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    C.V.

    RAMAN GLOBAL UNIVERSITY


    BHUBANESWAR-ODISHA-752054

    BONAFIED CERTIFICATE

    Certified that this project report " Bisecting K-Means - An Efficient


    Approach to Customer Segmentation” is the bonafide work of
    “Divanshu Nayan, Registration No.-20010462, Pranshu Mishra,
    Registration No.-20010236, Shahoor Ahmed, Registration No.-
    20010197” who carried out the project work under my supervision.

    SIGNATURE SIGNATURE

    Dr Rozalina Priyadarshini Dr. Bichitrananda Behera


    HEAD OF THE DEPARTMENT SUPERVISOR
    DEPARTMENT OF CSE PROFESSOR,
    DEPARTMENT OF CSE
    C.V.RAMAN GLOBAL UNIVERSITY
    BHUBANESWAR-ODISHA-752054

    CERTIFICATE OF APPROVAL

    This is to certify that we have examined the project entitled " Bisecting
    K-Means - An Efficient Approach to Customer Segmentation"
    submitted by Divanshu Nayan, Registration No.-20010462, Pranshu
    Mishra, Registration No.-20010236, Shahoor Ahmed, Registration
    No.-20010197, CGU-Odisha, Bhubaneswar. We hereby accord our
    approval of it as a major project work carried out and presented in a
    manner required for its acceptance of partial fulfillment of the Bachelor
    Degree of Computer Science & Engineering for which it has been
    submitted. This approval does not necessarily endorse or accept every
    statement made, opinion expressed, or conclusions drawn as recorded in
    this major project, it only signifies the acceptance of the major project
    for the purpose it has been submitted.

    Prof. Bichitrananda Behera


    Supervisor
    Asst. Professor, Department of CSE
    ACKNOWLEDGEMENT
    We would like to articulate our deep gratitude to our project guide Dr.
    Bichitrananda Behera, Professor, Department Of Computer Science
    And Engineering who has always been source of motivation and firm
    support for carrying out the project.

    We would also like to convey our sincerest gratitude and indebtedness to all
    other faculty members and staff of Department of Computer Science &
    Engineering, who bestowed their great effort and guidance at appropriate
    times without it would have been very difficult on our project work.

    An assemblage of this nature could never have been attempted with our
    reference to and inspiration from the works of others whose details are
    mentioned in references section. We acknowledge our indebtedness to all of
    them. Further, we would like to express our feeling towards our parents and
    God who directly or indirectly encouraged and motivated us during
    Assertion.

    Divanshu Nayan
    Regd No.-20010462
    Pranshu Mishra
    Regd No.-20010236
    Shahoor Ahmed
    Regd No.-20010197
    ABSTRACT

    Customer segmentation plays a critical role in maximizing business success.


    This study delves into the power of Recency, Frequency, and Monetary
    Value (RFM) analysis, a data-driven approach to segmenting customer
    bases. By analyzing transactional data over a defined period, RFM analysis
    assigns scores to customers based on how recently they purchased
    (Recency), how often they buy (Frequency), and the total amount they spend
    (Monetary Value). This segmentation empowers businesses to identify
    distinct customer groups with similar behavioral patterns. Understanding
    these patterns unlocks a deeper comprehension of customer needs and
    preferences. It allows businesses to explore potential clients who exhibit
    behaviors indicative of high value. Furthermore, RFM segmentation paves
    the way for targeted marketing strategies, fostering customer loyalty and
    bolstering retention efforts. This focus on retaining existing customers,
    recognized as a strategic priority, translates directly to increased revenue
    generation. To leverage these benefits, the study investigates the application
    of classic clustering algorithms like K-means and hierarchical clustering on
    RFM-derived data. It introduces a novel method for selecting the Bisecting
    K-Means algorithm, known for its efficiency in certain scenarios. The
    effectiveness of these techniques is then evaluated using a multi-faceted
    approach, considering factors like cluster compactness, execution time, and
    the similarity between each cluster and its closest counterpart. This revised
    abstract expands on the original points while emphasizing the significance
    of RFM analysis in customer retention and revenue generation. It also
    introduces the concept of a novel Bisecting K-Means selection method,
    piquing the reader's interest for further exploration in the full study.
    TABLE OF CONTENTS

    CHAPTER TITLE PAGE


    NO. NO.
    ABSTRACT v

    LIST OF TABLES viii

    LIST OF FIGURES ix

    1 INTRODUCTION 1

    1.1 PROBLEM STATEMENT 2

    1.2 OBJECTIVE 4

    1.3 RELATED WORK 5

    1.4 APPLICATION OF CUSTOMER 7


    SEGMENTATION

    1.5 CHALLENGES OF CUSTOMER 9


    SEGMENTATION

    2 PROPOSED SYSTEM 11

    2.1 SYSTEM REQUIRMENTS 12

    3 WORKFLOW 13
    1. INTRODUCTION

    The current business environment has become more competitive, 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 prioritizing client
    retention over gaining new ones. Business experts 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 segmentation due to its


    widespread availability, dynamic nature, and foundation in past purchase
    behaviors. Recency, Frequency, and Monetary (RFM) analysis emerges as a
    prominent method for evaluating clients based on their purchasing patterns.
    To quantify the Recency, Frequency, and Monetary aspects, a scoring system
    is developed. 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 monetary 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 Hierarchical 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 becomes 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 clustering 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..

    1.1 Problem Statement

    In today's rapidly evolving marketing landscape, the shift from product-


    centric to customer-centric strategies has highlighted the pivotal role of

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