Customer segmentation using association rule mining on retail transaction data

Abstract

This research aimed to investigate a suitable algorithm for customer segmentation using as customer behavior indicators the recency, frequency, and monetary (RFM) values of the customers. The clustering algorithms K-means, fuzzy C-means, and self-organizing neural network (SONN) were compared for finding the most appropriate algorithm. The customer segmentation was analyzed using association rule mining with the frequent pattern algorithm (FP-Growth). Data on retail transactions during January 2021 - May 2023 were obtained from Tuenjai Company, Thailand, with a total of 202,469 records. The results from the three algorithms were compared by the silhouette coefficient (SC), Calinski-Harabasz (CH) index, Davies-Bouldin (DB) index, iteration count, and execution time. The results showed that the K-means algorithm was the most suitable algorithm for customer segmentation in this study. K-means clustering grouped the customers into three groups here labeled as “important value”, “general development”, and “lost”, based on the RFM values. There were 38 rules for the important value segment, and two rules each for the general development and the lost groups. These results could be useful to the business organization for improving the customer experiences, increasing sales, preparing or promoting products, and stock management efficiency.