Customer Segmentation using RFM Analysis

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,
  1. Click the Create New icon and choose New chart from the drop-down menu.
  2. Add the columns to the chart shelf as shown below,
    1. X-axis: Customer Name
    2. Y-axis: Monetary Value with Sum function.
  3. Click Generate Graph and change the chart type to bar chart.

  4. Click the Analysis icon and select Cluster Analysis > Add Clusters.
  5. The Model is chosen automatically based on the columns dropped in the shelves.
  6. 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.

  7. The number of clusters is determined automatically but can be adjusted based on business needs and specific customer segmentation goals to ensure optimal categorization.
  8. 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.
  9. 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.
  1. Click the New icon on the side navigation panel and choose New Table/ Import Data.
  2. Select files and choose the Clusters Table to import and click Next.
  3. 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 

  1. Access the cluster table (imported data) and click the new icon > chart view.
  2. Drag and drop the columns as given below:
    1. X-axis - Clusters
    2. Y-axis - Monetary Value with the Count function.
    3. 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.

    • 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 you

    • What'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's

    • What'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! Extreme

    • What’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, expanded

    • Announcing 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.

      • Recent Topics

      • What is the maximum email domains ?

        I help manage about 20 associations and I'm looking for a way to centralize them in one place. Does Zoho Mail pro or enterprise support 20-30 domains for 3-5 users each?

      • Add to Workdrive filter

        I'm trying to create a filter that will upload attachments in emails and the e-mail body to a folder in workdrive. I am able to do one or the other (attachment, or e-mail content), but not both. I first tried it using the "Email (EML) + attachment" option.

      • Forgot my admin Panel Id and password

        Sir, I have an account , where a domain mycityestate.in is added for Zoho email , now it is hard for me to manage email because i have forgotten the Email account and password registered with Admin Panel of Zoho. Just need email name which is registered

      • MCP no longer works with Claude

        Anyone else notice Zoho MCP no longer works with Claude? I'm unable to turn this on in the claude chat. When I try to toggle it on, it just does nothing at all. I've tried in incognito, new browsers, etc. - nothing seems to work.

      • Image Compression Options

        Much better if we have level of options to compress the image [20%, 40%...] We are dealing with service reports daily that has before and after photos (image field)- the file size too large and one thing, the current limit is 10mb or 15mb for report

      • WhatsApp IM in Zoho Desk always routes to Admin instead of assigned agent

        Hello Zoho Experts, I connected WhatsApp IM to my Zoho Desk account. I only assigned my Customer Service (CS) agent to the WhatsApp channel, and I did NOT include Admin in this channel. However, every new WhatsApp conversation automatically gets assigned

      • Zoho CRM || Unable to Bulk Assignment of Territories for Contacts

        Dear Zoho CRM Support Team, I hope this email finds you well. We recently performed a bulk upload of Contacts into Zoho CRM using the official sample Excel template downloaded from the CRM. The upload itself was completed successfully; however, we encountered

      • Blocklist candidates in Zoho Recruit

        We’re introducing Block Candidate, which helps recruiters to permanently restrict a candidate from applying to current/future job openings. Once the candidate is blocked, they will no longer be able to participate in the recruitment process. This will

      • Pass shipping info to payment gateway Zoho Books to Authorize.net

        For some reason the integration from Zoho books to Authorize.net does not pass the shipping address. Authorize.net is ready to receive it, but zoho books does not send it

      • Knowledgebase SEO

        We have a custom-domain mapped help center that is not restricted via login. I have some questions: a) will a robots.txt file still allow us to control indexing? b) do we have the ability to edit the sitemap? c) do category URLs get indexed by search

      • Power Pivot and Data Modeling functionality in Zoho Sheet

        When will MS Excel functionalities like Power Pivot and Data Modeling functionalities be available in Zoho Sheet?

      • Problem with CRM Connection not Refreshing Token

        I've setup a connection with Zoom in the CRM. I'm using this connection to automate some registrations, so my team doesn't have to manually create them in both the CRM and Zoom. Connection works great in my function until the token expires. It does not refresh and I have to manually revoke the connection and connect it again. I've chatted with Zoho about this and after emailing me that it couldn't be done I asked for specifics on why and they responded. "The connection is CRM is not a feature to

      • New Features: Repeat Last Action, Insert Cut/Copied Rows/Columns and Hyperlink

        You might have noticed the constant updates to Zoho Sheet of late. Here are 3 more features that have been added to Zoho Sheet recently: F4 - Repeat Last Action Insert Cut/Copied Rows and Columns Insert Hyperlink Here is a screen cast demonstrating each of these features. Read further below to learn more about these new features. F4 - Repeat Last Action: You can now repeat the last action you made on your spreadsheet by using the keyboard shortcut, F4. It is quite handy and helps you get your work

      • Need help getting my mail on iPhone and Tablet

        I need to access my Zoho mail via the iPhone Mail app. I have entered the login name, password and the incoming and outgoing servers, which my Mail Settings page says are imappro.zoho.com and smtppro.zoho.com. The iPhone keeps saying it cannot authenticate.

      • Cliq 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 ? Regards

      • Add an background image to an email template in CRM

        Hi all, We wants to put an background image behind all our email templates. Is there a way to import this thru html. If i put the option background image in <body style="background-image:...</body> and i look to the preview it shows our background, but

      • Is there a way to show contact emails in the Account?

        I know I can see the emails I have sent and received on a Contact detail view, but I want to be able to see all the emails that have been sent and received between all an Accounts Contacts on the Account Detail view. That way when I see the Account detail

      • How do I bulk archive my projects in ZOHO projects

        Hi, I want to archive 50 Projects in one go. Can you please help me out , How can I do this? Thanks kapil

      • Copy contents of File Upload Field into Workdrive

        Hello, I have set up our CRM so that a Workdrive folder is automatically created for each Deal via workflow, this adds the id of the folder into a dedicated field. We also have a field on each Deal called 'Approved Layout', which is a file upload field.

      • Kaizen #198: Using Client Script for Custom Validation in Blueprint

        Nearing 200th Kaizen Post – 1 More to the Big Two-Oh-Oh! Do you have any questions, suggestions, or topics you would like us to cover in future posts? Your insights and suggestions help us shape future content and make this series better for everyone.

      • Deleting a memorized email address

        How can I delete a memorized email address? Even though the address has been deleted from Contacts, Zoho mail still auto suggests the address when typing it into the TO field. Thanks!

      • Multiple Cover Letters

        We are using the staffing firm edition of Recruit and we have noticed that candidates cannot add more than one cover letter. This is a problem as they might be applying for multiple jobs on our career site and when we submit their application to a client,

      • Introducing Record Category in CRM: Group options to see record status at a glance.

        Release update: Currently available for CN, JP, and AU DCs (all paid editions). It will be made available to other DCs by mid-March. Hello everyone, We are pleased to introduce Record Category in Zoho CRM - a new capability where the user can get an overview

      • 553 Relaying disallowed. Invalid Domain - gzkcompany.ro

        Hi there, Can you please assist me in getting the right domain settings? I just renewed my domain subscription, after expired and i got error: 553 Relaying disallowed. Invalid Domain - gzkcompany.ro Zoho mail can receive emails, but its impossible to

      • Not able to receive emails for a while

        I am not able to receive emails for a while now.

      • Confirmation requested: eligibility and process to downgrade to Forever Free — tenant bigbanghawking.com

        Thank you for your reply. I am testing Zoho Mail from Brazil with the tenant bigbanghawking.com (endpoint: mail.zoho.com) and we are currently on the Premium trial that expires 21/01/2026. Before deciding whether to pay or cancel, I need written confirmation

      • Create 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 to

      • Zoho API v2.0 - get ALL users from ALL projects

        Hello,        I've been trying to work on an automatization project lately and I find it difficult to work with this strict structure. To be more explicit, if i would like to get all users participating in a project i would need to get all projects first.       Same thing with projects. If i want to get all projects, I would need to get all portals first.        The problem with this aproach is that it consumes a lot of time and resources.             I want to ask if there is another way of getting

      • [Webinar] Solving business challenges by transitioning to Zoho Writer from legacy tools

        Moving to Zoho Writer is a great way to consolidate your business tools and become more agile. With multiple accessibility modes, no-code automation, and extensive integration with business apps and content platforms, Zoho Writer helps solve your organization's

      • الموقع لا يقوم بالسداد

        السلام عليكم ورحمة الله وبركاته وبعد من أمس وانا احاول السداد للدومين YELLOWLIGHT ولا اتمكن من السداد اقوم بتعبئة جميع البيانات ولكن دون جدوى يطلع لى حدث خطأ ما

      • New in Office Integrator: Enhanced document navigation with captions and cross references

        Hi users, We're pleased to introduce captions, table of tables and figures, and cross-references in the document editor in Zoho Office Integrator. This allows you to structure documents efficiently and simplify document navigation for your readers from

      • Where Do I set 24h time format in Cliq?

        Where Do I set 24h time format? Thanks

      • 🎉 ¡Seguimos trayendo novedades a Español Zoho Community! 🎉 Confirmada la agenda y ubicación para los Workshops Certificados

        Si todavía no te has hecho con tu entrada para nuestros Workshops Certificados del próximo 26 y 27 de marzo o, por el contrario, estabas esperando que confirmáramos dónde los celebraremos, ¡este post es para ti! 📍¿Dónde nos vemos?📍 Nuestros Workshops

      • User is already present in another account error in assigning users to marketing automation

        Hello everyone Greeting, I had a problem in assigning user in marketing automation, when I try to add it I see this error: (User is already present in another account error) what should I do?

      • How do I get complete email addresses to show?

        I opened a free personal Zoho email account and am concerned that when I enter an email address in the "To", "CC", fields, it changes to a simple first name. This might work well for most people however I do need to see the actual email addresses showing

      • What's New in Zoho POS - January 2026

        Hello everyone, Welcome to Zoho POS’s monthly updates, where we share our latest feature updates, enhancements, events, and more. Let’s take a look at how January went. Sort and resolve conflicts Conflicts are issues that may arise when registers and

      • Removing Tables from HTML Inventory Templates - headers, footers and page number tags only?

        I'm a bit confused by the update that is coming to HTML Inventory Templates https://help.zoho.com/portal/en/kb/crm-nextgen/customize-crm-account/customizing-templates/articles/nextgen-update-your-html-inventory-templates-for-pdf-generator-upgrade It says

      • Outlook is blocking incoming mail

        Outlook is blocking all emails sent from the Zoho server. ERROR CODE :550 - 5.7.1 Unfortunately, messages from [136.143.169.51] weren't sent. Please contact your Internet service provider since part of their network is on our block list (S3150). It looks

      • Not receiving email from customers and suppliers

        I am getting error . most of the customers tell me not able to send me email please check i have attached screenshot

      • Create user

        Hello I want to create user, but i get this error Unusual activity detected from this IP. Please try again after some time.

      • Next Page