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 - February 2026

      Hello Users! We're back with another round of updates for Zoho Analytics. This month's release focuses on giving you greater flexibility in how you visualize, manage, and act on your data - with new features like custom visualizations, remote MCP server,

    • 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

    Nederlandse Hulpbronnen


      • Recent Topics

      • Uplifted homepage experience

        Editions: All editions. Availability update: 17th February 2026: All editions in the CA and SA DC | JP DC (Free, Standard and Professional editions) 23 February 2026: JP (All Editions) | AU, CN (Free, Standard, Professional editions) 27 February 2026:

      • 【Zoho CRM】住所項目のアップデート：構造化された正確な住所入力を実現

        ユーザーの皆さん、こんにちは。Zoho コミュニティグループの中野です。 今回は「Zoho CRM アップデート情報」の中から、住所項目に関するアップデートをご紹介します。 アップデートの概要 これまでの住所項目は、自由入力形式のテキスト欄が中心でした。 そのため、入力者によって書き方がバラバラになりやすく、データの検索やレポート集計が難しいという課題がありました。 今回追加された新しい住所項目では、住所を構造化されたフォーマットで管理できるようになりました。 以下の要素をそれぞれ個別の項目として分割して管理します。

      • Edit a previous reconciliation

        I realized that during my March bank reconciliation, I chose the wrong check to reconcile (they were for the same amount on the same date, I just chose the wrong check to reconcile). So now, the incorrect check is showing as un-reconciled. Is there any way I can edit a previous reconciliation (this is 7 months ago) so I can adjust the check that was reconciled? The amounts are exactly the same and it won't change my ending balance.

      • Choose Component for User Filter

        This filter in the Choose Component for User Filter would be better if had an Order or Group by function. Also, the Specify the default filter values: is very confusing and limiting.

      • Zoho Desk - Event Calendar View

        Hi Desk team, Are there any plans to introduce a calendar or timeline view for Events in Zoho Desk? It would be very helpful if we could see Events visually in a calendar and/or timeline. This is very helpful when desk side support activities need to

      • Re-Apply SLA When Ticket Reopened from Closed Status?

        If you have an SLA applied, timers are deactivated when going to "On Hold" status type and reactivated when going back to an Open status type. What we discovered is when a customer replies to a closed case and it reopens, the SLA is not applied and timers

      • Option to Delete Chats in IM

        Currently, there is no option to delete any chats in IM, regardless of their source.

      • Time Zones for Users

        I've searched for this topic, but the only answers I see are from years back. We have users all over the country. is there a way for them to set their own time zone? This is important and should be a standard setting, but I do not see how to do it.

      • What is a realistic turnaround time for account review for ZeptoMail?

        On signing up it said 2-3 business days. I am on business-day 6 and have had zero contact of any kind. No follow-up questions, no approval or decline. Attempts to "leave a message" or use the "Contact Us" form have just vanished without a trace. It still

      • Showing the map along with mileage expense

        When you use the GPS to track mileage, it shows you the map of the actual path travelled. It would be very useful and practical to save that map with the mileage expense, so that when the report is created, it provides a map of each mileage expense associated

      • ID:2406331

        Hello, I have sent the form (ID:2406331) but no answer after two days. This is a paid subscription, I am not allowed to use the eighth paid slot of 50GB email space anymore, only 7 are being used. Is anyone going to help me please so I can use the eighth

      • Approval Workflow for Purchase Orders Abrir

        The requirement is , that all purchase orders greater than or equal to 5000 go through an approval process from certain people, but within books I only see that the approvers can be by levels or any approver but we cannot enter a rule like these. Can

      • Transaction Rule Matching

        Q1. Is there a method to have the Transaction Rules applied across multiple Bank Accounts? Q2. To match "contains" text in Transaction Rules, is a wildcard or regular expression required? Is it case sensitive? Would searching for "issue" in the following

      • Notebook on Mac: Fuzzy fonts in list view

        Hi, I am running Notebook on Mac OS 26. Generally it works fine, and the font display in the notes themselves is crisp. However, in the notes list (left of the open note) the font of the note titles as well as first lines is noticeable fuzzy. Attached

      • Trigger workflows from SLA escalations in Zoho Desk?

        Hey everyone, I’m currently working with SLA escalation rules in Zoho Desk and ran into a limitation that I’m hoping someone here has solved more elegantly. As far as I can tell, SLA escalations only support fairly limited actions (like changing the ticket

      • Zoho CRM Email Templates 100% Width No Background How?

        Hi, On the Zoho CRM Email Templates in setup > customization > templates > new templates > I choose blank template, but still it puts in a gray background and a max width for the email. I just want to make an email that looks like an email I would send from gmail that has no background or max width. How do you do this? 

      • ZOHO CRM Quote Export / Quote Report

        How can I either Export my quote list, or create a Report that shows all quotes AND includes the NOTES field in a column. I attempted to Run a Report which includes ALL FIELDS, however it does not include the Notes Field (but oddly does include the fields

      • Introducing Radio Buttons and Numeric Range Sliders in Zoho CRM

        Release update: 1. 2 March 2026: Currently out for CN, JP, AU and CA DCs (Free and standard editions). For other DCs, this will be released by mid-March. 2. 26 March 2026: CA, SA, AU, JP, CN DCs - Free, Standard, Professional, Enterprise, Ultimate, CRM

      • Adding a Mark Up

        Can you use the discount column to be a mar up column on estimates and invoices?

      • URGENT. Recovering email without eArchive

        Hello, I have deleted some email from my trash but do not have eArchive. Is it possible to recovery without this? many thanks!

      • Subscription Statuses - Dunning

        How are other companies handling the scenario when customers don't pay and dunning takes over? Our issue is that in my situations, we want our customers to be able to catch up their late payments and continue their subscription after the dunning process

      • Logo Doesnt appear on email

        Hi, 1. PROBLEM: mails sent to customer from zoho invoice ( Estimates and incoices etc.) Logo doesnt appaer on email. 2. SUGGESTION: there must be an option to select from google fonts if we want specific font to the pdf templates. thanks

      • How to see Statement Details Shown in Unclassified Transactions in All Transactions?

        All, The list of Unclassified Transactions show the Statement Details and Descriptions. What is the method to see that column in the All Transactions list? -Thanks!

      • Non-Avalara Tax Automation wtih Zoho Books

        We are paying a ridiculous amount for Avalara. Our team wants to make a change, but they're the only software fully integrated with Zoho. We also don't have the bandwidth to do this manually, so we do need some sort of automated software solution. We

      • Migrating to the new outgoing webhook model in Zoho Connect

        Dear User, Outgoing webhooks configured across the Zoho Connect Integrations page, Zoho Flow, and Zapier will stop working after May 31, 2026. This is due to an upcoming upgrade to our outgoing webhook flow. This update is mandatory only for networks

      • Create formula calculations in Assemblies for scaling quantities

        Something we have been encountering with our composite items is dealing with scaling of quantity of one or more items within the composite assembly relative to the number of complete units being sold. I.e. running the equation 2(n-1) on one of the assembly

      • Lastest update

        The latest update to notepad has completely trashed all my notes. If I go to view it it just opens up a screen with a box with dotted lines around it for me to add something I can import saved nodes but you can't view them at all. Anybody else having

      • Tip #67- Exploring technician console: Disable Input Devices- 'Insider Insights'

        Hello Zoho Assist Community! Picture this: you are in the middle of a critical remote session, carefully configuring a system or running an important update, and the customer accidentally clicks somewhere or types something that undoes your progress.

      • What matters more in Zoho implementations: tools or system architecture?

        I recently worked on a full-stack migration for a catering equipment business using Zoho One with Shopify, and it raised a few interesting observations. The setup included migrating a large product catalog (around 9,700+ SKUs), integrating multiple supplier

      • Facturation électronique 2026 - obligation dès le 1er septembre 2026

        Bonjour, Je me permets de réagir à divers posts publiés ici et là concernant le projet de E-Invoicing, dans le cadre de la facturation électronique prévue très prochainement. Dans le cadre du passage à la facturation électronique pour les entreprises,

      • [Webinar] Solving business challenges: One tool for documents, forms, PDFs, e-signatures, and more

        Hi Zoho Writer users, Most businesses rely on multiple tools, such as a word processor, form builder, e-signature provider, and PDF editor, for their document workflows. Managing multiple subscriptions, switching between tools, and moving data across

      • Deposit on invoice

        I'm trying to figure out how to customize an Estimate to include a Deposit/Retainer Invoice line within the Estimate. I tried creating my own custom field called "Deposit" where I manually inputted the deposit amount, which was nice. However, my employer

      • Zoho NOTEBOOK: What are file size restrictions?

        I understand that Zoho NOTEBOOK is a free product, and what it offers is great. But I'm wondering what the file size restrictions are. When I record an audio note in Zoho Notebook, what is the maximum length of recording time/audio file size? When I wish to upload MP4 video, what is the maximum video size I can upload per Zoho Notebook restriction? Moreover, does Zoho Notebook use its own storage structure, or can I upgrade my storage for Zoho Notebook to add larger file attachments, videos and audio

      • Concern Regarding Stock Validation in Inventory Management

        Hi Zoho Team, We would like to highlight a concern regarding stock validation in the inventory system. As per standard inventory management practices, if the stock level is zero, the system should not allow users to create a shipment, packing slip, or

      • Automation Series #2: SLA vs Supervisor Rule in Zoho Desk

        SLA vs Supervisor Rule: Keeping tickets on track in Zoho Desk This post is part of the "Desk Automation Series," Chapter 1. Through this series, we will help you choose the right automation type in Zoho Desk by comparing commonly confused automations

      • Zoho Recruit - Email Relay

        Good day, Has anyone succeeded in setting up an email relay for Office 365? If I add the details from https://support.microsoft.com/en-us/office/pop-imap-and-smtp-settings-8361e398-8af4-4e97-b147-6c6c4ac95353, I get the connection error. Regards, Eka

      • Better use of contacts

        Zoho inventory has the ability to add multiple contacts to customers. However Zoho inventory doesn't currently provide a way to link a contact to objects like sales orders. This means that while you can tell what company has placed a sales order you can't

      • Notebook AI limits

        Hi folks, Working with the AI transcription tools in Notebook, on the Mac App, which I find quite handy, but the one thing I am struggling with is the inability to either edit or copy the results of the transcript: I can't click in any of the boxes, and

      • Disappointment with Zoho Payments

        Dear Gowdhaman, I am writing to inform you that I am removing Zoho Payments from my website. I cannot continue to disappoint my customers due to the lack of UPI support, as has been the case with my experience so far. Please note that the 0.5% transaction

      • Zoho Commerce B2B

        Hello, I have signed up for a Zoho Commerce B2B product demo but it's not clear to me how the B2B experience would look for my customers, in a couple of ways. 1) Some of my customers are on terms and some pay upfront with credit card. How do I hide/show

      • Next Page