Customer Segmentation

Understanding who your customers are and what they want is a fundamental part of any successful business. Yet as a business grows, so does the customer base, and it can become increasingly challenging to create a one-size-fits-all customer profile. This is where the concept of customer segmentation comes in.

What is RFM Analysis?

RFM is a marketing technique that allows you to segment your audience according to their relevance to your business. This is done based on three criteria: Recency, Frequency and Monetary Value. RFM analysis is one of the most efficient methods to identify high-value targets and increase conversion rates. In this post we’ll cover how to use and calculate this advanced metric in order to improve your marketing and sales results. RFM stands for:

Recency: Number of days since the last purchase or order.
Frequency: average orders during a certain period (for instance, number of monthly purchases or the entire customer lifecycle).
Monetary value: total order amount during a specific time frame.

It is a very useful method indeed! It provides answers to questions as…

Who are your best clients?
Who are your most loyal customers?
Which clients are about to leave?
Who should be considered a “lost” client?
Which clients are worth the extra effort?
Which client segment will react favorably to your current/next campaign?

The answers to these questions are the starting point for new strategies focused on reaping the following benefits:

Higher efficiency: marketing actions (and their impact) are optimized
Higher conversion rates: CVR increases.
Better loyalty-building practices: Customer retention improves.
More interaction: Response rates increase.
More revenue: Sales are boosted.

How does it work?

To put it simply, RFM analysis takes three key customer variables into account to create a ranking that groups customers according to their business value. This means that if a client recently completed a purchase (Recency), they will get more points. If they made multiple purchases (Frequency), they will be placed higher. And if they spent a bigger amount of money on their orders (Monetary value), they will also have a higher score. When we combine these three factors, we can create a RFM ranking.

Customer	Recency	R-Score	Frequency	F-Score	Monetary	M-Score	R-F-M Score	Segment
C1	62	3	3	4	449	5	3-4-5	Loyal
C2	33	4	3	4	446	5	4-4-5	Champions
C3	119	1	3	4	310	4	1-4-4	Cannot Loose Them
C4	42	4	3	4	266	4	4-4-4	Loyal
C5	40	4	2	3	148	3	4-3-3	Potential Loyalists
C6	42	4	11	5	965	5	4-5-5	Champions
C7	28	4	1	1	75	2	4-1-2	New Customers
C8	80	2	7	5	660	5	2-5-5	At Risk
C9	30	4	11	5	965	5	4-5-5	Champions
C10	116	1	7	5	812	5	1-5-5	Cannot Loose Them

In order to discover distinct customer categories based on their real behavior and to implement more successful tactics, RFM segmentation is particularly helpful for eCommerce platforms. For each audience group, the chart below displays segment terminology, behavioral specifics, and viable marketing approaches.

Segment	Questions to ask	Dashboard views
Champions	Bought recently, order often, and spend the most.	Reward them. Can be early adopters of new products. Will promote your brand. Most likely to send referrals.
Loyal	Orders regularly. Responsive to promotions.	Upsell higher value products. Ask for reviews.
Potential Loyalists	Recent customers, and spent a good amount.	Offer membership/loyalty program. Keep them engaged. Offer personalized recommendations.
New Customers	Bought most recently.	Provide onboarding support, give them early access, start building relationships.
Promising	Potential loyalist a few months ago. Spends frequently and a good amount. But the last purchase was several weeks ago.	Offer coupons. Bring them back to the platform and keep them engaged. Offer personalized recommendations.
Need Attention	Above average recency, frequency and monetary values. May not have bought very recently though.	Make limited time offers, Recommend based on past purchases. Reactivate them.
About To Sleep	Below average recency, frequency and monetary values. Will lose them if not reactivated.	Share valuable resources, recommend popular products/renewals at discount, reconnect with them.
At Risk	Made biggest purchases, and often. But haven’t returned for a long time.	Win them back via renewals or newer products, don’t lose them to competition, talk to them.
Hibernating	Last purchase was long back, low spenders and low number of orders.	Offer other relevant products and special discounts. Recreate brand value.
Lost	Lowest recency, frequency and monetary scores.	Revive interest with reach out campaign, ignore otherwise.