5.1 8.6 5.6 8.9 24.1 18.8 7.2 25.2 10.3 20.2 2.8 7.5 6.3 17.3 11.6
Small bread 5.5 23.4 8.0 1.2 43.1 5.6 5.7 5.3 24.1 28.6 2.5 4.7 7.2 81.1 70.6
Sauses 6.6 9.5 5.6 8.3 20.3 12.8 12.8 14.0 9.6 29.9 4.1 9.6 6.3 70.8 14.2
Quark 5.3 8.2 3.7 5.9 14.6 8.8 48.5 15.9 3.0 45.1 2.8 2.9 5.3 9.7 5.8
Fresh biscuits 5.8 15.5 6.1 7.2 17.0 19.5 7.6 12.5 6.6 11.7 3.1 7.2 6.2 78.5 7.7
Yoghurt 11.9 12.3 3.6 7.3 10.4 7.3 10.6 12.9 7.9 26.5 3.0 3.7 5.3 14.4 21.1
Bread 3.7 6.5 17.0 2.4 15 3.1 4.7 16.6 7.2 31.3 2.2 5.2 6.3 52.1 5.1
Crisps 5.9 4.0 3.1 7.6 11.8 36.5 2.8 5.8 6.2 15.6 2.8 7.9 4.2 35.7 11.2
Butter 6.0 11.2 4.9 6.5 12.2 9.4 6.3 12.1 6.2 23.3 2.7 4.9 5.7 9.3 7.1
Canned vegs. 6.9 7.9 6.6 4.1 16.8 11.6 6.9 11.3 3.0 11.6 3.4 5.5 4.9 8.8 6.7
Coffee 2.5 6.4 2.8 7.1 12.7 7.8 7.5 8.9 5.4 4.2 2.7 3.99 3.5 9.8 2.5
Cat food 55.6 10.1 1.9 1.6 27.9 3.2 1.6 2.8 2.2 22.6 1.5 1.8 8.4 101.9 2.2
Water 3.3 7.6 3.6 4.6 14.5 14.0 6.7 13.1 2.7 4.9 2.5 7.9 4.5 123.4 5.2
Fresh salads 5.3 5.3 5.5 3.6 13.0 7.9 5.6 8.6 5.5 10.1 2.6 5.3 4.00 20.5 4.7
Cigarettes 4.6 3.6 1.2 0.8 22.9 9.6 8.5 2.7 3.0 14.5 2.0 19.3 3.5 23.6 18.1
Packed fruit 0.4 380.3 0.4 0.2 0.9 0.4 0.3 0.8 0.2 1.0 0.1 0.3 0.1 9.0 0.3
Topping 2.6 6.7 3.2 6.3 8.4 12.4 5.5 10.4 3.3 8.3 2.2 2.8 4.8 11.7 5.9
Pastry 1.9 9.4 11.4 0.8 13.7 2.2 4.8 6.0 7.3 7.6 2.1 2.4 1.6 19.9 4.9
Fruit juice 2.6 7.1 2.0 3.2 8.6 19.1 3.9 5.1 1.8 10.7 1.2 4.7 3.2 65.0 5.1
Pasta 2.6 4.5 3.2 3.7 12.4 9.7 6.3 6.5 3.0 14.5 2.2 4.4 4.5 39.4 5.5
Newspaper&Mag. 5.8 6.8 5.0 4.0 9.0 6.4 3.4 8.5 2.6 22.5 1.7 5.2 3.0 19.8 4.1
Maintenance art. 3.5 7.6 3.7 3.5 6.0 7.9 3.9 5.7 2.9 7.6 2.3 4.0 3.1 16 5.4
The next paragraph will summarize the most prevalent characteristics per segment, both in
terms of the difference on the segmentation variables, as in terms of its profile based on the
descriptor variables. Because of space limitations and the high number of clusters, we will only
focus on the most striking differences. The interested reader is referred to appendix 1 where
more detailed figures can be found about the profile of each cluster.
4.3 Description of the segmentation results
Segment 1 is a relatively small segment (4.69%) and can be characterized by a significantly
higher than average purchase rate of cat food, but significantly lower than average purchase
rates of bake-off products, bread, pastry, packed fruit, Dutch cheese and coffee. Thus, it
seems that for bread products, the supermarket is not the preferred store. The profile of the
segment turns out that there are slightly more employees in this segment compared to the
entire sample, and that almost 60% of them owns a cat which is much higher than the overall
sample average (14%).
Segment 2 is even smaller in size (1.22%) than segment 1, and shows an extremely high
purchase rate in the packed fruit category, but a lower than average purchase rate of cigarette
products. The proportion of retired customers (25%) in this segment is significantly higher
than the overall sample average (11.9%), whereas the proportion of housewives (12.5%) and
labourers (8.3%) is significantly lower than average (resp. 21.5% and 17.2%). Their shopping
cart contains almost twice (31.4) the number of items per store visit than on average (17.2),
although their ticket price is only 16% higher.
Segment 3 is a relatively large segment (11.7%) and shows higher than average purchase
rates of bread and pastry, but lower than average purchase rates of Dutch cheese, soft drinks,
yoghurt, crisps, cat food, cigarettes and packed fruit. This segment contains a higher
proportion of retired customers (17%) than average (11.9%) and purchase a slightly less
number of items per store visit (15.0) than on average (17.2), which explains their lower
average ticket price (1081 Bef.) when compared to the overall sample average ticket price
(1259 Bef).
Segment 4 is even bigger (17.7%) than segment 3 and shows relatively low average
purchase rates in almost all product categories with some extremely low average purchase
rates in bake-off products, small bread items, pastry, cat food, cigarettes, packed fruit and
Dutch cheese. At least, it is clear that this segment does not appreciate the bread products in
general in this supermarket. The cluster has an average socio-demographic and lifestyle
profile, but cluster 4 contains proportionally less cat owners than on average. They visit the
store less frequently per week (1.2) than the overall sample average (1.5), but they purchase
slightly more products per ticket (20.9) than average (17.2) which may explain their higher
average ticket price (1597 Bef).
Segment 5 is a relatively small segment (2.3%) and shows slightly higher average purchase
rates in almost all product categories (except for Dutch cheese and packed fruit) but possesses
very distinct characteristics in terms higher than average purchase rates in the product
categories fresh fruit & vegetables, fresh meat products, milk, bake-off products, pastry, dry
biscuits, candy, soft drinks, chocolate, small bread products, fresh biscuits, canned vegetables,
coffee, fresh salads and cigarettes. Segment 5 not surprisingly consists of relatively large
families (3.9 members) compared with the sample average (3.0) and contains higher proportion
of employees (35.5) than average (23.4) and a significantly lower proportion of retired
customers (4.4) than the overall sample average (11.9). Their shopping baskets on average
contain significantly more items (25.8) than the overall sample average (17.2) which is also
reflected in the average ticket price (1840 Bef). Furthermore, customers in segment 5 shop
twice as often per week (3.3) compared to the average customer (1.5). Thus, although
relatively small, this segment should deserve a special treatment since they are loyal and
represent a high monetary value per customer. It seems that these customers do all of their
shopping in one store.
Segment 6 is a small segment (4.0%) and could be characterized as sweet tooth as
reflected by their higher than average purchase rates of dry biscuits, candy products, fresh
biscuits, crisps, fruit juice, topping and milk. Just as in most other segments, the average
purchase rate of Dutch cheese and packed fruit is much lower. This segment contains
proportionally much more labourers (27.8%) than the overall sample average (17.2%) but
significantly less retired customers (5.0%) than the overall average (11.9%). The average
household size in cluster 6 equals 3.7 which is higher than the overall average family size (3.0).
This is reflected in the average number of items purchased per ticket (28.2 compared to 17.2
for the overall sample) and in the average price per ticket (2045 Bef). The proportion of
customers who are a member of a club is, however, significantly less (33.7%) than the overall
sample average (43.7%).
Segment 7 is a small cluster (3.7%) and has a very distinct preference for quark. Indeed,
the average purchase rate of quark (48.5) is much higher than the overall sample average (11).
The average purchase rates in the other product categories is comparable with the overall
sample averages, except again for cat food, Dutch cheese and packed fruit. Also the socio-
demographic profile of this segment shows some interesting differences. We observe a much
higher proportion of labourers (30.1%) and a much lower proportion of retired customers
(4.1%) compared with the overall sample average (resp. 17.2% and 11.9%). The average
number of items per ticket for customers of cluster 7 is slightly higher (22.9) than the overall
sample average (17.2) and this is also reflected in the average ticket price (1692 Bef.).
Segment 8 is of a moderate size (6.3%) and has relatively high average purchase rates of
fresh fruit & vegetables, fresh meat and chocolate products. Purchase rates in other product
categories are comparable with the overall sample mean, except for Dutch cheese, cat food,
packed fruit and cigarettes with much lower average purchase rates. The lower purchase rate
of cat food is also reflected in the proportion of cat owners of this cluster which is lower (8.1%)
than the overall sample mean (14.0%). Furthermore, a higher proportion of customers in
cluster 8 possesses a garden (81.3%) compared to the overall sample mean (71.2%) and size
of the households is slightly higher (3.3) than average (3.0). This slight difference is also
reflected in the average number of items purchased per ticket (20.0) and the average ticket
price (1474). Moreover, customers from this cluster tend to shop more frequently (2.5 times
per week) than the average customer (1.5 times per week).
Segment 9 is a small segment (3.5%) and has a significantly higher than average purchase
rate of bake-off products (95) compared with the overall sample mean (21.8). For the other
product categories, we observe relatively average purchase rates, except for canned
vegetables, fruit juice, Dutch cheese, cat food and packed fruit. In terms of socio-
demographics, cluster 9 has a significantly higher proportion of housewives (30.1%) than
average. Furthermore, cat ownership is lower (8.7%) than average (14.0) and the average size
of the household is higher (3.5) when compared with the overall sample average (3.0).
Segment 10 is very small (0.76%) and has higher than average purchase rates in almost all
product categories, and especially in Dutch cheese, quark and yoghurt, as well as in fresh fruit
& vegetables, fresh meat, bake-off, bread, candy, and others. This segment is dominated by
employees and relatively large family sizes (3.9). The average number of items purchased per
ticket is significantly higher (36.2) than the overall sample average (17.2) and this is also
reflected in the average price per ticket (1969 Bef). Shoppers in this segment visit the store
almost twice as much as the average customer.
Segment 11 is the largest segment of all (28.5%) and is characterized by relatively low
average purchase rates on most of the product categories, but especially in
newspapers&magazines, fruit juice and packed fruit. This segment has an average socio-
demographic profile compared with the overall sample and has a slightly smaller family size
(2.9) than average (3.0). The number of items per ticket is slightly higher (17.8) than average
(17.2) which is also reflected in the ticket price (1386 Bef.). Striking however is that this group
visits the supermarket only half (0.75) as often per week as the average customer in the
sample (1.5)!
Segment 12 is of a moderate size (7.7%) and is characterized by slightly higher than
average purchase rates in most product categories, except for Dutch cheese, quark, yoghurt,
cat food, and packed fruit. It looks like this segment does not appreciate dairy products or
purchases them in another store. In terms of the socio-demographic profile of this segment,
we observe a slightly more active proportion of customers (both employees and labourers) and
less inactive customers (retired and unemployed). The average family size is slightly higher
(3.2) than the overall sample average (3.0). Both the number of different items per ticket, the
ticket price and the average number of weekly visits are slightly higher than average.
Segment 13 is a relatively small segment (4.1%) but has an extremely high average
purchase rate of Dutch cheese, and average purchase rates in other categories. In contrast,
purchase rates of cigarettes, packed fruit and pastry are much lower than average. In terms of
socio-demographics, the customer in this segment is comparable to the customer in the overall
sample, except from a slightly smaller family size (2.8) than average (3.0). In terms of
profitability per ticket however, we observe twice the number of items per ticket (34.5) than
average (17.2), but this is not proportionally reflected in the average ticket price which is only
34% higher (1685 Bef). The higher number of items per ticket may possibly be explained by
the lower average number of visits per week (1.0) compared to the overall sample average
(1.5), which may be an indication of one-stop-shopping or stocking-up behaviour.
Segment 14 consists of just one household and can be considered an outlier in the dataset.
The clustering procedure separated this household because of its extremely high purchase rates
in most of the product categories, which can be explained by the family size (5 children and 2
parents).
Segment 15 is a small cluster (3.1%) and it is characterized by significantly higher than
average purchase rates of small bread items and yoghurt. Just as in most of the other
segments, cat food, Dutch cheese and packed fruit have lower average purchase rates. The
socio-demographic profile of this cluster shows a significantly higher proportion of labourers
(26.2) than expected from the overall sample average (17.2), but a much lower proportion of
retired customers (3.2) than the overall sample average (11.9). The average household size is
also much larger (4.0) than in the overall sample (3.0). This is partially reflected in the average
number of items per ticket (23.1) and the ticket price (1586 Bef) which are significantly (but not
extremely) higher than the overall sample average (resp. 17.2 and 1259 Bef).
5.1 Conclusions
The objective of this paper was to investigate the potential of behavioural segmentation based
on scanning and loyalty card data, and to provide a methodology how this can be
accomplished. We introduced a latent class clustering model that groups customers based on
their purchase rates within a set of predefined product categories. The developed model was
tested on sales transaction data from a Belgian supermarket store. More specifically, 15
segments were identified in the data, of which 1 segment was an outlier. The segments
significantly differ according to their average purchase rates in the set of product categories,
and were profiled based on loyalty card data from these households. This enabled us to
suggest some segment-specific actions for retail decision making. Furthermore, we believe that
the results of this kind of product category based in-store segmentation analysis may provide
useful input for further analysis on a more detailed scale, for instance to investigate the success
rate of individual SKUs within each segment.
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Appendix
Note 2: profile data for cluster 14 are not shown because the cluster contains only one outlier
observation and thus the profile information is not relevant.