CUSTOMER SEGMENTATION USING

MACHINE LEARNING
(To Identify Ships In A Satellite Image)
Summer Internship Report Submitted in partial fulfilment
of the requirement for undergraduate degree of

Bachelor of Technology

In

COMPUTER SCIENCE AND ENGINEERING

By

SHERI SAI TEJA

222010310037

Under the Guidance of

VINAYKUMAR
JOSHI
Assistant Professor

Department Of Computer Science and Engineering

GITAM School of Technology
GITAM (Deemed to be University)
Hyderabad-502329
September 2023
 DECLARATION

I submit this industrial training work entitled “Customer Segmentation Using Machine
Learning” to GITAM (Deemed To Be University), Hyderabad in partial fulfilment of the
requirements forthe award of the degree of “Bachelor of Technology” in “Computer Science
and Engineering”. I declare that it was carried out independently by me under the guidance of
Mr.Vinay kumar joshi, Asst. Professor, GITAM (Deemed To Be University), Hyderabad,
India.

The results embodied in this report have not been submitted to any other University or
Institute for the award of any degree or diploma.

Place: HYDERABAD Name: Sheri Saiteja

Date: 06-09-2023 Student Roll No: 222010310037

I
 GITAM (DEEMED TO BE UNIVERSITY)

Hyderabad-502329, India
Dated: 21 -07-2020

CERTIFICATE

This is to certify that the Industrial Training Report entitled “Customer

Segmentation Using Machine Learning” is being submitted by Sheri Saiteja (222010310037)
in partial fulfilment of the requirement for the award of Bachelor of Technology in Computer
Science And Engineering at GITAM (Deemed to Be University), Hyderabad during the
academic year 2023-2024.

It is faithful record work carried out by him at the Computer Science And
Engineering Department, GITAM University Hyderabad Campus under my guidance and
supervision.

VINAY KUMAR JOSHI DR.K.SUDEEP

Assistant Professor Professor and HOD

Department of CSE Department of CSE

II
 ACKNOWLEDGEMENT

Apart from my effort, the success of this internship largely depends on the
encouragement and guidance of many others. I take this opportunity to express my gratitude to
the people who have helped me in the successful competition of this internship.

I would like to thank respected Dr. N. Siva Prasad, Pro Vice Chancellor, GITAM
Hyderabad and Dr. N. Seetharamaiah, Principal, GITAM Hyderabad.

I would like to thank respected Dr.K.Dudeep, Head of the Computer Science and
Engineering for giving me such a wonderful opportunity to expand my knowledge for my own
branch and giving me guidelines to present an internship report. It helped me a lot to realize of
what we study for.

I would like to thank the respected faculties Mr. Vinay Kumar Joshi who helped me
to make this internship a successful accomplishment.

I would also like to thank my friends who helped me to make my work more organized
and well-stacked till the end.

Sheri Saiteja

222010310037
 ABSTRACT

Nowadays Customer segmentation became very popular method for dividing company’s
customers for retaining customers and making profit out of them, in the following study
customers of different of organizations are classified on the basis of their behavioral
characteristics such as spending and income, by taking behavioral aspects into consideration
makes these methods an efficient one as compares to others. For this classification a
machine algorithm named as k-means clustering algorithm is used and based on the
behavioral characteristic’s customers are classified. Formed clusters help the company to
target individual customer and advertise the content to them through marketing campaign
and social media sites which they are really interested in.

The emergence of many competitors and entrepreneurs has caused a lot of tension
among competing businesses to find new buyers and keep the old ones. As a result of
the predecessor, the need for exceptional customer service becomes appropriate
regardless of the size of the business. Furthermore, the ability of any business to
understand the needs of each of its customers will provide greater customer support in
providing targeted customer services and developing customized customer service
plans. This understanding is possible through structured customer service. Each
segment has customers who share the same market features. Big data ideas and
machine learning have promoted greater acceptance of automated customer
segmentation approaches in favor of traditional market analytics that often do not
work when the customer base is very large. In this paper, the k-means clustering
algorithm is used for this purpose. The Sk learn liabrary was developed for the k-
Means algorithm (found in the Appendix) and the program is trained using a 100-
patterntwo-factor dataset derived from the retail trade. Characteristics of average
number of customer purchases and average number of monthly customers.

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 AGENDA
1. INTRODUCTION 8

2. ABOUT THE PROJECT 9

3. WHAT IS CUSTOMER S EGMENTATION? 10-11

TYPES OF CUSTOMER SEGMENTATION FACTORS

1.1 DEMOGRAPHIC

1.2 PSYCHOGRAPHIC

1.3 BEHAVIORAL

1.4 GEOGRAPHIC

4. ADVANTAGES OF CUSTOMER SEGMENTATION 11-12

5. WHY MACHINE LEARNING? 12-15

6. K-MEANS ALGORITHM AND

IMPLEMENTATION 15-21

7. VISUALIZING CUSTOMER SEGMENT 22-25

8. ENVIRONMENTS AND TOOLS FOR PROJECT 25

9. CONCLUSION 26

10. REFERENCE 26
 1. Introduction

Customer segmentation is the practice of dividing a customer base into groups of individuals that
have similar characteristics relevant to marketing, such as age, gender, interests and spending
habits.

Companies employing customer segmentation know that each customer is different and that
targeting all their customers with one approach isn't effective. Instead, the organization's
marketing efforts would be better served if they target specific, smaller groups with messages
those consumers find relevant.

The goal of customer segmentation is to reach out to customers more effectively, thereby leading
to more sales or customer conversions. Companies also hope to gain a deeper understanding of
their customers' preferences and needs by discovering what each segment finds most valuable
and more accurately tailoring marketing materials toward that segment.

Customer segmentation relies on identifying key differentiators that divide customers into groups
that can be targeted. Information such as a customer's demographics, geography, psychographic
and behavioral tendencies are taken into account when determining customer segmentation
practices.

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 2. About the Project

Customer segmentation is the process by which you divide your customers up based on
common characteristics – such as demographics or behavioral, so your marketing team
or sales team can reach out to those customers more effectively.

These customer segmentation groups can also be used to begin discussions of building a
marketing persona or product user persona. This is because effective customer
segmentation analysis is typically used to inform a brand’s messaging and positioning,
helps organisations know what new products are services they might want to invest in,
and uncovers ways to improve how the business sells. Because of this, marketing
personas need to be closely aligned to those segments in order to be effective.

The “target persona” (or “marketing persona”) is, by definition, a personification of a

specific customer segment so it’s not uncommon for businesses to create several
personas to match the various customer segments they’ve created.

But for that to happen, a business needs a robust set of customer segments to form a
customer segmentation model. This leads us to the next section, distinguishing the
difference between customer segmentation and market segmentation, so that your
segmentation is as accurate and specific to you as possible.

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 3. What is Customer Segmentation

Customer segmentation simply means grouping your customers according to various

characteristics (for example grouping customers by age).

It’s a way for organizations to understand their customers. Knowing the differences
between customer groups, it’s easier to make strategic decisions regarding product
growth and marketing.

The opportunities to segment are endless and depend mainly on how much customer data
you have at your use. Starting from the basic criteria, like gender, hobby, or age, it goes
all the way to things like “time spent of website X” or “time since user opened our app”.

There are different methodologies for customer segmentation, and they depend on four
types of parameters:

geographic,
demographic,
behavioral,
psychological.

1.1 Geographic:

Geographic customer segmentation is very simple, it’s all about the user’s location. This
can be implemented in various ways. You can group by country, state, city, or zip code.

1.2 Demographic:

Demographic segmentation is related to the structure, size, and movements of customers

over space and time. Many companies use gender differences to create and market
products. Parental status is another important feature. You can obtain data like this from
customer surveys.

1.3 Behavioral:

Behavioral customer segmentation is based on past observed behaviors of customers that

can be used to predict future actions. For example, brands that customers purchase, or
moments when they buy the most. The behavioral aspect of customer segmentation not
only tries to understand reasons for purchase but also how those reasons change
throughout the year.

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1.4 Psychological:

Psychological segmentation of customers generally deals with things like personality

traits, attitudes, or beliefs. This data is obtained using customer surveys, and it can be
used to gauge customer sentiment.

4. Advantages of Customer Segmentation

Implementing customer segmentation leads to plenty of new business opportunities. You

can do a lot of optimization in:

budgeting,
product design,
promotion,
marketing,
customer satisfaction.

Let’s discuss these benefits in more depth.

Budgeting:
Nobody likes to invest in campaigns that don’t generate any new customers. Most
companies don’t have huge marketing budgets, so that money has to be spent right.
Segmentation enables you to target customers with the highest potential value first, so
you get the most out of your marketing budget.

Product design:
Customer segmentation helps you understand what your users need. You can identify the
most active users/customers, and optimize your application/offer towards their needs.

Promotion:
Properly implemented customer segmentation helps you plan special offers and deals.
Frequent deals have become a staple of e-commerce and commercial software in the past
few years. If you reach a customer with just the right offer, at the right time, there’s a
huge chance they’re going to buy. Customer segmentation will help you tailor your
special offers perfectly.

Marketing:
The marketing strategy can be directly improved with segmentation because you can
plan personalized marketing campaigns for different customer segments, using the
channels that they use the most.

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Customer satisfaction:
By studying different customer groups, you learn what they value the most about your
company. This information will help you create personalized products and services that
perfectly fit your customers’ preferences.

In the next section, we’re going to discuss why machine learning for customer
segmentation.

5. Why Machine Learning?

Machine learning methodologies are a great tool for analyzing customer data and finding
insights and patterns. Artificially intelligent models are powerful tools for decision-
makers. They can precisely identify customer segments, which is much harder to do
manually or with conventional analytical methods.

There are many machine learning algorithms, each suitable for a specific type of
problem. One very common machine learning algorithm that’s suitable for customer
segmentation problems is the k-means clustering algorithm. There are other clustering
algorithms as well such as DBSCAN, Agglomerative Clustering, and BIRCH, etc.

Why would you implement machine learning for customer segmentation?

More time

Manual customer segmentation is time-consuming. It takes months, even years to

analyze piles of data and find patterns manually. Also if done heuristically, it may not
have the accuracy to be useful as expected.

Customer segmentation used to be done manually and wasn’t too precise. You’d
manually create and populating different data tables, and analyze the data like a detective
with a looking glass. Now, it’s much better (and relatively easy thanks to rapid progress
in ML) to just use machine learning, which can free up your time to focus on more
demanding problems that require creativity to solve.

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 Ease of retraining

Customer Segmentation is not a “develop once and use forever” type of project. Data is
ever-changing, trends oscillate, everything keeps changing after your model is deployed.
Usually, more labeled data becomes available after development, and it’s a great
resource for improving the overall performance of your model.

There are many ways to update customer segmentation models, but here are the two
main approaches:

Use the old model as the starting point and retrain it.
Keep the existing model and combine its output with a new model.

Better scaling

Machine learning models deployed in production support scalability, thanks to cloud

infrastructure. These models are quite flexible for future changes and feedback. For
example, consider a company that has 10000 customers today, and they’ve implemented
a customer segmentation model. After a year, if the company has 1 million customers,
then ideally we don’t need to create a separate project to handle this increased data.
Machine Learning models have the inherent capability to handle more data and scale in
production.

Higher accuracy

The value of an optimal number of clusters for given customer data is easy to find using
machine learning methods like the elbow method. Not only the optimal number of
clusters but also the performance of the model is far better when we use machine
learning.

Exploring customer dataset and its features

Let’s analyze a customer dataset. Our dataset has 24,000 data points and four features.
The features are:

Customer ID – This is the id of a customer for a particular business.

Products Purchased – This feature represents the number of products purchased by a
customer in a year.
Complaints – This column value indicates the number of complaints made by the
customer in the last year
Money Spent – This column value indicates the amount of money paid by the customer
over the last year.

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 Pre-processing the dataset

Before feeding the data to the k-means clustering algorithm, we need to pre-process the
dataset. Let’s implement the necessary pre-processing for the customer dataset.

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 6. Implementing K-means clustering in Python

K-Means clustering is an efficient machine learning algorithm to solve data clustering

problems. It’s an unsupervised algorithm that’s quite suitable for solving customer
segmentation problems. Before we move on, let’s quickly explore two key concepts

Unsupervised Learning

Unsupervised machine learning is quite different from supervised machine learning. It’s
a special kind of machine learning algorithm that discovers patterns in the dataset from
unlabelled data.

Unsupervised machine learning algorithms can group data points based on similar
attributes in the dataset. One of the main types of unsupervised models is clustering
models.

Note that, supervised learning helps us produce an output from the previous experience.

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 Clustering algorithms

A clustering machine learning algorithm is an unsupervised machine learning algorithm.

It’s used for discovering natural groupings or patterns in the dataset. It’s worth noting
that clustering algorithms just interpret the input data and find natural clusters in it.

Some of the most popular clustering algorithms are:

K-Means Clustering
Agglomerative Hierarchical Clustering
Expectation-Maximization (EM) Clustering
Density-Based Spatial Clustering
Mean-Shift Clustering
In the following section, we’re going to analyze the customer segmentation problem
using the k-means clustering algorithm and machine learning. However, before that, let’s
quickly discuss why we’re using the k-means clustering algorithm.

Why use K-means clustering for customer segmentation?

Unlike supervised learning algorithms, K-means clustering is an unsupervised machine

learning algorithm. This algorithm is used when we have unlabelled data. Unlabelled
data means input data without categories or groups provided. Our customer segmentation
data is like this for this problem.

The algorithm discovers groups (cluster) in the data, where the number of clusters is
represented by the K value. The algorithm acts iteratively to assign each input data to one
of K clusters, as per the features provided. All of this makes k-means quite suitable for
the customer segmentation problem.

Given a set of data points are grouped as per feature similarity. The output of the K-
means clustering algorithm is:

The centroids values for K clusters,

Labels for each input data point.
At the end of implementation, we’re going to get output such as a group of clusters along
with which customer belongs to which cluster.

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First, we need to implement the required Python libraries as shown in the table below.

# Import required libraries

import pandas as pd
import numpy as np
from sklearn.cluster import KMeans
import plotly.express as px
import plotly.graph_objects as go
import matplotlib.pyplot as plt

We’ve imported the pandas, NumPy sklearn, plotly and matplotlib libraries. Pandas and
NumPy are used for data wrangling and manipulation, sklearn is used for modelling, and
plotly along with matplotlib will be used to plot graphs and images.

After importing the library, our next step is to load the data in the pandas data frame. For
this, we’re going to use the read_csv method of pandas.

#Load customers data

customersdata = pd.read_csv("customers-data.csv")

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After loading the data, we need to define the K- means model. This is done with the help
of the KMeans class that we imported from sklearn, as shown in the code below.

# Define K-means model

kmeans_model = KMeans(init='k-means++', max_iter=400, random_state=42)

After defining the model, we want to train is using a training dataset. This is
implemented with the use of the fit method, as shown in the code below.

# Train the model

kmeans_model.fit(customersdata[['products_purchased','complains',
'money_spent']])

Finding the optimal number of clusters

Finding the optimal number of clusters is one of the key tasks when implementing a k-
means clustering algorithm. It’s worth noting that a k-means clustering model might
converge for any value of K, but at the same time, not all values of K will produce the
best model.

For some datasets, data visualization can help understand the optimal number of clusters,
but this doesn’t apply to all datasets. We have a few methods, such as the elbow method,
gap statistic method, and average silhouette method, to assess the optimal number of
clusters for a given dataset. We’ll discuss them one by one.

The elbow method finds the value of the optimal number of clusters using the total
within-cluster sum of square values. This represents how spread-apart the generated
clusters are from one another. In this case, the K-means algorithm is evaluated for
several values of k, and the within-cluster sum of square values is calculated for each
value of k. After this, we plot the K versus the sum of square values. After analyzing this
graph, the number of clusters is selected, so that adding a new cluster doesn’t change the
values of the sum of square values significantly.
Average silhouette method is a measure of how well each data point fits its
corresponding cluster. This method evaluates the quality of clustering. As a general rule,
a high average silhouette width denotes better clustering output.
Gap statistic method is a measure of the value of gap statistics. Gap statistics is the
difference between the total intracluster changes for various values of k compared to
their expected values. This calculation is done using the null reference distribution of
data points. The optimal number of clusters is the value that maximizes the value of gap
statistics.

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We’re going to use the elbow method. The K-means clustering algorithm clusters data by
separating given data points in k groups of equal variances. This effectively minimizes a
parameter named inertia. Inertia is nothing but within-cluster sum-of-squares distances in
this case.

When we use the elbow method, we gradually increase the number of clusters from 2
until we reach the number of clusters where adding more clusters won’t cause a
significant drop in the values of inertia.

The stage at this number of clusters is called the elbow of the clustering model. We’ll see
that in our case it’s K =5.

For implementing the elbow method, the below function named “try_different_clusters”
is created first. It takes two values as input:

K (number of clusters),
data (input data).

# Create the K means model for different values of K

def try_different_clusters(K, data):

cluster_values = list(range(1, K+1))

inertias=[]

for c in cluster_values:
model = KMeans(n_clusters = c,init='k-means++',max_iter=400,random_state=42)
model.fit(data)
inertias.append(model.inertia_)

return inertias

The method try_different_clusters is called using the below code, where we pass the
values of K from 1 to 12 and calculate the inertia for each value of k.

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# Find output for k values between 1 to 12
outputs = try_different_clusters(12,
customersdata[['products_purchased','complains','money_spent']])
distances = pd.DataFrame({"clusters": list(range(1, 13)),"sum of squared distances":
outputs})

Using the below code, we plot the value of K (on the x-axis) against corresponding
values of inertia on the Y-axis.

# Finding optimal number of clusters k

figure = go.Figure()
figure.add_trace(go.Scatter(x=distances["clusters"], y=distances["sum of squared
distances"]))

figure.update_layout(xaxis = dict(tick0 = 1,dtick = 1,tickmode = 'linear'),

xaxis_title="Number of clusters",
yaxis_title="Sum of squared distances",
title_text="Finding optimal number of clusters using elbow method")
figure.show()

We can generate the below plot using the above code. The elbow of the code is at K=5.
We have chosen 5 as if we increase the number of clusters to more than 5, there is very
small change in the inertia or sum of the squared distance.

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Optimal value of K = 5

The stage at which the number of clusters is optimal is called the elbow of the clustering
model. For example, in the below image, the elbow is at five clusters (K =5). Adding
more than 5 clusters will cause the creation of an inefficient or less performant clustering
model.

As discussed before, we need to train the k-means clustering model again with the
optimal number of clusters found.

# Re-Train K means model with k=5

kmeans_model_new = KMeans(n_clusters = 5,init='k-
means++',max_iter=400,random_state=42)

kmeans_model_new.fit_predict(customersdata[['products_purchased','complains','money
_spent']])

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 7. Visualizing customer segments

In this section, we’ll be implementing some code using plotly express. This way we’ll
visualize the clusters in three dimensions, formed by our k-means algorithm. Plotly
express is a library based on plotly that works on several types of datasets and generates
highly-styled plots.

First, let’s add a new column named ‘clusters’ to the existing customer data dataset. This
column will be able to tell which customer belongs to what cluster.

# Create data arrays

cluster_centers = kmeans_model_new.cluster_centers_
data = np.expm1(cluster_centers)
points = np.append(data, cluster_centers, axis=1)
points

Note that we’re using NumPy expm1 methods here. NumPy expm1 function returns the
exponential value of minus one for each element given inside a NumPy array as output.
Therefore, the np.expm1 method accepts arr_name and out arguments and then returns
the array as outputs.

# Add "clusters" to customers data

points = np.append(points, [[0], [1], [2], [3], [4]], axis=1)
customersdata["clusters"] = kmeans_model_new.labels_

After adding the new column, named clusters, the customer data dataset will look as
below.

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Finally, we’re going to use the below code to visualize the five clusters created. This is
done using plotly with the express library.

Plotly is a Python library used for graphing, statistics, plotting, and analytics. This can be
used along with Python, R, Julia, and other programming languages. Plotly is a free and
open-source library.

Plotly Express is a high-level interface over Plotly, that works on several types of
datasets and generates highly-styled plots.

The plotly.express class has functions that can produce entire figures in one go.
Generally, it’s referred to as px. It’s worth noting plotly express is the built-in module of
the plotly library. This is the starting point of creating the most common plots as
recommended. Note that each plotly express function creates graph objects internally and
returns plotly.graph_objects.

A graph created by a single method call using plotly express can be also created using
graph objects only. However, in that case, it takes around 5 to 100 times as much code.

As the 2D scatter plot, px.scatter plots individual data in a two-dimensional space, and
the 3D method px.scatter_3d plots individual data in a three-dimensional space.

# visualize clusters
figure = px.scatter_3d(customersdata,
color='clusters',
x="products_purchased",
y="complains",
z="money_spent",
category_orders = {"clusters": ["0", "1", "2", "3", "4"]}
)
figure.update_layout()
figure.show()

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24
Visualization of clusters of data points is very important. Various edges of the graph
provide a quick view of the complex input data set.

8. Tools

A customer segmentation tool is a type of software that lets you automate the entire
segmentation process by:

Pulling customer data from multiple channels

Analyzing massive amounts of customer data, such as age, location, needs and wants,
shopping habits, and more – depending on what’s relevant to your business

Assigning leads and customers to customer segments based on shared traits and
behavioral patterns.

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 9. Conclusion

It’s not wise to serve all customers with the same product model, email, text message
campaign, or ad. Customers have different needs. A one-size-for-all approach to business
will generally result in less engagement, lower-click through rates, and ultimately fewer
sales. Customer segmentation is the cure for this problem.

Finding an optimal number of unique customer groups will help you understand how
your customers differ, and help you give them exactly what they want. Customer
segmentation improves customer experience and boosts company revenue. That’s why
segmentation is a must if you want to surpass your competitors and get more customers.
Doing it with machine learning is definitely the right way to go.

10. Reference

https://neptune.ai/blog/customer-segmentation-using-machine-learning
https://www.youtube.com/watch?v=4jv1pUrG0Zk

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