# Cluster Analysis: Everything You Need to Know

## Cluster Analysis in Data Mining

Any group of objects that belongs to the same class is known as a cluster. In data mining, cluster analysis is a way to discover similar item groups from hundreds and thousands of items from other groups.

## 1. What is Cluster Analysis?

Cluster analysis is a type of strategy that is used to categorize objects or cases into proximate groups called clusters. For instance, in the insurance providers, these steps in cluster analysis help segregate fraudulent access of the customer data.

## 2. Cluster Analysis Methods

Cluster analysis methods empower the algorithm to work with multivariate data from multiple fields of marketing, geo-spatial, and bio-medical to deliver the cumulative analysis. Various methods are available to implement cluster analysis.

### A) Partitioning Method

In this method, let us say that the “m” partition is to be done on the “p” objects of the database. A cluster will then be illustrated by each partition and m<p. K is the number of groups after the classification of objects.

### B) Hierarchical Method

This method builds a specific hierarchy from the given data sets and the objective of this type of cluster analysis is to segregate. Generally, this method follows two directions–agglomerative approach and divisive approach.

### C) Constraint-based Method

This clustering method takes into account different constraints to bring more analysis and insights into the algorithm.

### D) Density-based Method

In this method, all the information and analysis revolves around the density attribute. Here, clusters continue to add more density around them until a specific threshold limits its scope.

### E) Model-based Method

Here, every group is hypothesized, so that it can find the data which is best suited for the model. This method automatically considers the clusters present in the data, taking into account various noises or outliers to ease the procedure.

### F) Grid-based Method

In Grid-based methods, objects are grouped to form a grid. Space within the objects has specific cells to build a grid structure.

## 3. Cluster Analysis Example

There are various cluster analysis techniques with â€˜k-meansâ€™ clustering and â€˜hierarchical clusteringâ€™ which are popularly used to match business specifications.

### A) K-means Clustering

K-means clustering follows the path for data partition with â€˜k clustersâ€™ belonging to the nearest mean acting as a cluster benchmark, using distances and location from within each other. These â€˜k clusterâ€™ methods are implemented across multiple data mining methods. Clusters are then recognized and have unique characteristics with specific mean or any particular center point.

### B) Hierarchical Clustering

Here, hierarchical clustering represents the formation of clusters hierarchy among the different data dimensions, distances, scales, and other measurements. Here, cluster formation is done in the form of a tree with multiple level hierarchy as they move up the order. New clusters are added with new cases and then grouped with specific observations. This whole hierarchical procedure aids researchers in defining and limiting their scope of the study.

## 4. Application of Cluster Analysis

• Cluster analysis assists in several industrial applications, such as dynamic market research on products, pattern distinction, data research, and processing of images from raw feed.
• Clustering also provides comprehensive support for professional marketers to separate customer groups from different purchasing habits and practices to build strategic planning for the future.
• Clustering helps in the classification of animals and plants using comparable functions or genes in the field of biology. It helps in acquiring insight into the structure of the species.
• Based on geographic location, value, and house type, a group of houses are distinguished in the city.
• It helps in the discovery of information by classifying the files on the internet. It is put-to-use in detection applications.
• Fraud in a credit card can be easily detected which analyzes the pattern deception.
• The analysis also provides aid in identifying and evaluating each cluster with its characteristics. It can understand how the data is doled out, and it works as a tool in the function of data mining.

## 5. Requirement

Here are the main requirements for implementing cluster analysis in data mining.

### A) Scalability

With large datasets prevailing in all industries, scalability to manage and handle large databases is one of the foremost requirements for cluster analysis.

### B) Ability to understand and work with different types of data in Cluster Analysis

Cluster Analysis algorithm must have the capability to work with all types of data, be it numerical, categorical, or any binary form data, respectively.

### C) Able to discover clusters with random shape

Algorithms should be able to detect clusters of arbitrary shapes. They should not be limited to distance measures that tend to find a spherical batch of small sizes.

### D) High dimensionality

An algorithm should be able to handle all levels of data dimensions from low to high.

### E) System capability to work with Noisy Data

Most of the databases have added noise, missing, or error-prone data that can affect the performance of the algorithm.

### F) Interpretability and usability

Results derived from cluster analysis should provide comprehensive understanding along with usability and have the intelligence to perform specific tasks with impeccable performance.

## 6. Advantages of cluster analysis

On the aspect of benefit, cluster analysis plays a crucial role in data analysis for businesses to bring new patterns and insights from customer behavior in several industries such as finance, retail, and marketing for a better future perspective.

For example, these clustering methods bring discoveries and insights for businesses from their customers. Furthermore, algorithms can segregate them on different factors of patterns, habits, and reasons to match with business aspirations in a competitive market. They are thus helping businesses to enhance their revenues and lower operations costs for exploring new growths.

## Conclusion

As the size and complexity of raw data have grown, the traditional paper-based approach to discerning structure in them has become increasingly intractable, and cluster analysis delivers an optimum solution. Cluster analysisâ€™s purpose is always to provide a group, even if there is no group structure.

Hypothesis generation-based on cluster analysis has two further advantages in terms of scientific methodology. These are objectivity and replicability. Clustering outcomes should not be generalized. If you are interested in learning more about Data Analytics in the business context, our 10-month Integrated Program in Business Analytics, in collaboration with IIM Indore is perfect for you!