Bisecting K-Means - An Efficient Approach to
Customer Segmentation
Divanshu Nayan Pranshu Mishra
Computer Science and Engineering Computer Science and Engineering
C.V. Raman Global University C.V. Raman Global University
Bhubaneswar, India Bhubaneswar, India
Dr. Bichitrananda Behra
Computer Science and Engineering
C.V. Raman Global University
Bhubaneswar, India
Abstract—Organizations can efficiently segment their con-
sumer base by leveraging RFM (Recency, Frequency, and Mon-
etary) values, derived from analyzing transactional data over
a specified period. This segmentation approach facilitates the
identification of groups with similar behaviors, enabling a deeper
understanding of customer needs and the exploration of potential
clients for the business. Additionally, segmenting the client base
has a positive impact on revenue generation. Emphasizing the
retention of current consumers over acquiring new ones is widely
acknowledged as a priority. For instance, businesses can employ
marketing strategies tailored to specific market niches to cultivate
client loyalty and enhance retention efforts.The study utilizes
classic K-means and hierarchical clustering algorithms to cluster
transactional data subsequent to conducting an RFM analysis. It
introduces a novel approach for selecting the Bisecting K-Means
method. The efficacy of these techniques is evaluated based on
cluster compactness, execution time, and the average similarity
between each cluster and its most similar counterpart.
Index Terms—Customer segmentation, RFM analysis, K-
Means, Hierarchical Clustering, Bisecting K-Means
I. I NTRODUCTION
The current business environment has become more com-
petitive, requiring new approaches to maintain a competitive
edge. A customer segmentation model’s implementation can
greatly increase business earnings. The Pareto principle, which
states that every 2 customers out of 10 usually contribute
disproportionately to revenue, emphasizes the need of prior-
itizing client retention over gaining new ones. Business ex-
perts can customize marketing strategies, identify trends, plan
product development, coordinate advertising campaigns, and
provide pertinent items by utilizing customer segmentation,
which capitalizes on a variety of distinctive client attributes.
Customer segmentation guarantees successful communication
with specific groups by tailoring communications. Customer
segmentation often makes use of variables including location,
age, gender, income, lifestyle, and past purchasing patterns.
In this context, behavioral data is utilized for segmenta-
tion due to its widespread availability, dynamic nature, and
foundation in past purchase behaviors. Recency, Frequency,
and Monetary (RFM) analysis emerges as a prominent method
Shahoor Ahmed
Computer Science and Engineering
C.V. Raman Global University
Bhubaneswar, India
for evaluating clients based on their purchasing patterns. To
quantify the Recency, Frequency, and Monetary aspects, a
scoring system is developed. These scores are then amalga-
mated to generate an RFM score, ranging from 555 to 111
(Haiying and Yu, 2010). This composite score serves as a tool
for examining customers’ historical and current behaviors to
predict future patterns. Notably, within this framework, the
scores of Recency, Frequency, and Monetary exhibit a direct
correlation with customers’ lifetime value and retention rates.
Following the computation of recency, frequency, and mon-
etary values, the K-Means technique is applied to group the
variables into clusters within the customer base. This facilitates
the identification of which consumer group contributes most
significantly to the company’s profitability by examining the
behavior of each cluster. Additionally, two other clustering
algorithms, the Bisecting K-Means algorithm and Hierarchi-
cal clustering, are employed. The objective of this study is
to introduce a method for enhancing the interpretability of
clusters, improving compactness, and reducing cluster spread
and processing time. Once customer clusters are established,
understanding the distinctions among these groupings be-
comes imperative. A thorough examination of the clusters is
conducted to identify targeted clients and tailor offers and
promotions relevant to their needs and preferences.Marketing
professionals will find the proposed consumer segmentation
methodology valuable for its potential to enhance targeted
marketing efforts. The remaining portion of the research
concentrates on comparing and contrasting the three cluster-
ing techniques, evaluating them based on similarity, cluster
compactness, execution time, and other pertinent variables.
This comparative analysis will provide valuable insights into
the strengths and weaknesses of each technique, enabling
marketing professionals to make informed decisions about
which clustering approach best suits their specific needs and
objectives.
 II. A LGORITHM DESCRIPTION
The segmentation process utilizes the transactional dataset
of a company’s clients, employing three distinct algorithms to
group clients based on RFM analysis. Initially, the data un-
dergoes pre-processing to remove outliers and filter significant
occurrences. The z-score method is employed to identify out-
liers and assess how the data align with the mean and standard
deviation. Through this method, the standard deviation and
mean are standardized to 0 and 1, respectively. Outliers are
identified as data points that exhibit significant deviation from
the mean (zero). Subsequently, the recency, frequency, and
monetary values are computed by inputting the preprocessed
data into the RFM model.The three clustering algorithms,
namely K-Means, Hierarchical Clustering, and Bisecting K-
Means, are subsequently applied to the three qualities (recency,
frequency, and monetary values). These algorithms partition
the clients into distinct groups based on their RFM characteris-
tics. Following this, the cluster compactness, similarity index,
and execution time of each clustering method are scrutinized to
assess their effectiveness. For a quick reference, a summarized
depiction of the suggested client segmentation strategy is
presented in Figure 1.
A. RFM analysis
In database marketing, Recency, Frequency, and Monetary
(RFM) analysis stands as a potent and widely recognized
method. Ranking clients based on their historical purchasing
behavior is a prevalent practice in this realm. RFM analysis
finds numerous applications across various domains, including
online shopping and e-commerce, particularly in scenarios
involving a large number of clients. This strategy entails
utilizing three dimensions to segment customers: Monetary
(M), Frequency (F), and Recency (R).
1) Recency: How recently did the client make a purchase?:
The amount of time a customer takes between two purchases
is known as their recency value. A lower number of recency
suggests that the client makes several quick trips to the
business. In a similar vein, a higher value suggests a lower
likelihood of a customer visiting the business soon.
2) Frequency: How many times did the customer make a
purchase?: The quantity of purchases a consumer makes in a
certain time frame is known as their frequency. The company’s
clients are more devoted the greater the frequency value.
3) Monetary: What was the customer’s expenditure?: The
quantity of money spent by the consumer during a specific
time period is referred to as monetary. The more money spent,
the more revenue the company receives from them.
B. K-Means clustering:
K-Means is a common algorithm that divides the data into
the number of clusters that are specified so that the intra-cluster
similarity is high. It takes the parameters and the number of
clusters as inputs. The iterative K-Means method calculates
the centroids’ values before to each iteration. The centroids
determined at each iteration determine which clusters the data
points are shifted within. The procedure is iterated until the
total can no longer be reduced. Algorithm 1 displays the K-
Means algorithm.
Min-max normalization is used to normalize the recency,
frequency, and monetary values of the variables. Because
skewed values could be troublesome, this is done. Now, the
scaled data is subjected to the clustering method. To determine
which customer category generates the most revenue for the
business, the amount of money earned by each is calculated.
K-means has complexity O(n + k + i). where k is the number
of clusters, i denotes the number of iterations, and ’n’ denotes
the number of instances.
K-Means Algorithm
1: Input:
2: - Dataset D = {x1 , x2 , . . . , xn } with n data points in d
dimensions.
3: - Number of clusters k.
4: Output:
5: - Cluster centroids {c1 , c2 , . . . , ck }.
6: Initialization:
7: 1. Randomly select k data points as initial cluster centroids
(0) (0) (0)
{c1 , c2 , . . . , ck }.
8: for t = 1 to T (maximum iterations) do
9: 2. Assignment Step: Assign each data point xi to the
nearest cluster centroid cj based on distance metric
(e.g., Euclidean distance).
(t−1) 2
assign xi to cluster j = arg min ||xi − cl ||
l∈{1,2,...,k}
10: 3. Update Step: Recompute the centroid of each cluster
cj as the mean of the data points assigned to it.
(t) 1 X
cj = xi
|Cj |
xi ∈Cj
11: 4. Termination Criterion: If the centroids haven’t
changed significantly between iterations (or a maximum
number of iterations is reached), then terminate. Other-
wise, go back to step 2.
12: end for=0
C. Hierarchical Clustering:
Hierarchical clustering is an unsupervised learning tech-
nique that organizes data points into a nested structure, similar
to a family tree. It begins by treating each data point as its own
individual cluster. Then, it iteratively merges the most similar
clusters based on a chosen distance metric (like Euclidean
distance) until a single cluster encompassing all data points is
formed. This process creates a visual representation called a
dendrogram, which depicts the merging hierarchy and allows
you to determine the optimal number of clusters for your
data analysis. However, the computational cost of hierarchical
clustering can be significant. In the worst-case scenario, its
time complexity scales with the cube of the number of data
points (O(n3 )), making it less suitable for massive datasets
compared to other clustering algorithms.
Min-max normalization is used to scale the variables, same
like in the preceding procedure. The clients are currently
grouped according to the most recent, frequent, and monetary
values using hierarchical clustering.
Agglomerative Hierarchical Clustering Algorithm:
1: Input:
2: - Dataset D = {x1 , x2 , . . . , xn } with n data points in d
dimensions.
3: - Distance metric (e.g., Euclidean distance).
4: - Linkage function (e.g., Single Linkage, Complete Link-
age).
5: Output:
6: - Dendrogram representing the hierarchical cluster struc-
ture.
7: Initialization:
8: 1. Consider each data point as an individual cluster.
9: 2. Compute a proximity matrix storing the distance be-
tween all data points.
10: for t = 1 to n − 1 (merging iterations) do
11: 3. Find closest clusters: Identify the two most similar
clusters based on the chosen linkage function and the
proximity matrix.
12: 4. Merge clusters: Combine the identified clusters into
a new cluster.
13: 5. Update proximity matrix: Recalculate distances
between the new cluster and all remaining clusters.
14: end for
15: 6. The final set of clusters and their hierarchy is repre-
sented by the dendrogram. =0
D. Bisecting K-means
Bisecting K-means offers a unique clustering perspective,
merging the top-down logic of divisive hierarchical clustering
with the iterative splitting of K-means. It starts with all
data points in a single cluster and strategically divides the
cluster with the most significant internal differences using
K-means (K=2). This selective splitting continues until the
desired number of clusters is reached. This approach can
be advantageous for large cluster counts due to its focus
on the most informative splits and its tendency to produce
clusters with more balanced sizes compared to standard K-
means.The time complexity of the bisecting k-means algorithm
is O((K-1)IN), where I is the number of iterations to converge.
Bisecting k-means is also linear in the size of the documents.
Bisecting K-Means Clustering Algorithm
1: Input:
2: - Dataset D = {x1 , x2 , . . . , xn } with n data points in d
dimensions.
3: - Number of clusters k.
4: Output:
5: - Cluster centroids {c1 , c2 , . . . , ck }.
6: Initialization:
7: 1. Start with all data points in a single cluster.
8: for t = 1 to k − 1 (bisection steps) do
9: 2. Splitting Step: Apply K-Means algorithm (often
with a single iteration) to the current cluster to split
it into two sub-clusters.
10: 3. Choose one of the sub-clusters for further splitting
in the next iteration. Common strategies include:
11: (a) Selecting the sub-cluster with higher centroid dis-
tance (larger diameter).
12: (b) Selecting the sub-cluster with higher within-cluster
variance (more spread).
13: end for
14: 4. The final set of clusters consists of the k remaining
clusters after bisection. =0
III. E XPERIMENTATION AND RESULT DISCUSSION
By using the transactional data set of customers of an online
retailer for a year, which is sourced from the University of
California, Irvine (UCI) repository, the effectiveness of the
suggested methodology is assessed. This section outlines the
consumer segmentation process step-by-step. The dataset has
eight attributes, such as the customer ID, product code, name,
price, date, and time of purchase, among others. There are
541910 instances with eight attributes in the original data
set. The dataset includes consumer purchases made between
December 1, 2010, and December 9, 2011. During data
pre-processing, any cases with missing values in significant
attributes, unit prices and quantities less than 0, and dates
older than the current date are eliminated. As an extra step
in the pre-processing of the data, the Z-Score analysis is also
carried out to detect the outliers. Only those records that pass
the filtering process—such as invoice data and time, product
quantity per transaction, and product pricing per unit in terms
of currency and frequency—have been sent into the benchmark
algorithms. The three extra attributes—recentness, frequency,
and monetary—that are produced from RFM computation are
present in 4067 occurrences of the amended dataset. Table 2
displays a description of the original dataset.
Fig. 2 displays the result plots produced by bisecting K-
means, hierarchical clustering, and K-means clustering. Every
algorithm’s execution time is computed using the system time.
It is found that because of its lower computational cost, the
suggested Bisecting K-Means method works faster than the
other two. The average distance between the generated clusters
is studied using the silhouette width and the average similarity
of each cluster with its most similar cluster is meansured by
Davies-Bouldin score. The silhouette plot is a visual analysis
of the clustering result that shows the number of customers in
each cluster as well as the shortest distance between a cluster
point and another cluster point. The data points inside a cluster
are closer to one another but not to the ones in other clusters
when the average silhouette width is bigger and vice versa.And
data points inside a cluster are less similar to the ones in
other clusters when the Davies-Bouldin score is Smaller and
vice versa. For the final clusters produced by the Hierarchical
Clustering and Bisecting K-Means approach as well as the
K-means clustering technique, the average silhouette width is
computed. The average silhouette width of the Bisecting K-
Means clustering is found to be larger than that of the K-Means
clustering and the Hierarchical clustering.
IV. C ONCLUSION :
Customer relationships will be strengthened by customer
segmentation. While acquiring new clients is significant for
the business, keeping the current clientele is even more crucial
(Tong et al., 2017). This work uses RFM analysis for seg-
mentation and then expands it to include other methods such
as K-Means clustering, Hierarchical Clustering, and a new
technique. K-Means bisection achieved by slightly altering
the current K-Means clustering. These methods’ operation is
examined. After analyzing how long each algorithm takes
to run, it is found that the suggested Bisecting K-Means
strategy takes less time. Because of its simplicity and lower
computation cost, the suggested algorithm is more efficient.
Due to the fact that segmentation is carried out according to
values of currency, frequency, and recency, the business is able
to tailor its marketing campaigns to the clients’ purchasing
habits. Future research will examine consumer behavior in
each category, including the products that members of that
segment purchase on a regular basis. This would make it easier
to give particular products greater promotional incentives.
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