Observing Customer Segment Stability Using Soft Computing Techniques and Markov Chains within Data Mining Framework

Abstract

This study proposes a model that utilizes soft computing and Markov Chains within a data mining framework to observe the stability of customer segments. The segmentation process in this study includes clustering of existing consumers and classification-prediction of segments for existing and new customers. Both a combination and an integration of soft computing techniques were used in the proposed model. Segmenting customers was done according to the purchasing behaviours of customers based on RFM (Recency, Frequency, Monetary) values. The model was applied to real-world data that were procured from a UK retail chain covering four periods of shopping transactions of around 300,000 customers. Internal validity was measured by two different clustering validity indices and a classification accuracy test. Some meaningful information associated with segment stability was extracted to provide practitioners a better understanding of segment stability over time and useful managerial implications.