What is Hierarchical Clustering?

Hierarchical clustering is an algorithm that groups similar data points together based on their distance or similarity.

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Hierarchical clustering is a type of clustering algorithm used in unsupervised machine learning, which groups similar data points together based on their distance or similarity. It involves organizing data into a tree-like structure, known as a dendrogram, which represents the relationships between the data points.

How does Hierarchical Clustering work?

There are two types of hierarchical clustering: agglomerative (bottom-up) and divisive (top-down).

  1. Agglomerative clustering: In this approach, the algorithm starts with each data point as a separate cluster and iteratively merges the closest pair of clusters until all data points belong to a single cluster.
  2. Divisive clustering: In contrast to agglomerative clustering, divisive clustering begins with a single cluster containing all data points and recursively splits the clusters into smaller ones until each data point is in its own cluster.
Hierarchical agglomerative clustering example
Hierarchical divisive clustering

To measure the similarity or distance between clusters, various metrics can be used, such as Euclidean distance, Manhattan distance, or cosine similarity. Additionally, different linkage methods, like single, complete, average, and Ward's linkage, help determine how clusters are merged or split.

Hierarchical clustering involves the following steps:

  1. Calculate the similarity or dissimilarity between each pair of data points.
  2. Assign each data point to a separate cluster.
  3. Compute the distance between each pair of clusters based on their similarity or dissimilarity.
  4. Merge the two closest clusters together into a new cluster.
  5. Recalculate the distance between the new cluster and the remaining clusters.
  6. Repeat steps 4 and 5 until a single cluster containing all the data points is formed.
  7. Visualize the results using a dendrogram, which shows the hierarchy of the clusters.

Tips for Using Hierarchical Clustering

Here are a few tips for using hierarchical clustering:

  • Choose the right distance measure. The distance measure you choose will affect the results of your clustering.
  • Choose the right number of clusters. The number of clusters you choose will affect the results of your clustering.
  • Use a reliable algorithm. There are many different algorithms for hierarchical clustering. Choose an algorithm that is reliable and that will produce the results you want.
  • Interpret your results. The results of hierarchical clustering can be interpreted to identify clusters of similar data points, to classify data points, and to identify outliers.

How is Hierarchical Clustering Used in Market Research?

Hierarchical clustering has numerous applications in market research, including segmentation, product categorization, and trend analysis. Let's look at some specific use cases:

  1. Customer Segmentation: Hierarchical clustering helps market researchers identify distinct groups of customers based on their demographics, preferences, or behaviors. By understanding the characteristics of each group, businesses can develop targeted marketing strategies, personalize customer experiences, and increase customer loyalty.
  2. Product Categorization: Market researchers can use hierarchical clustering to organize products or services into meaningful groups based on their attributes or features. This process helps identify gaps in the market, potential opportunities for new products, or areas for improvement in existing offerings.
  3. Trend Analysis: Hierarchical clustering allows researchers to identify patterns and trends in large datasets, such as social media posts, customer reviews, or market data. By understanding these trends, businesses can make informed decisions, anticipate customer needs, and stay ahead of competitors.
  4. Competitor Analysis: By clustering competitors based on their offerings, market position, and target audience, market researchers can identify potential threats, opportunities, and areas where their business can differentiate itself.

Hierarchical clustering is a powerful and versatile tool in the world of market research. It helps researchers make sense of complex datasets and discover valuable insights that drive better decision-making. By understanding how hierarchical clustering works and its applications in market research, businesses can leverage this technique to improve their products, services, and overall customer satisfaction.

John Sevec

SVP, Client Strategy

John provides strategic advisory and insight guidance to premier clients across mTab’s portfolio. His expertise spans customer strategy, market insight and business intelligence.