However, as a market segmentation method, CHAID (Chi-square Automatic Interaction Detection) is more sophisticated than other multivariate analysis. Chi-square automatic interaction detection (CHAID) is a decision tree technique, based on –; Magidson, Jay; The CHAID approach to segmentation modeling: chi-squared automatic interaction detection, in Bagozzi, Richard P. (ed );. PDF | Studies of the segmentation of the tourism markets have CHAID (Chi- square Automatic Interaction Detection), which is more complex.

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For categorical predictors, the categories classes are “naturally” defined. Unique analysis management tools. The next step is to cycle through the predictors to determine for each predictor the pair of predictor categories that is least significantly different with respect to the dependent variable; for classification problems segmentatipn the dependent variable is categorical as wellit will compute a Chi -square test Pearson Chi -square ; for regression problems where the dependent variable is continuousF tests.

In practice, CHAID is often used in the context of direct marketing to select groups of consumers and predict how their responses to some variables affect other variables, although other early applications were in the field of medical and psychiatric research.

This is not so much a computational problem as it is a problem of presenting the trees in a manner that is easily accessible to the data analyst, or for presentation to the “consumers” of segmenration research. Specifically, the merging of categories continues without reference to any alpha-to-merge value until only two categories remain for each predictor.

Chi-square automatic interaction detection CHAID is a decision tree technique, based on adjusted significance testing Bonferroni testing. One important advantage of CHAID over alternatives such as multiple regression is that it is non-parametric. What is more, Dr. QUEST is segmentatiom faster than the other two algorithms, however, for very large datasets, the memory requirements are usually larger, so using the QUEST algorithms for classification with very large input data sets may be impractical.

CHAID will build non-binary trees that tend to be “wider”.

Market Segmentation: Defining Target Markets with CHAID

In addition to CHAID detecting interaction between independent variables — for explanatory studies that are concerned with the impact that many variables have on each other e. However, it is easy to see how the use of coded predictor designs expands these powerful classification and regression techniques to the analysis of data from experimental. For a discussion of various schemes for combining predictions from different models, see, for example, Witten and Frank, It is useful when looking for patterns in datasets with lots of categorical variables and is a convenient way of summarising the data as the relationships can be easily visualised.


This page was last edited on 8 Novembersegmentatin Kass, who had completed a PhD thesis on this topic. The results can be visualised with a so-called tree diagram — see below, for example. Use of regression assumes that the residuals have a constant variance. If the respective test for a given pair of predictor categories is not statistically significant as chad by chaud alpha-to-merge value, then segkentation will merge the respective predictor categories and repeat this step i.

Segmentatoon Read Edit View history. However, the lower segments offer the marketer a challenge with a “juicy” yield if a high-octane strategy can be devised to efficiently tap into these segments. Where there might be more than two groupings for a predictor, merging of the categories is also considered to find the best discrimination.

CHAID often yields many terminal nodes connected to a single branch, which can be conveniently summarized in a simple chwid table with multiple categories for each variable or dimension of the table. At each branch, as we split the total population, we reduce the number of observations available and with a small total sample size the individual groups can quickly become too small for reliable analysis.

Member Only Content Sign in or register for a free online subscription to get access to member-only content. It segmentatiob enables you to assess the viability of a potential product or service before taking it to market.

Continuous predictor variables can also be incorporated by determining cut-offs to create ordinal groups of variables, based, for example, on particular percentiles of the variable.

However, in this case F-tests rather than Chi-square tests are used. As a practical segmeentation, it is best to apply different algorithms, perhaps compare them with user-defined interactively derived trees, and decide on the most reasonably and best performing model seegmentation on the prediction errors.

It commonly takes the form of an organization chart, more commonly referred to as a tree display.

What is CHAID (Chi-Square-based Automatic Interaction Detection)?

The next step is to choose the split the predictor variable with the smallest adjusted p -value, i. These regression models are specifically designed for analysing binary e. By using this site, you agree to the Terms of Use and Privacy Policy. CHAID will “build” non-binary trees i. In each of these instances, the response is dichotomous. Please help to improve this article by introducing more precise citations. Another advantage of this modelling approach is that we are able to analyse the data all-in-one rather than splitting the data into subgroups and performing multiple tests.


Please tick this box to confirm that you are happy for us to store and process the information supplied above for the purpose of managing your subscription to our newsletter. The segments are prioritized for targeting based on first their level of responsiveness, and second on their size. However, a more formal multiple logistic or multinomial regression model could be applied instead.

When most of the variables in the analysis are quantitative, including the response variable, then multiple regression is a popular technique. This type of display matches well the requirements for research on market segmentation, for example, it may yield a split on a variable Incomedividing that variable into 4 categories and groups of individuals belonging to those categories that are different with respect to some important consumer-behavior related variable e.

The Response Tree, above, represents a market segmentation of the population under consideration. If a statistically significant difference is observed then the most significant factor is used to make a split, which becomes the next branch in the tree.

A general issue that arises when applying tree classification or regression methods is that the final trees can become very large. The technique was developed in South Africa and was published in by Gordon V. We might find that rural customers have a response rate of only Retrieved from ” https: Specifically, the algorithm proceeds as follows:.

In practice, CHAID is often used in direct marketing to understand how different groups of customers might respond to a campaign based on their characteristics. It is often the case that the response variable is dichotomous. This is because the assumptions under which regression is valid are not met.