Clustering for Customer Segmentation: End-to-End Example
Learners will preprocess an e-commerce dataset, cluster customers by spend and frequency, and profile each segment to generate business insights.
Clustering for Customer Segmentation: End-to-End Example is a free Machine Learning Academy lesson on CoddyKit — lesson 4 of 4. You can read the complete lesson below for free — then practise it hands-on in the browser with a built-in code editor and a 24/7 AI tutor. It is part of the Machine Learning Academy learning path, one of 4 lessons in the course, and your progress syncs across the web and the CoddyKit app.
The Business Goal: Segment Customers
Customer segmentation groups buyers by behaviour so that marketing, product, and customer-success teams can tailor their actions to each group. Typical signals include recency (days since last purchase), frequency (number of purchases), and monetary value (total spend) — the RFM framework. Clustering discovers these segments from data without needing predefined categories.
Loading and Inspecting the Dataset
We use the classic Online Retail dataset (UCI ML Repository). It contains ~500k transactions with invoice date, customer ID, quantity, and unit price. Our first task is to load the data, drop rows with missing customer IDs, filter out returns (negative quantity), and compute the RFM features for each customer.
import pandas as pd
df = pd.read_csv('online_retail.csv', encoding='latin1')
# Drop missing customers and returns
df = df.dropna(subset=['CustomerID'])
df = df[df['Quantity'] > 0]
df['Revenue'] = df['Quantity'] * df['UnitPrice']
df['InvoiceDate'] = pd.to_datetime(df['InvoiceDate'])
print(df.shape)
print(df.dtypes)Engineering RFM Features
Recency: days since the customer's last purchase (smaller = more recent = better). Frequency: number of unique invoices. Monetary: total revenue generated. We compute these relative to a snapshot date (one day after the last transaction in the dataset) so recency increases with inactivity.
snapshot_date = df['InvoiceDate'].max() + pd.Timedelta(days=1)
rfm = df.groupby('CustomerID').agg(
Recency=('InvoiceDate', lambda x: (snapshot_date - x.max()).days),
Frequency=('InvoiceNo', 'nunique'),
Monetary=('Revenue', 'sum')
).reset_index()
print(rfm.describe())Treating Outliers and Skewness
RFM features are often highly right-skewed: a handful of VIP customers dominate the monetary axis. Before scaling, apply a log transform (np.log1p) to compress the long tail. Clip extreme outliers beyond the 99th percentile to prevent a single whale customer from distorting all centroids.
import numpy as np
for col in ['Recency', 'Frequency', 'Monetary']:
cap = rfm[col].quantile(0.99)
rfm[col] = rfm[col].clip(upper=cap)
rfm[col + '_log'] = np.log1p(rfm[col])
print(rfm[['Recency_log', 'Frequency_log', 'Monetary_log']].describe())Scaling Features for K-Means
K-Means uses Euclidean distance, so features must be on the same scale. After log-transforming, apply StandardScaler to centre each feature at zero with unit variance. Always fit the scaler on training data only — here the full RFM table since there is no separate test set for unsupervised learning.
from sklearn.preprocessing import StandardScaler
features = ['Recency_log', 'Frequency_log', 'Monetary_log']
X = rfm[features].values
scaler = StandardScaler()
X_scaled = scaler.fit_transform(X)
print('Mean after scaling:', X_scaled.mean(axis=0).round(4))
print('Std after scaling:', X_scaled.std(axis=0).round(4))Selecting k with Elbow and Silhouette
Run the elbow and silhouette diagnostics on the RFM dataset to select k. For a typical e-commerce dataset you might see the elbow around k=4 or k=5, which corresponds to intuitive segments: champions, loyal customers, at-risk customers, and churned customers.
from sklearn.cluster import KMeans
from sklearn.metrics import silhouette_score
results = []
for k in range(2, 9):
km = KMeans(n_clusters=k, n_init=10, random_state=42)
labels = km.fit_predict(X_scaled)
results.append({'k': k, 'inertia': km.inertia_,
'silhouette': silhouette_score(X_scaled, labels)})
import pandas as pd
print(pd.DataFrame(results))Fitting the Final Clustering Model
After selecting k, fit the final K-Means model and add the cluster labels back to the RFM DataFrame. This makes it easy to compute segment profiles and build customer-facing reports. The fit_predict method fits and returns labels in one call.
from sklearn.cluster import KMeans
k = 4
km = KMeans(n_clusters=k, n_init=20, random_state=42)
rfm['Segment'] = km.fit_predict(X_scaled)
print('Cluster sizes:')
print(rfm['Segment'].value_counts())Profiling Each Segment
Compute the mean of the original (untransformed) RFM values for each cluster. This gives interpretable business profiles: Champions have low recency, high frequency, high monetary; Churned have high recency, low frequency, low monetary. Naming segments based on their profiles makes reports actionable.
profile = rfm.groupby('Segment')[['Recency', 'Frequency', 'Monetary']].mean()
print(profile.round(1))
# Optional: label segments by profile
segment_names = {
0: 'Champions',
1: 'At-Risk',
2: 'Loyal',
3: 'Churned'
}
rfm['SegmentName'] = rfm['Segment'].map(segment_names)
print(rfm['SegmentName'].value_counts())Visualising Segments with Scatter Plots
Plot Frequency vs Monetary with colour coding for each segment. Add recency as point size to encode the third dimension visually. This chart is the deliverable that a marketing team can use to identify which customers to target for reactivation campaigns vs upselling campaigns.
import matplotlib.pyplot as plt
plt.figure(figsize=(8, 5))
for seg in rfm['Segment'].unique():
mask = rfm['Segment'] == seg
plt.scatter(rfm.loc[mask, 'Frequency'],
rfm.loc[mask, 'Monetary'],
s=rfm.loc[mask, 'Recency'] + 5,
label=f'Segment {seg}', alpha=0.5)
plt.xlabel('Frequency')
plt.ylabel('Monetary')
plt.legend()
plt.title('RFM Customer Segments')
plt.show()Assigning New Customers to Segments
After deploying the model, new customers get assigned by passing their scaled RFM vector through the same scaler and then calling km.predict. Never refit the scaler on new data — use the scaler fitted on the training RFM table to avoid shifting the feature space. The centroid positions remain fixed after fitting.
import numpy as np
# Simulate a new customer: recency=10, frequency=15, monetary=600
new_customer = np.array([[10, 15, 600]])
new_log = np.log1p(new_customer)
new_scaled = scaler.transform(new_log)
segment = km.predict(new_scaled)[0]
print('New customer segment:', segment)Business Insights and Next Steps
Clustering is a starting point, not an end. After profiling segments, the team should design targeted actions: send re-engagement emails to At-Risk customers, offer loyalty rewards to Champions, present upsell offers to Loyal customers. Track conversion rates per segment to measure the ROI of segmentation. Periodically retrain the model as customer behaviour evolves over time.
Quick Check
Test your understanding of customer segmentation with clustering from this lesson.
Lesson Recap
In this lesson you learned: RFM (Recency, Frequency, Monetary) features are the standard building blocks for customer segmentation, log transformation and StandardScaler make skewed RFM features suitable for K-Means, and segment profiling translates cluster numbers into actionable business labels like Champions and At-Risk. Next up we explore PCA — a technique for reducing high-dimensional data to its most informative components.
Frequently asked questions
Is the “Clustering for Customer Segmentation: End-to-End Example” lesson free?
Yes — the full text of “Clustering for Customer Segmentation: End-to-End Example” is free to read here on the web, and the Machine Learning Academy course includes 4 lessons in total. To practise it interactively (a built-in code editor and a 24/7 AI tutor) and unlock the rest of the Machine Learning Academy course, upgrade to CoddyKit PRO.
What will I learn in “Clustering for Customer Segmentation: End-to-End Example”?
Learners will preprocess an e-commerce dataset, cluster customers by spend and frequency, and profile each segment to generate business insights. You practise Machine Learning Academy with hands-on code you run directly in the browser, and a 24/7 AI tutor answers your questions as you work through the lesson.
Do I need any experience to start Machine Learning Academy?
No prior experience is required. Machine Learning Academy on CoddyKit is structured for beginners through advanced learners; this is — lesson 4 of 4, so you can start here or from the beginning and move at your own pace.
How long does the “Clustering for Customer Segmentation: End-to-End Example” lesson take?
Most CoddyKit lessons take about 5–10 minutes. Each one is bite-sized and interactive, so you make steady progress and pick up exactly where you left off across the web and the app.
Can I write and run code in this Machine Learning Academy lesson?
Yes. Every Machine Learning Academy lesson includes a built-in code editor, so you write and run real code right in your browser and get instant AI feedback — no local setup required.
All lessons in this course
- K-Means: Centroids, Assignment, and Update Steps
- Choosing K: Elbow Method and Silhouette Score
- DBSCAN: Core Points, Border Points, and Noise
- Clustering for Customer Segmentation: End-to-End Example