Comparative performance of the FSCL neural net and K-means algorithm for market segmentation

Abstract Given the success of neural networks in a variety of applications in engineering, such as speech and image quantization, it is natural to consider its application to similar problems in other domains. A related problem that arises in business is market segmentation for which clustering techniques are used. In this paper, we explore the ability of a specific neural network, namely the Frequency-Sensitive Competitive Learning Algorithm (FSCL), to cluster data for developing strategic marketing decisions. To this end, we investigate the comparative performance of FSCL vis-a-vis the K-means clustering technique. A cluster analysis conducted on brand choice data for the coffee category revealed that the two methodologies resulted in widely differing cluster solutions. In an effort to address the dispute over the appropriate methodology, a comparative performance investigation was undertaken using simulated data with known cluster solutions in a fairly large experimental design to mimic varying data quality to reflect data collection and measurement error. Based on the results of these studies, it is observed that a combination of the two methodologies, wherein the results of the FSCL network are input as seeds to the K-means, seems to provide more managerially insightful segmentation schemes.

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