A Note of Caution Regarding Applying Basic Latent Class Analysis

We investigate latent class analysis as a market segmentation method. In particular, we explore the ramifications of the often assumed, perhaps necessarily, local independence condition. Using survey data for a major soft drink brand, we identify brand characteristics which are perceived very differently across simply defined demographic segments. We next apply latent class analysis, assuming local independence, to these same characteristics to derive a segmentation structure. These derived segments, driven by the local independence assumption, are completely different from the initial demographic segments. Strong justification for this assumption, which dictates the solution and cannot be explored in advance, clearly should be present