A Classification Model for Customer Segmentation

Chithra Ramaraju1 and Nickolas Savarimuthu2

1
Research Scholar, 2 Associate Professor
Department of Computer Applications,
National Institute of Technology, Tiruchirappalli-620015
chithra_viswanathan@yahoo.co.in, nickolas@nitt.edu

Abstract. Customer management is one of the important aspects in retail busi-

ness. It is vital for the retailers to adopt different methodologies by which high
valued customers can be identified, in order to perform suitable target market-
ing effectively. In this paper, a novel model is proposed for classifying retail
customers into different categories based on purchasing behavior of customers.
A class label for each transaction is determined based upon customer profit val-
ue (CPV), and a classifier model is build for predicting different categories of
customers. The classifier model is constructed using SPSS tool for market
basket data. Finally, the classifier model is verified with test data set, and used
for predicting customer category. The extracted information is helpful for plan-
ning customer retention and providing personalized customer services by un-
derstanding their needs, preferences and behavior.

Keywords: Data mining, Classification, Prediction, customer value.

1 Introduction
Customer relationship management (CRM) has become inevitable business strategies
in the new millennium. Customer segmentation is a CRM concept based on core mar-
keting idea. CRM can be viewed as ‘Managerial efforts to manage business interac-
tions with customers by combining business processes and technologies that seek to
understand a company’s customers [1]. Now business organizations are realizing the
importance of CRM, and its two main objectives are 1. Customer retention through
customer satisfaction. 2. Customer development through customer insight.
Present day retail shops are accumulating, millions of sales transactions, and cus-
tomer information in their day-to-day business, which are stored in the databases.
These databases are hidden with valuable information and can be directly applied for
making intelligent business decision. The main goal of retailers is to provide best
customer services by knowing their needs and preferences and it is essential for retail-
er to predict and find out most profitable customers who account for the major portion
of their future profits.
Retailers recognized that valuable, non trivial useful information can be extracted
from voluminous retail data, which helps decision makers to take vital decision for
business operations. Customer purchasing behavior is considered significant, based on
past sales transactions. Customer segmentation is one of the fundamental tasks, which

A. Abraham et al. (Eds.): ACC 2011, Part I, CCIS 190, pp. 661–670, 2011.
© Springer-Verlag Berlin Heidelberg 2011
662 C. Ramaraju and N. Savarimuthu

has been more widely used to identifying right customers, knowing their needs and
offering right services at the right time are the main goals of retailers which lead retail
organization to employ and plan a clear strategy for treating different types of cus-
tomers. When evaluating customer profitability, marketers often use 80/20 rule (80%
of the profits are produced by top 20% of profitable customers and 80% of the costs
are spent on top 20% of unprofitable customers) [2][3]. So many companies are in-
terested in measuring customer value, by which most profitable customers are identi-
fied and retained by building retention strategies [3][4][5].
KDD (Knowledge Discovery from Database) is the nontrivial process of extracting
valid, novel, potentially useful, and ultimately understandable patterns from database.
Data mining is one of the processes in the KDD process which includes several know-
ledge discovery methods, such as frequent pattern mining, association rule mining,
sequential pattern mining, classification and clustering. These data mining tech-
niques are used to assess the value of customers, understand and predict their beha-
vior. The extracted information can then be used to identify trends and associations,
form a prediction or classification model, refine an existing model, or provide a sum-
mary of the database being mined. Business intelligence has emerged as one of the
most popular applications in the past four decades, which can help in extracting more
valuable information.
The objective of this study is
1. To compute CPV value
2. To determine class label for each customer (high, medium and low profitable
customers) based upon CPV value.
3. To construct classifier model in order to predict customer category.
4. To plan customer retention strategy and provide personalized customer ser-
vices by understanding each customer category, their needs, preferences and
behavior.
The rest of the paper is organized as follows: Section 2 presents related work and
section 3 provides terms and definitions for customer profit value calculation. Section
4 presents a conceptual framework and experimental results. Section 5 discusses on
conclusion and future scope in this work.

2 Related Works

2.1 Customer Value

Analyzing customers in groups is one of the most fundamental issues in Marketing.

Customer segmentation is the process of dividing the customer details into distinct
and internally homogeneous groups in order to develop different marketing strategies
tailored to their characteristics. There are different segmentation types based on the
specific criteria or attributes used for segmentation.
Frederick F. R [6] proposed customer lifecycle value model, which was most popu-
lar and recognized by many scholars. The theory and idea proposed by Kotler [7]