Dynamic customer segmentation via hierarchical fragmentation-coagulation processes

Understanding customer behavior is necessary to develop efficient marketing strategies or launch tailored programs with social value for the public. Customer segmentation is a critical task for understanding diverse and dynamic customer behavior. However, as the popularity of different products varies, building dynamic customer behavior models for products with few customers may overfit the data. In this paper, we propose a new Bayesian nonparametric model for dynamic customer segmentation—Hierarchical Fragmentation-Coagulation Processes (HFCP), which allows sharing behavior patterns across multiple products. We conduct comprehensive empirical evaluations using two real-world purchase datasets. Our results show that HFCP can: (i) determine the number of groups required to model diverse customer behavior automatically; (ii) capture the changes such as split and merge of customer groups over time; (iii) discover behavior patterns shared among products and identify products with similar or different purchase behavior impacted by promotion, brand choice and change of seasons; and (iv) overcome overfitting problems and outperform previous customer segmentation models on estimating behavior for unseen customers. Hence, HFCP is a flexible and accurate segmentation model that can be used by stakeholders to understand dynamic customer behavior and compare the purchase behavior for different products.