Clustering is the process of grouping data points based on similarity, allowing for tailored strategies for distinct groups, as exemplified by customer segmentation in a rental store. There are two primary types of clustering: hard clustering, where data points belong entirely to one cluster, and soft clustering, which assigns probabilities of belonging to multiple clusters. Key algorithms include k-means, which efficiently handles large datasets and requires prior knowledge of the number of clusters, and hierarchical clustering, which organizes data without needing predetermined cluster numbers but struggles with scalability.