What is the right number of clusters?

There is no unique segment structure, but some solutions make more sense than others. It is a trial and error process based on using both statistical criteria and managerial criteria.

One possibility is to ask Enginius to automatically select the “best” number of segments. The software will only use statistical criteria, though, ignoring the managerial usefulness of the proposed solution. The dendrogram or elbow chart from the software output generally shows where there is no longer much to be gained in separating the data more finely. But the purpose of the segmentation will often dictate the appropriate number of clusters.

Starting from that initial solution, explore a few additional segment structures. For example, if you find that 3 clusters create with a natural break in the dendrogram, then also explore a 2-segment solution and a 4 segment solution to see if they provide better interpretability.

In summary, think about building a business case for the number of clusters:
(1) what do the data tell us and
(2) how can we implement the segmentation?
(If the purpose of the segmentation is to allocate all customers to, say, 3 sales reps, then there should be 3 segments)