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.

      Zoho Campaigns Resources


        • Desk Community Learning Series


        • Digest


        • Functions


        • Meetups


        • Kbase


        • Resources


        • Glossary


        • Desk Marketplace


        • MVP Corner


        • Word of the Day


        • Ask the Experts


          • Sticky Posts

          • 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.

          • Invitation-Based User Access in Zoho Analytics

            Hello everyone, We’re rolling out an important update on how users are added to your Zoho Analytics Organization and Workspaces. Previously, when admins added users, they were automatically added to the organization. Moving forward, to improve security

          Zoho CRM Plus Resources

            Zoho Books Resources


              Zoho Subscriptions Resources

                Zoho Projects Resources


                  Zoho Sprints Resources


                    Zoho Orchestly Resources


                      Zoho Creator Resources


                        Zoho WorkDrive Resources



                          Zoho CRM Resources

                          • CRM Community Learning Series

                            CRM Community Learning Series


                          • Tips

                            Tips

                          • Functions

                            Functions

                          • Meetups

                            Meetups

                          • Kbase

                            Kbase

                          • Resources

                            Resources

                          • Digest

                            Digest

                          • CRM Marketplace

                            CRM Marketplace

                          • MVP Corner

                            MVP Corner




                            Zoho Writer Writer

                            Get Started. Write Away!

                            Writer is a powerful online word processor, designed for collaborative work.

                              Zoho CRM コンテンツ



                                ご検討中の方

                                  • Recent Topics

                                  • Zoho Projects - Visual improvement to parent and sub-task relationship

                                    Hi Projects Team, My feature request is to improve sub-task visibility. Please see screenshot below. I really think parent child relationships could be visually improved. Even if the first letter of the parent task was inline with other same level tasks

                                  • Automating 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 of

                                  • AI Interview Insights: Turn Recorded Interviews into Quick Transcripts & Summaries

                                    Evaluating interviews shouldn’t require replaying long recordings or taking manual notes. With AI Interview Insights, you can now review complete transcripts and AI-generated summaries of your One-way (Recorded) interviews right inside Zoho Recruit. This

                                  • API method to get activity feed in Recruit

                                    Hi community, I'm trying to figure out - is there any API method tto get information about datetime when Recruit/Candidates record tag where added?

                                  • Printing Mailing labels

                                    Is there any way to adjust the size of the printing labels? or product would I use to print labels from Zoho? Thanks, Josef Krieger Moderation Update (14th April 2025): We have another post discussing the same topic with votes and feedback from users.

                                  • How many groups in Zoho Mail can I make?

                                    I'm currently on the free plan, which has a limit of 10 users. Does that limit includes groups too? If not, what is the limit for groups? Thanks!

                                  • Default to Current Date

                                    I'm importing data from a excel spread sheet that does not have date column and I'd like the date column in the Zoho Database to default to the current date. Any way I can do this?

                                  • Widget shows error

                                    Hi， May I ask why below characters will be auto added into the widget link and how to solve this error? As my widget shows 404 error now. ?serviceOrigin=https%3A%2F%2Fcrm.zoho.com&frameorigin=https%3A%2F%2Fcrm.zoho.com

                                  • "Spreadsheet Mode" for Fast Bulk Edits

                                    One of the challenges with using Zoho Inventory is when bulk edits need to be done via the UI, and each value that needs to be changed is different. A very common use case here is price changes. Often, a price increase will need to be implemented, and

                                  • Dropshipping Address - Does Not Show on Invoice Correctly

                                    When a dropshipping address is used for a customer, the correct ship-to address does not seem to show on the Invoice. It shows correctly on the Sales Order, Shipment Order, and Package, just not the Invoice. This is a problem, because the company being

                                  • Different Company Name for billing & shipping address

                                    We are using Zoho Books & Inventory for our Logistics and started to realize soon, that Zoho is not offering a dedicated field for a shipping address company name .. when we are creating carrier shipping labels, the Billing Address company name gets always

                                  • What's New in Zoho Inventory | Q2 2025

                                    Hello Customers, The second quarter have been exciting months for Zoho Inventory! We’ve introduced impactful new features and enhancements to help you manage inventory operations with even greater precision and control. While we have many more exciting

                                  • Make Packages from multiple sales order of a single customer

                                    Our customers sends orders to us very frequently, some times what customer wants is to ship items from 5 to 6 sales orders in a single shipment. it will be very nice if, zoho can implement this function, in which we can select items from other sales orders of the customer.

                                  • Update CRM Price Books to include volume discounts as per Zoho Books/Inventory

                                    Once again, Zoho has 3 great products that all store information in different ways (which is not helpful when you attempt to integrate the 3 products - one of the best features of Zoho). Zoho CRM Price Books are basic at best. Zoho Books/Inventory Price

                                  • Print a price list or price book

                                    Hi Community. Am I right in concluding that Zoho has no functionality to print a price list from either Zoho CRM, Zoho Inventory or Zoho Books? I won't get stuck on the fact that Zoho doesn't sync price books between Zoho CRM and Books/Inventory (more

                                  • Start Workflow from Deluge Script

                                    I have developed a customized process from our CRM that leverages a deluge script to create a statement of work document. Once the document has been created via the merge and store function, I would like the ability to start a workdrive review & approve

                                  • Add System Pre-Defined Lookup Field to Subform?

                                    Hi there! New to using Zoho, so this may already exist, but I'm having trouble figuring it out. Is there a way to get the system pre-defined Account Lookup field (in our case, renamed to Company Name), as the starting point for a subform? In our company,

                                  • Global lists for Multi select

                                    It would be great if I could select a global list to use for a multi select dropdown filed.

                                  • Pageless mode needed to modernise Writer

                                    When we switched from GSuite to Zoho, one of the easiest apps I found to give up, was Docs. In many ways, Writer has always been more powerful than Docs, especially in terms of workflows/fillable forms/etc. However, I went back into Docs because I notice

                                  • Show Custom Button in Portal Listview Canvas

                                    I have created a custom button that shows in a list view of deals (internally I can see it). I have permissions to allow this button on the portal. But it is not displaying in the canvas list? Before I do too much leg work, is this function allowed?

                                  • Zoho Survey Enhancements

                                    We love Survey. We use it a ton. It needs some enhancements. Maybe some of these are already on the roadmap? API - this is crucial. We have some complex surveys that take place and need to update records, trigger other functions/automations, etc. I would

                                  • Work Order Assignment for Engineers Handling Their Own Requests

                                    I’m setting up FSM for a business where there are multiple engineers, but each engineer handles their own process end-to-end receiving the service request, creating the work order, and completing the field service job. I noticed that I must create an

                                  • Zoho Sites "pages" management page

                                    I have 80 plus pages on zoho sites. When I go to the "pages" link to view and edit pages, They are not in any kind of order, so I spend lots of time searching for pages when I need to edit or create new. How can I change the view order of all my pages

                                  • AI feature in Zoho Desk suggesting answers based on past ticket threads

                                    Hi I would like to suggest something that would be very useful : instead of suggesting answers based on the Knowledge Base, I think it would be great if Zia could analyze the history of all customer and agents threads, to suggest answers in new tickets.

                                  • Advanced Customization of the Help Center using JavaScript

                                    Hello everyone, The Help Center in Zoho Desk can be customized by using HTML and CSS to provide structure and enhance the page's appearance—but what if you want to add interactive and dynamic elements? You can add these effects with JavaScript, a programming

                                  • Using a CRM Client Script Button to create a Books Invoice

                                    Hello, I need help handling error messages returned to my client script from a function. The scenario I have setup a client script button which is available from each Deal. This CS executes a crm function, which in turn creates an invoice based on the

                                  • Using IMAP configuration for shared email inboxes

                                    Our customer service team utilizes shared email boxes to allow multiple people to view and handle incoming customer requests. For example, the customer sends an email to info@xxxx.com and multiple people can view it and handle the request. How can I configure

                                  • Synchronise item image between Zoho Commerce and Zoho Books/Inventory/CRM

                                    Here is a blindingly simple idea to tie several Zoho products together. Zoho - please include a method to synchronise the item image (or images) from one Zoho application to another. For example, if you upload an item image in Zoho Inventory, a user should

                                  • Introducing Zoho POS for the Kingdom of Saudi Arabia

                                    Hey everyone, We are excited to kick-start December with a completely personalized edition of POS for retail businesses in Saudi Arabia to help run your operations with ease. It offers four different subscription plans—Free, Standard, Professional, and

                                  • Whatsapp Connection Status still "Pending" after migration

                                    Hello, I migrated my WhatsApp API to Zoho from another provider a day ago. So far the connection status is still “Pending”. There is a problem? How long does it usually take?

                                  • Unveiling Zoho Sites 2.0 - A new dimension in website building

                                    Dear Zoho Sites Users, We are thrilled to announce the launch of Zoho Sites 2.0 today! This refresh represents a significant step forward in the capabilities of Zoho Sites and is crucial for creating a lasting and positive impact on our customers' businesses.

                                  • Subform edits don't appear in parent record timeline?

                                    Is it possible to have subform edits (like add row/delete row) appear in the Timeline for parent records? A user can edit a record, only edit the subform, and it doesn't appear in the timeline. Is there a workaround or way that we can show when a user

                                  • Script Editor not an option

                                    I am trying to apply a script to a sheet and Script Editor is not an option. I don't want to go outside Sheets to do this (like Creator) if it can be done inside Sheets.

                                  • Zoho CRM - Writing Assistant Tone

                                    Hi Zoho CRM Team, Text in my emails often gets underlined in yellow because I tend to use a more informal tone with my client's, like using "I'm" instead of "I am". Is there some way for me to tell the system that this is my preferred writing tone, so

                                  • Not able to link email text.

                                    Kindly check Zoho Sites. I am unable to turn a text into a email link. The save button does not work. Kindly try yourself to see it not responding to save.

                                  • Adding Multiple Files to a Zoho Vault Entry

                                    There is a old blog post talking about adding multiple file attachments to one Zoho Vault Secret: https://www.zoho.com/blog/vault/introducing-new-features-in-zoho-vault-powerful-password-sharing-wider-storing.html Is that still possible, I can see how

                                  • Migrate data from old to new account

                                    Hy, Have one Old Zoho Notebook Account with Data , want to migrate that whole Data to New Zoho Notebook Account which is in Zoho One . Is that possible ? If Yes then how?

                                  • Option to Customize Career Site URL Without “/jobs/Careers”

                                    Dear Zoho Recruit Team, I hope you are doing well. We would like to request an enhancement to the Career Site URL structure in Zoho Recruit. In the old version of the career site, our URL was simply: 👉 https://jobs.domain.com However, after moving to

                                  • Zoho Analytics Regex Support

                                    When can we expect full regex support in Zoho Analytics SQL such as REGEXP_REPLACE? Sometimes I need to clean the data and using regex functions is the easiest way to achieve this.

                                  • RTL Support for Webforms in Zoho CRM

                                    Dear Zoho CRM Support Team, We are writing to request an enhancement to the webform builder functionality within Zoho CRM. Currently, to create a webform in a right-to-left (RTL) language, the entire CRM instance must be set to RTL, which can be inconvenient

                                  • Next Page