Segmentation of Spatially Dependent Geographical Units: Model and Application

We develop and test a new methodology that assigns geographical units (such as ZIP codes) to market segments by simultaneously considering bases of segmentation, such as customer attitudes and needs, such that the resulting segments display a high level of spatial concentration. Such concentrated segments are managerially desirable because of the logistical and administrative efficiencies created by implementing spatially concentrated segment-level strategies. The suggested approach captures spatial dependence flexibly while allowing us to identify managerially actionable segments that effectively balance homogeneity and spatial concentration. An illustrative empirical application demonstrates how the results can be utilized to derive consumer insights for actionable segmentation strategies. A Monte Carlo simulation and an assessment of the quality of the segments obtained from the empirical application support the value of the proposed spatially dependent segmentation method. This paper was accepted by P...