Customer Segmentation using RFM Analysis
How well do you know your customers? Whether you operate in a B2B or B2C space, chances are that 80% of your business comes from just 20% of your customers (Pareto's Principle). According to a study by Forbes, acquiring new customers costs five times more than retaining the existing ones. Identifying high-value customers is crucial to increase revenue and building brand loyalty.
Customer Segmentation is a critical strategy for businesses to understand and engage with customers effectively. Understanding the behavioral patterns of customers can help personalize the purchases they make and cater to their needs better.
Questions like who are the customers who contribute more to sales, who are the customers about to churn, will help digital marketers understand the behavioral patterns of their customers.
While there are many criteria based on which the customer base can be segmented, this solution focuses on segmenting customers based on the RFM analysis.
What is RFM Analysis?
RFM analysis (Recency, Frequency and Monetary) is a method used to identify and segment existing customers based on their purchasing behavior. The key metrics of RFM analysis include
Recency
Recency refers to how recently a customer has made their purchase and this is the most important metric of the other metrics. This metric is a strong indicator of customer loyalty and interest.
Frequency
Frequency refers to how often a customer makes purchases or interacts with a business within a specific period. It measures the level of engagement and loyalty of a customer.
Monetary
Monetary value refers to the total amount of money a customer has spent with a business during a specific period.
Industry-Specific Applications of RFM Analysis
- SaaS and subscription services: RFM analysis can be adapted for SaaS and subscription services to segment users based on engagement, renewals, and revenue contribution.
- Financial Sector: RFM analysis can improve credit scoring and risk assessment by evaluating customer transaction patterns, helping financial institutions make more informed loan approval decisions.
Data Requirements
For RFM analysis, you'll need a transactional dataset with the following equivalent columns (details)
- A product (Product ID)
- A related transaction (Transaction ID)
- Number of products purchased in a transaction (Product Quantity)
- The product purchase price (Product Price)
- Transaction date (Date)
- Customer who made the purchase (Customer ID, Customer Name)
We have used a sample table of e-commerce data for illustration.
Steps for Implementing RFM analysis
1. Gather and Prepare Transaction Data :
Gather all transaction data, ensuring it includes customer identifiers, transaction dates, and monetary amounts, and address missing or inconsistent values, ensuring data integrity before analysis.
2. Compute RFM Metrics:
To segment customers based on their behavior, we compute three key metrics: Recency (R), Frequency (F), and Monetary Value (M). Below are SQL queries for each, along with detailed explanations.
Recency (R)
Recency measures how recently a customer made a purchase. It is calculated as the number of days since their last transaction. Customers with recent purchases are more engaged, while those who haven’t bought in a long time may be at risk of churn.
The time frame for RFM analysis should be tailored to your business model and industry. Choosing the right period for RFM analysis is essential, as it directly influences the accuracy of customer segmentation and the quality of insights derived.
Frequency (F)
Frequency tracks how often a customer makes purchases within a specific period. A higher frequency indicates a loyal customer who regularly shops, while a lower frequency suggests occasional or one-time buyers.
Monetary Value (M)
The total amount spent by the customer in the same period
RFM Query Table
|
SELECT
"Customer ID",
"Customer Name",
DAYS_BETWEEN(MAX("Transaction Date"), CURRENT_DATE()) AS "Recency",
COUNT ("Order ID") AS "Frequency",
SUM("Transaction Amount") AS "Monetary Value"
FROM "Customer Data"
GROUP BY "Customer ID",
"Customer Name"
ORDER BY "Recency" ASC,
"Frequency" DESC,
"Monetary Value" DESC
|
3. Segment Customers using Cluster Analysis
Manual scoring can skew the results and may not be practical for handling large volumes of data. In contrast, using machine learning algorithms like cluster analysis ensures unbiased, efficient, and data-driven segmentation. Unlike traditional scoring methods such as the quantile or percentile-based approach, cluster analysis recognizes inherent relationships and patterns in the data. With cluster analysis, business can obtain accurate segmentation and devise targeted strategies to improve sales and customer retention.
Follow the below steps to apply cluster analysis,
- Click the Create New icon and choose New chart from the drop-down menu.
- Add the columns to the chart shelf as shown below,
- X-axis: Customer Name
- Y-axis: Monetary Value with Sum function.
- Click Generate Graph and change the chart type to bar chart.
- Click the Analysis icon and select Cluster Analysis > Add Clusters.
- The Model is chosen automatically based on the columns dropped in the shelves.
- By default, the columns dropped in the shelves (Monetary Value) are selected as factors. Click the drop-down icon to include Recency and Frequency columns as factors.
- The number of clusters is determined automatically but can be adjusted based on business needs and specific customer segmentation goals to ensure optimal categorization.
- Choose the Normalization method to prevent values of high ranges from dominating the results. For instance, Recency (measured in days) and Monetary Value (measured in currency) have different scales, and normalization ensures a balanced contribution from each metric.
- Click Apply.
4. Export Clusters Data
Once the customer profiles have been segmented using cluster analysis, Export the Current view in the preferred table format to build more data visualizations to understand the clusters.
Build an RFM Analysis Dashboard
The RFM analysis dashboard provides a comprehensive view of customer behavior. Let's look at the steps involved in building this dashboard.
1. Import the Clusters Data
Import the downloaded clusters table back into Zoho Analytics using the files option as given below.
- Click the New icon on the side navigation panel and choose New Table/ Import Data.
- Select files and choose the Clusters Table to import and click Next.
- A data preview will be displayed; verify the data types of columns and click Create.
2. Create Reports to Understand the Characteristics of the Clusters
While the data is clustered, understanding the characteristics of each cluster is what enables businesses to take strategic actions. This includes identifying which customers need targeted marketing, personalized engagement, or retention efforts. Recognizing patterns within clusters provides insights into customer behavior, which is essential for optimizing marketing campaigns, improving retention strategies, and enhancing customer experience.
The below reports help understand the distribution of customers across different monetary value, recency and frequency segments within each cluster.
Clusters vs Monetary Value
- Access the cluster table (imported data) and click the new icon > chart view.
- Drag and drop the columns as given below:
- X-axis - Clusters
- Y-axis - Monetary Value with the Count function.
- Color - Monetary Value with the Actual Range function.
Analyzing the chart, we can infer that,
- Cluster 1 consists of a diverse group of customers spanning all spending levels.
- Cluster 2 includes moderate to high spenders who contribute significantly to revenue.
- Cluster 3 comprises low to mid-range spenders, often occasional buyers.
- Cluster 4 represents high-value customers with premium spending habits.
- Cluster 5 consists primarily of low spenders with minimal purchasing activity.
You can similarly create reports to know about the distribution of customers for the Recency and Frequency metrics.
The below table lists the characteristics of clusters
|
Cluster
|
Cluster Classification
|
Recency
|
Frequency
|
Monetary
|
Recommended actions
|
|
Cluster 1
|
Needs Attention
|
100 to 150 days
|
Low to Moderate
|
Diverse spending
|
Re-engagement campaigns, discounts, or reminders to encourage repeat purchases.
|
|
Cluster 2
|
Loyalist
|
0-50 (Highly Active)
|
High
|
Consistent moderate-to-high spenders
|
Loyalty programs, exclusive deals, early access to new products to maintain engagement.
|
|
Cluster 3
|
Potential Loyalist
|
0-50 (Active)
|
Low to Moderate | Budget-conscious, occasional buyers | Cross-selling, personalized recommendations, and value-based promotions. |
|
Cluster 4
|
Champions
|
100-150 (Inactive)
|
Moderate to High (Frequent buyers)
|
High spenders
|
VIP experiences, personalized services, and premium offers to retain and enhance their spending.
|
|
Cluster 5
|
Hibernating
|
Mostly inactive or infrequent
|
Low
|
Minimal spending
|
Win-back campaigns, incentives, special discounts, and targeted ads to regain interest.
|
Based on the above table, you can give specific labels to the clusters using the bucket columns option.
RFM Dashboard
Limitations & Considerations of RFM Analysis
While RFM analysis is a powerful customer segmentation tool, businesses should be aware of certain limitations and factors that can influence results:
- Data Freshness and Relevance: RFM analysis relies on transactional data, making the freshness and relevance of this data crucial for accurate customer segmentation. Setting up automated data imports ensures real-time updates, reducing the risk of working with stale data.
- Seasonal Variations: Customer purchasing behavior often fluctuates due to seasonal trends, holidays, and industry-specific cycles, which can impact RFM scores and lead to misleading segmentation if not accounted for properly. Instead of analyzing only recent months, compare customer behavior for the same period in previous years to detect true engagement patterns.
Access your files securely from anywhere
Centralize Knowledge. Transform Learning.
All-in-one knowledge management and training platform for your employees and customers.
New to Zoho Recruit?
Zoho Developer Community
New to Zoho LandingPage?
Zoho LandingPage Resources
New to Zoho Survey?
New to Zoho CRM Plus?
Deliver unforgettable customer experiences
New to Zoho CRM Plus?
Deliver unforgettable customer experiences
New to Zoho Marketing Plus?
Everything you need to run your marketing
New to Zoho Marketing Plus?
Everything you need to run your marketing
New to Bigin?
Topic Participants
Nisha Angel J
Hammer Group
Juan
Sticky Posts
What's New in Zoho Analytics - January 2026
Hello Users! We are starting the year with a strong lineup of updates, marking the beginning of many improvements planned to enhance your analytics experience. Explore the latest improvements built to boost performance, simplify analysis, and help youWhat's New in Zoho Analytics - November 2025
We're thrilled to announce a significant update focused on expanding your data connectivity, enhancing visualization capabilities, and delivering a more powerful, intuitive, and performant analytics experience. Here’s a look at what’s new. Explore What'sWhat's New in Zoho Analytics - October 2025
Hello Users! We're are back with a fresh set of updates and enhancements to make data analysis faster and more insightful. Take a quick look at what’s new and see how these updates can power up your reports and dashboards. Explore What's New! ExtremeWhat’s New in Zoho Analytics – September 2025
Hello Users!! In this month’s update, we’re raising the bar across multiple touchpoints, from how you bring in data, plan and track projects to how you design and brand your dashboards. We’ve added the all-new Gantt chart for project visualization, expandedAnnouncing Agentic AI - Ask Zia!
We are delighted to roll out the new agentic AI capabilities in Ask Zia, where every stage of the BI workflow is assisted by AI. With a human-in-the-loop approach, Ask Zia ensures that you’re in command of the decision, while AI handles the complexity.
New to Zoho TeamInbox?
Zoho TeamInbox Resources
Zoho CRM Plus Resources
Zoho Books Resources
Zoho Subscriptions Resources
Zoho Projects Resources
Zoho Sprints Resources
Qntrl Resources
Zoho Creator Resources
Zoho CRM Resources
Design. Discuss. Deliver.
Zoho Show Resources
Get Started. Write Away!
Writer is a powerful online word processor, designed for collaborative work.
Zoho CRM コンテンツ
-
オンラインヘルプ
-
Webセミナー
-
機能活用動画
-
よくある質問
-
Ebook
-
-
Zoho Campaigns
- Zoho サービスのWebセミナー
その他のサービス コンテンツ
Nederlandse Hulpbronnen
ご検討中の方
Recent Topics
Email was sent out without our permission
Hi there, One customer just reached out to us about this email that we were not aware was being sent to our customers. Can you please check on your end?Best practices for managing Project Charters, Business Case and RAID logs within Zoho?
Hello everyone, I’m currently refining our PMO setup within Zoho Projects and I’m curious how others are handling high-level governance documentation. We’ve been using the standardized Project Charter, Business Case and RAID frameworks from projectmanagertemplate.comZoho Books Payroll
How am I supposed to do payroll and pay my employees with Zoho Books? I think it's pretty strange that an accounting software doesn't have the ability to perform one of the most common functions in business; paying your employees. Am I missing something,Sort Legend & stacked bar chart by value
I'd love to see an option added to sort the legend of graphs by the value that is being represented. This way the items with the largest value in the graph are displayed top down in the legend. For example, let's say I have a large sales team and I createIs It Possible to Convert a Custom Module to a Quote?
I recently created a custom module in our CRM environment for RFQs so that our sales team can submit quote requests directly in Zoho rather than by email/phone. This allows for a cleaner overall process, minimizing potential errors and potentially encouragingNewsletter in multiple languages
Hi We are planning on starting to use Zoho Campaigns for our newsletters. Since we send our newsletters in three languages, I would need the "unsubscribe page" and other pages related to the NL (Thank you page and so on) to be available in different languagesProposal: Actionable API Error Messages to Reduce Support Ticket Volume
I've encountered a long-standing frustration with how Zoho Creator's API communicates errors to developers, and I'm hoping the Zoho team can address this in a future update. This issue has persisted for over 9 years based on community discussions, andAllocating inventory to specific SO's
Is there a way that allocate inventory to a specific sales order? For example, let's say we have 90 items in stock. Customer 1 orders 100 items. This allocates all 90 items to their order, and they have a back order for the remaining 10 items which couldCliq iOS can't see shared screen
Hello, I had this morning a video call with a colleague. She is using Cliq Desktop MacOS and wanted to share her screen with me. I'm on iPad. I noticed, while she shared her screen, I could only see her video, but not the shared screen... Does Cliq iOS is able to display shared screen, or is it somewhere else to be found ? RegardsClosing the Loop: Why Lookup Asymmetry is Harming Data Integrity in Creator
TL;DR: Lookup fields allow users to add new related records inline via the "+" icon, but there's no equivalent ability to edit an existing related record without navigating away and losing form context. Adding a native "Edit" icon—with automatic UserAdd the ability to Hide Pages in Page Rules
Hi, We have Field Rules to show and hide fields and we have page Rules, but we can't hide a page in Page Rules so it isn't completed before the previous page (And then have the Deny Rules to prevent submitting without both pages completed), we can onlyusing the Client script on the load of the form if service no is empty means then i want to make issue relate to is Service
using the Client script on the load of the form if service no is empty means then i want to make issue relate to field is Service if Purchae no is empty means then i want to make issue relate to is PurchaseChanges to the send mail Deluge task in Zoho CRM
Hello everyone, At Zoho, we continuously enhance our security measures to ensure a safer experience for all users. As part of our ongoing security enhancements, we're making an important update on using the send mail Deluge task in Zoho CRM. What's changing?Work Order wont mark as Completed
I have a couple of work orders that won't mark as completed even when I've marked the Service Appointments as completed fully.Item name special charaters <>
Im trying to input speical characters such as < and > into item name and item description but comes up with following error: Invalid value passed for Item Name and Invalid value passed for Item Description How do i allow speical characters?Zoho Analytics Dashboard - How to hide the user filter
I am using the same dashboard template across different external clients and applying a user filter to the data by site URL. How can I hide the user filter in View Mode so the external client won't see the list of other clients in the drop-down menu?Customer Parent Account or Sub-Customer Account
Some of clients as they have 50 to 300 branches, they required separate account statement with outlet name and number; which means we have to open new account for each branch individually. However, the main issue is that, when they make a payment, theyKaizen #229: Email-Deal Associations in Zoho CRM
Hi All, Welcome back to another week of Kaizen! Emails are a core channel for customer communication in any CRM system. In Zoho CRM, emails can be associated with records across multiple modules. In this post, we will focus on email associations withAction Required: Update Microsoft SQL Server Security Settings Before February 2026
Dear Users, We recently deployed security updates in Zoho Analytics that inadvertently caused connection failures for a few customers using Microsoft (MS) SQL Server hosted on older Windows versions (Windows Server 2012, 2012 R2, and 2014). To restoreContacts limit in basic vs standard - what counts? Are customers contacts?
I’ve been using books for a number years for my small business. I only ever work with 20 clients at any given time. I do purchase services from a number of vendors to run my business, so there are some comtacts there too. I used to use the basic package,Saving issue
First problem I opened a MS word file in writer. after the work is done, it does not save instantly, I waited for like 10min and it still did not save. second problem When I save a file, then file gets saved as another copy. I just did save, not saveAutomating Employee Birthday Notifications in Zoho Cliq
Have you ever missed a birthday and felt like the office Grinch? Fear not, the Cliq Developer Platform has got your back! With Zoho Cliq's Schedulers, you can be the office party-cipant who never forgets a single cake, balloon, or awkward rendition ofCreate Tasklist with Tasklist Template using API v3
In the old API, we could mention the parameter 'task_template_id' when creating a tasklist via API to apply a tasklist template: https://www.zoho.com/projects/help/rest-api/tasklists-api.html#create-tasklist In API v3 there does not seem to be a way toAbility to Set a Unified Tab Order/View for All Users in Zoho Projects
Hello Zoho Projects Team, We hope you are doing well. We would like to submit a feature request regarding tab/menu organization in Zoho Projects. Current Behavior: The tab (module) order in Zoho Projects is user-specific. Each user (internal or external)Task Order
Hello! I've recently switched to Zoho Projects and a long time user of MS Project, Asana and LiquidPlanner (which has recently been purchased) and I'm running into a frustration I'm hoping someone can assist with. It has to do with how tasks are orderedAutomating CRM backup storage?
Hi there, We've recently set up automatic backups for our Zoho CRM account. We were hoping that the backup functionality would not require any manual work on our end, but it seems that we are always required to download the backups ourselves, store them,2026 Product Roadmap and Upcoming Features
This is your guide to what is coming in Zoho Vertical Studio throughout 2026. We’ll update this post throughout the year as items move from development to release, and as and when new initiatives are added. Once a feature is released, it will be reflectedVendor legal and DBA names for USA users
I would like to hear how Zoho Books users are handling DBA names in the vendor profile. If the Company name in the vendor profile has to be the legal name (line 1 of the W-9), whare are you entering the DBA name (the name that checks are made out to)Zoho Books API invoice email bouncing with 'relaying-issues' error
I have waited over 30 days for zoho books uk to assist with the following and i have had no replies or tickets erronously closed. The service has been terrible - very unlike zoho! So i am raising this here hoping that a community member can assist: Hello,Stop the Workarounds: We Need Native Multi-Step Forms
After over 17 years of community requests, I'm hoping the Zoho team can finally address the lack of native multi-page form support in Zoho Creator. This has been one of the longest-standing feature requests in the community, with threads spanning nearlyProduct Updates in Zoho Workplace applications | January 2026
Hello Workplace Community, Let’s take a look at the new features and enhancements that went live across all Workplace applications for the month of January. Zoho Mail Zoho People Notifications preview in Zoho Mail Notification emails from Zoho PeopleHow do i setup default values for few fields
We have few fields in CRM like rate of return, type etc - they can be picklist and standard inut fields. picklist we have choice to set default value. but how do we default some value in input type of fields?We know the company but not the contact
We are fairly new to Zoho, part of our marketing stack is we use products like lead feeder to identify which companies are visiting our site. We are able to match this data to salesiq but cannot find a way to add a company name to the salesiq visitorCustomize Calendar view in Teamspaces Settings
Right now every customization that happens inside of the calendar view inside of CRM is only visible for the specific user. We want to be able to set up calendar views as an admin for specific roles. I would suggest to do that inside of the settings ofHow to filter subform report based upon main form report in dashboard
Hi Team, I am creating a dashboard in Zoho Analytics. I want to have a main form report and below I want to show subform report of main form. If I filter the main form with date then I want to show subform records based upon main form. how can I achieveusing the Client script I want to Hide Show the Fields
if Related to service means some of the field like service no want to shoe and hide Amc no , purchase no how i achive this let issu = ZDK.Page.getField('Issue_Related_To').getValue(); if (issu == 'Service') { var field_obj = ZDK.Page.getField('Warranty_Cases');Ask the Expert – Zoho One Admin Track : une session dédiée aux administrateurs Zoho One
Vous administrez Zoho One et vous vous posez des questions sur la configuration, la gestion des utilisateurs, la sécurité ou encore l’optimisation de votre back-office ? Bonne nouvelle : une session Ask the Expert – Zoho One Admin Track arrive bientôt,Write-Off multiple invoices and tax calculation
Good evening, I have many invoices which are long overdue and I do not expect them to be paid. I believe I should write them off. I did some tests and I have some questions: - I cannot find a way to write off several invoices together. How can I do that,Kaizen #210 - Answering your Questions | Event Management System using ZDK CLI
Hello Everyone, Welcome back to yet another post in the Kaizen Series! As you already may know, for the Kaizen #200 milestone, we asked for your feedback and many of you suggested topics for us to discuss. We have been writing on these topics over thevendors / customers with 2 different address and gst no
Why can't we have option for more than one address and depending on the state option for more than 1 GST no. ? We have customers / vendors PAN india with different addresses and GST no. for different states.Next Page