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Department of Applied Economic Sciences

Limburg University Center

B-3590 Diepenbeek, Belgium

Email: tom.brijs@luc.ac.be

retailers to differentiate from their competitors by specializing and by offering

goods/services that are tailored towards one or more subgroups or segments of

the market. Retailers understand that shoppers are heterogeneous in nature,

that they possess different wants and needs and that it is impossible to satisfy

them all. However, the retailer in the FMCG sector is highly limited in his ability

to segment the market and to focus on the most promising segments, since the

typical attraction area of the retail store is too small to afford neglecting a

subgroup within the stores attraction area. In fact, the supermarket should

appeal to as many of the heterogeneous public in its attraction area as possible.

Nevertheless, given the huge amount of transactional and loyalty card data being

collected, this leads to the intriguing question whether in-store segmentation

may be a viable alternative to discover homogeneous customer segments based

on their shopping behaviour. Indeed, the discovery of homogeneous customer

groups who tend to use the store similarly could be used for instance to target

individuals with customized promotions. Therefore, in this paper we will

introduce a new methodology for behaviour-based customer segmentation.

More precisely, we will use the method of latent class mixture modelling to

discover hidden customer segments on the basis of the contents of their

shopping baskets. Furthermore, loyalty card data is used to find out if these

customer segments differ in terms of socio-demographic or lifestyle

characteristics and whether these characteristics can be used to target different

customer segments with more relevant product offers. The method is carried

out on market basket data from a major Belgian supermarket store. Results

indicate that a number of distinct segments can be identified who differ

significantly in terms of the average purchase rate within a pre-determined set of

product categories.

1 Introduction

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].

Since, as a result of loyalty programs, demographic information (such as residence, profession,

age, gender, ethnicity, marital status, education, etc.) about customers is widely available,

segmentation based on demographic variables is probably the most popular method for

segmentation (e.g. [11]). For instance, in their study, Segal and Giacobbe [23] carry out a

Wards hierarchical cluster analysis on 10.000 customers in a large metropolitan area in the USA

on the basis of a set of demographic characteristics, such as occupation, household

composition, income, housing, etc. Their analysis revealed 4 demographic segments for which

they subsequently analysed and found profound differences in the market share of 4 major

supermarket chains. Gensch [11] clustered 700 individuals on 19 demographic variables, such

as income, age, marital status, number of cars, etc. in order to test the advantage of

disaggregate choice models. Gensch shows that meaningful segmentation can increase the

predictive fit of choice models and can lead to different managerial actions and strategies when

the assumption of homogeneity is too restrictive. McCurley Hortman et al. [14] carried out a

demographic segmentation based on the age of the head of household, number of working

adults in the household, and years in residence at the current address. Their cluster analysis

produced three distinct segments, i.e. a baby boomers segment, a middle-aged family group

and an elderly segment. These segments were subsequently used to study the differences in

the respondents emphasis on price, selection, and convenience when selecting supermarkets.

Despite the above mentioned studies, researchers often criticize that segmentation on the

basis of demographics lacks a direct link with purchase behaviour [6, 9]. In other words, it is

not theoretically clear whether differences in socio-demographic background produces a

significantly different purchase behaviour. While some studies found some slight differences in

responsiveness to marketing variables, many studies conclude that these differences are in fact

too small to be relevant for practical purposes [10, 17]. Probably, the usefulness of (geo-)

demographic variables can best be evaluated in the context of backward and forward

segmentation [27].

In the forward approach to segmentation, demographics are used to apriori form a number

of clusters which are subsequently related to product-specific measures of consumer behaviour.

For instance in our case, the supermarket retailer could segment the shoppers according to the

ownership of a microwave and/or freezer, to subsequently test whether this affects the

purchase frequency of pre-packed meals in the supermarket.

In the backward approach, product-specific measures of consumer behaviour are used to

form apriori segments, to subsequently profile these segments according to general customer

characteristics, such as (geo-)demographics. For instance, the supermarket retailer would

define a number of segments of ready-made meals in terms of the usage frequency, to

subsequently profile heavy versus light users in terms of the ownership of a microwave or a

freezer. In other words, the retailer would then test whether the ownership of a microwave

and/or freezer are able to discriminate between light versus heavy users of the ready-made

meals category. In our opinion, this backward approach is preferable.

Segmentation based on purchase behaviour aims at discovering groups of customers that

exhibit a similar purchase behaviour. However, the definition of behaviour in this context may

cover many loads. For instance, retailers often distinguish between light and heavy users of a

product (category), or regular stock-up shoppers versus emergency top-up shoppers, or lunch-

time shoppers versus evening shoppers, or home and daytime shoppers versus work and

weekend shoppers, or fast-checkout customers versus regular checkout customers, etc. In the

case of in-store segmentation, differences in behaviour of this kind can be relatively easily

extracted from receipt data. For example, Reutterer [22] uses Kohonen Self-Organizing Maps

(SOM) to cluster supermarket shoppers into 9 segments based on their preference for different

brands within the margarine product category. Preference in this context was measured by the

relative purchase frequency of a brand within its category. He found distinct segment

differences in the preference for private label and national brands. Kopp et al. [15] applied a k-

means clustering on a group of 1.650 supermarket shoppers based on a vector of share-of-

shopping-visits for eight competitive retailer groups. They identified six distinct segments and

subsequently tested their difference in profile on the basis of a number of descriptor variables,

such as fashion lifestyles, attribute importance, demographics, etc. McCurley Hortman et al.

[14] carried out an a-priori segmentation of shoppers based on whether the majority of their

shopping trips were made to a discount-image store or to a nondiscount-image store. In yet

another study, Ghosh [12] applies an a-priori segmentation to classify consumers into loyal or

deal-prone segments based on their past purchase patterns in order to facilitate evaluation and

adjustment of promotional plans.

In general, it is believed that clusters of behaviour based segmentation have relatively

strong predictive power to reveal differences in actual purchase behaviour. Therefore, in this

study we will use purchase behaviour to cluster customers into groups.

Benefit segmentation aims at discovering clusters of consumers that seek similar benefits when

evaluating and choosing or purchasing (in) products or retail stores. Benefits may be

measurable, such as economical or durable, but may also be rather abstract concepts, such as

trendy or sportive. The difference in importance that consumers attribute to these benefits

offers an interesting basis for segmentation since they reflect the needs that consumers have.

For instance, Miller and Granzin [20] discover segments of consumers on the basis of a number

of benefits from fast-food retail chains, such as speed of delivery, price, friendliness of

employees, taste of the food, etc.

Lifestyle segmentation involves discovering groups of consumers that have a similar lifestyle

pattern, also called psychographic pattern. Lifestyle segmentation variables refer to how

consumers spend their leisure time (activities), what are their interests, and how they think

about themselves and the society in general (opinions) [3]. Gutman and Mills [13] cluster

fashion merchandise shoppers based on a number of fashion lifestyle related variables, such as

fashion leadership, fashion interest, etc. An important motivation to use these specific fashion

related lifestyle variables is that other studies have argued that general lifestyle variables

provide a poor discrimination towards purchase behaviour. Gutman and Mills study revealed 7

fashion segments, such as leaders, followers, independents, uninvolveds, etc. which were

subsequently profiled on a set of demographic variables.

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.

In this study, the objective is to cluster supermarket shoppers based on the contents of their

shopping baskets, being measured by the purchase rates in different product categories of the

assortment over a certain period of time. Since it is known that purchase rates can be

modelled with the Poisson distribution [8], we will use the Poisson distribution throughout the

rest of this paper.

Given a number of subjects (i.e. supermarket shoppers) on which the variable yn (i.e. purchase

rate within one particular product category) is measured, and assume that these values arise

from a population that is a mixture of S segments of unknown sizes 1, , S, then the

unconditional LC cluster model can be defined as:

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.

In this study, we are however not interested in clustering supermarket shoppers only on their

purchase rate in just one product category, but rather in a number of product categories. In

other words, the basis for segmentation is defined as the consumers purchase rate within

multiple product categories of the assortment. This leads to the following definition of the

unconditional multivariate LC cluster model for the case where the observations ynk are

assumed to be conditionally independent within each segment 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.

The purpose of the LC cluster models defined above, is to estimate the parameter vector .

The two main methods to estimate this parameter vector are maximum likelihood (ML) and

maximum posterior (MAP) [25] of which the former is the most frequently used. Basically, the

objective of maximum likelihood estimation is to maximize the likelihood for given the data

ynk , i.e.

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.

The process to discover the optimal segmentation in terms of the number of latent classes is

carried out in two phases.

Firstly, in order to get an approximation about the optimal number of latent classes, a LC

cluster analysis was carried out for 1 to 15 segments without restarting the EM-algorithm with

different random starting values. The reasons for this are twofold. First of all, to save

computing time, since rerunning different cluster solutions with different random starting values

is computationally very intensive. Second of all, running a range of different cluster solutions

for only one starting value is usually sufficient to obtain a good impression of the range within

which the optimal cluster solution can be found. Figure 1 illustrates the results of this

experiment and shows the quality of the cluster solutions for different numbers of latent

classes. One can observe that the evaluation statistics (CAIC, BIC, AIC) reach a minimum value

in the range of 13 to 15 segments. This means that the optimal number of latent classes must

be situated approximately in that range.

CA IC, BIC

335000,00 MA IC

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.

Nr of segments 12 13 14 15

Run nr 1 2 3 1 2 3 1 2 3 1 2 3

Likelihood -125348 -125049 -125091 -93844 94811 -95987 -92826 92449 92989 -91746 -91494 -94153

entropy 0.984 0.981 0.982 0.988 0.984 0.987 0.983 0.983 0.983 0.981 0.985 0.984

R 0.437 0.438 0.438 0.614 0.609 0.603 0.619 0.622 0.618 0.626 0.627 0.613

CAIC 255142 254544 254629 192506 194439 196791 190841 190087 191166 189052 188550 193867

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.

Cluster nr 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Size (in % of total) 4.69 1.22 11.67 17.69 2.29 4.03 3.72 6.27 3.50 0.76 28.49 7.70 4.13 0.05 3.11

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).

Based on the characteristics and the profile of each customer segment (see section 4.3),

actions or recommendations can be undertaken stimulate or alter the purchase behaviour of

each cluster. For instance, cluster 5 is a relatively small cluster, but is highly valuable in terms

of the size (25.8) and the turnover (1840 Bef) per ticket being realized. However, compared to

cluster 10, which contains households of equal size (3.9), cluster 10 on average purchases even

more items per ticket (36.2). Therefore, it would be valuable to think of ways to stimulate the

purchase rate of customers in cluster 5. Market basket analysis techniques, such as association

rules [1] or association coefficients [4], may help to discover frequently purchased

combinations of products within a segment and stimulate purchase behaviour by promoting

certain products or product combinations.

Segment 11 which visits the store only half as much (0.75 times per week) as the average

customer (1.5 times per week) should be stimulated to shop more frequently. Given the size of

this segment (i.e. 25% of the sample), it could be worthwhile printing a customized promotion

leaflet including tokens or reduction vouchers for the purchase of particular products during the

week, but not during the weekend, in order to stimulate shop visits during the week.

Segment 4 is a relatively large segment (17.7%) and has very low purchase rates in all

bread related categories, such as bread, pastry, small bread and bake-off products. Thus, it is

likely that these customers prefer purchasing their bread items at a local bakery instead of in

the supermarket. Given the size of this segment, this should be investigated and actions should

be taken upon. Possibly, this segment should be treated separately by means of a customized

promotion leaflet, or by stimulating future purchases by printing messages on their cash

receipts relating the purchase of bread items in the supermarket, e.g. special offers, quality

improvements, wider variety,

Segment 6 was described as sweet tooth and this could be exploited by presenting special

offers in the sweet product categories, or by putting the most popular sweet items closer

together in order to stimulate sales, etc. The selection of particular products to put on

promotion should however be carried out very carefully. It is not because this segment shows

a higher purchase rate in dry biscuits, that all of the consumers seek the same kinds of benefits

from this category. For instance, heavy users of dry biscuits maybe consists of two groups:

those who eat biscuits and for which price is not an issue (e.g. people who buy biscuits for a

dinner evening), and those for which price is in fact an issue (e.g. children who come to buy

bisuits after school and who are short of money).

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.

Firstly, the latent class cluster model was tested on real-life data from a Belgian supermarket

store. Real-life sales transaction data of this kind is typically subject to noise and outliers which

may hinder the discovery of good clusters. For instance, it could be argued that households in

cluster 14 should not be removed from the data before the analysis. Nevertheless, the

technique of latent class clustering was able to separate this observation from the other

observations by putting it into a separate cluster.

Secondly, the presence of outliers influences the interpretation of the results by comparing

segment-specific purchase rates for a category with the overall sample average purchase rate

that may be highly skewed as a result of the outlier observations. A better way of comparing

the segment-specific results would be to compare them with overall sample median values, for

instance.

The latent class cluster model in this paper was developed on the basis of a subset of

product categories from the assortment. In fact, only the thirty most frequently purchased

product categories were included in the analysis. This is of course a limitation of the research,

but given the restrictions of the software, hardware and computation times, we were not able

to include more categories. Nevertheless, with regard to the stability of the clustering solution,

we believe that the most frequently purchased product categories are the most important to

influence the cluster solution since purchase rates for infrequently purchased categories are

typically close to or equal to zero for all customers and will thus not influence the cluster

solution significantly.

Finally, in our model we have assumed mutual independence of the observations, i.e.

uncorrelated purchase rates. In other words, we assume that a higher purchase rate within

one category does not imply a higher (or lower) purchase rate in any other product category.

This is against the idea of one-stop-shopping or consumption complementarity where

customers tend to purchase products from different product categories to fulfil a complex set of

needs. This limitation should be viewed within the trade-off between model complexity and the

ease of computation of the model. Indeed, allowing for correlated observations would

necessitate the use of the multivariate Poisson distribution and would complicate the estimation

of the cluster model.

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Appendix

Var 2 = labourers (in %) Var 11 = freezer owners (in %)

Var 3 = housewives (in %) Var 12 = microwave owners (in %)

Var 4 = unemployed (in %) Var 13 = garden owners (in %)

Var 5 = retired (in %) Var 14 = family size (parents + children)

Var 6 = self employed (in %) Var 15 = different SKUs per ticket

Var 7 = car owners (in %) Var 16 = revenue per ticket (in Belgian Francs)

Var 8 = dog owners (in %) Var 17 = tickets per week

Var 9 = cat owners (in %) Var 18 = distribution of shop visits (in %)

CLUSTER NR All 1 2 3 4 5 6 7 8 9 10 11 12 13 15

Employees 23.4 33.7 29.2 27.5 23 35.5 29.1 30.1 27.6 30.4 40 24.3 27.1 22.2 24.6

Labourers 17.2 16 8.3 14.4 19.3 20 27.8 30.1 17 15.9 13.3 17.5 23.1 18.5 26.2

Housewives 21.5 25 12.5 19.6 24.2 22.2 25.3 21.9 26.8 30.1 20 18.8 21.2 19.7 21.3

Unemployed 1.3 0 4.2 0.4 2.0 0 1.2 0 1.6 0 0 1.8 1.3 0 3.3

Retired 11.9 6.5 25 17.0 12.4 4.4 5.0 4.1 14.6 7.2 6.6 9.8 8.6 14.8 3.2

Self employed 2.2 2.2 4.2 1.7 2.9 4.4 1.2 2.7 1.6 2.9 6.6 2.3 2.6 4.9 1.6

Car owners 88.3 84.1 90.1 90.8 90.5 95.3 90.9 94.4 94.9 92.4 100 88.8 86.5 87.6 87.5

Dog owners 25.4 17.4 29.2 23.6 25.1 31.1 32.9 30.1 23.6 18.8 40 24.1 26.5 28.4 27.8

Cat owners 14.0 58.7 8.3 12.6 8.6 35.5 12.6 8.2 8.1 8.7 26.6 11.0 13.9 16 13.1

Club members 43.6 44 59 49.7 45 53.5 33.7 36.6 48.7 51.5 53.3 44.4 41.2 44.4 37.5

Freezer owners 73.1 75 66.6 75.1 79.2 80 73.4 68.5 78 76.8 100 72.1 68.8 76.5 72.1

Microwave owners 62.8 67.4 58.3 62.4 65.4 68.8 63.3 63 61.8 69.6 80 62.6 61.6 62.9 62.3

Garden owners 71.2 76 58.3 75.1 80.4 82.2 74.7 76.7 81.3 76.8 100 68.8 68.8 76.5 72.1

Family size 3.0 3.16 2.9 3.0 3.2 3.9 3.7 2.9 3.3 3.5 3.9 2.9 3.2 2.8 4.0

SKUs per ticket 17.2 22.6 31.4 15 20.9 25.8 28.2 22.9 20 22.3 36.2 17.8 18 34.5 23.1

Revenue per ticket 1259 1529 1459 1081 1597 1840 2045 1692 1474 1449 1969 1386 1455 1685 1586

Tickets per week 1.5 1.4 2.2 1.8 1.2 3.3 2.0 1.6 2.5 1.6 2.6 0.75 1.6 2.3 1.9

Distr. of shop visits:

Monday 13.8 15.4 10.9 14.8 12.8 14.6 15.3 13.5 14.4 11.7 15.2 13.8 15.6 12.4 12.4

Tuesday 12.2 10.2 10.6 13 11.6 12.8 12.4 12.4 13.3 12.1 11.2 11.3 13.5 11 11.4

Wednesday 13.1 14.2 13.2 13.6 12.1 15.3 13.9 11.8 16.3 12.4 8.7 11.7 13.9 11.5 13.6

Thursday 18.4 17.6 18.6 17.8 20 14.6 16.9 16.7 17.0 12.7 19.3 18.4 17.6 19.2 16.6

Friday 20.5 21.5 16.8 19.2 22.4 20.3 20.4 22.1 20.1 19.9 25 22 19.9 23.9 19.4

Saturday 21.9 21.1 29.7 21.4 21 22.3 20.9 23.3 18.8 31 20.5 22.7 19.4 21.9 26.5

Note 1: segment-specific profile information should be treated with care because:

these figures are derived from loyalty card data for which the statistical reliability is not

known

some segments have only few observations (e.g. segments 2, 10 and 14).

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.

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