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 - 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

    • Recent Topics

    • IF Statement in Zoho CRM Formula Field

      Hi, I am attempting to write a formula field that will give me one result if one statement AND another statement are true, then a different value if the first statement AND a different statement are true, else 0. Stated differently: if account = destination

    • CRM Percent custom fields: When will it show the % symbol and behave like %?

      1. Actually Percent custom fields fail to show the % symbol. 2. When in formulas Percent fields work like number: 100 x 5% = 5 ideal world 100 x 5% = 500 what happens actually 3. When importing Percent fields the % symbol has to be removed and the data

    • Free Webinar: Zoho Sign for Zoho Projects: Automate tasks and approvals with e-signatures

      Hi there! Handling multiple projects at once? Zoho Projects is your solution for automated and streamlined project management, and with the Zoho Sign extension, you can sign, send, and manage digital paperwork directly from your project workspace. Join

    • New in CRM: Dynamic filters for lookup fields

      Last modified on Oct 28, 2024: This feature was initially available only through Early Access upon request. It is now available to all users across all data centers, except for the IN DC. Users in the IN DC can temporarily request access using this form

    • Zoho Sheet - Desktop App or Offline

      Since Zoho Docs is now available as a desktop app and offline, when is a realistic ETA for Sheet to have the same functionality?I am surprised this was not laucned at the same time as Docs.

    • Automatically CC an address using Zoho CRM Email Templates

      Hi all - have searched but can't see a definitive answer. We have built multiple email templates in CRM. Every time we send this we want it to CC a particular address (the same address for every email sent) so that it populates the reply back into our

    • Disable fields in During action in Blueprint?

      Hi there. I've tried field disable (setReadOnly(true)) using client script and the event is onMandatoryFormLoad on detail page, assuming it'll work on blueprint fields, but it bears no result. Is this the expected behaviour? That we can't do this yet?

    • Editing the Ticket Properties column

      This is going to sound like a dumb question, but I cannot figure out how to configure/edit the sections (and their fields) in this column: For example, we have a custom "Resolution" field, which parked itself in the "Ticket Information" section of this

    • Zoho Bookings and Survey Integration through Flow

      I am trying to set up flows where once an appointment is marked as completed in Zoho Bookings, the applicable survey form would be sent to the customer. Problem is, I cannot customise flows wherein if Consultation A is completed, Survey Form A would be

    • "Total Hours" on Employee Attendance Report

      I'm learning that in Zoho jargon, "total hours" does not include paid breaks. Or at least not the way that my setup is working. That seems a little weird to me, since most jurisdictions in the US don't differentiate between time spent on paid break and

    • Allow Managers to Create Shifts for Their Departments in Zoho People

      Hello Zoho People Product Team, Greetings and hope you are doing well. This feature request is related to Zoho People - please don't move it to zoho one! We would like to submit a feature request regarding shift management permissions in Zoho People.

    • Bulk upload image option in Zoho Commerce

      I dont know if I am not looking into it properly but is there no option to bulk upload images along with the products? Like after you upload the products, I will have to upload images one by one again? Can someone help me out here? And what should I enter

    • Integration with...

      Dear Zoho Commerce team, Please could you consider the integration within Zoho Commerce / Inventory and Qapla'? (https://www.qapla.it/en/) This app is better than Aftership in many ways: - Aftership integration require PRO plan and price start from more

    • Image field in custom module

      Hi guy, Is there any hope of adding a custom image field in the custom module? We created a custom module to keep track of assets, and it would be helpful if we could attach an image to the record. Thanks Rudy

    • Repeat Column merge in ZOHO writer columns doesn't allow to set max columns per row

      I'm using ZOHO writer to merge data from a ZOHO CRM subform and I want it to make a table. We're using Insert Table for Column Repeat, because this is what we need. (Name of column (Teamname) and underneath that a list of names of teammembers). It works

    • Generate leads from instagram

      hello i have question. If connect instagram using zoho social, it is possible to get lead from instagram? example if someone send me direct message or comment on my post and then they generate to lead

    • Adding Markdown text using Zoho Desk API into the Knowledge Base

      Hi Zoho Community members, We currently maintain the documentation of out company in its website. This documentation is written in markdown text format and we would like to add it in Zoho Knowledge Base. Do you know if there is REST API functionality

    • Create case via email

      Good Afternoon, I have just registered and am taking a look around the system. Is it possible to create a case via email.  I.e. an employee/client/supplier emails a certain address and that auto generates the case which then prompts a member of staff

    • Need a Universal Search Option in Zohobooks

      Hello Zoho, Need a Universal Search Option in Zohobooks to search across all transactions in our books of accounts. Please do the needful Thanks

    • Custom Sorting based on other columns in table

      I need the ability to apply custom sorting to a text-based dimension in the X axis where the sorting is based on another column in the table. For example, I have a chart report where the X axis is a text label. I would like to be able to sort those text

    • Locked Notebook

      Hi, I hadn't used my Notebook in some time and was refamiliarizing myself with it. I clicked a lock icon and now I can't unlock. When I hit the information or unlock icons I'm taken to a page with the notebook icon and a keyboard. When I type, nothing

    • Zoho Books blocks invoicing without VeriFactu even though it is not mandatory until 2027

      I would like to highlight a very serious issue in Zoho Books for Spain. 1. The Spanish government has postponed the mandatory start of VeriFactu to January 1st, 2027. This means that during all of 2026 businesses are NOT required to transmit invoices

    • Unable to produce monthly P&L reports for previous years

      My company just migrated to Books this year. We have 5+ years financial data and need to generate a monthly P&L for 2019 and a monthly P&L YTD for 2020. The latter is easy, but I'm VERY surprised to learn that default reports in Zoho Books cannot create

    • Hide fields only for creation

      Hello, I'd like to hide some fields only during the creation of a contact in Zoho CRM. In fact I have some fields that are automatically calculated thanks to an automation, so when my users create a contact I don't want them to fill those fields. I know

    • Can I hide empty Contact fields from view?

      Some contacts have a lot of empty fields, others are mostly filled. Is there a way I can hide/show empty fields without changing the actual Layout? I would like to de-clutter my view, and also be able to add information later as I am able. I would be willing to learn to code a button, but I am highly confused about it and thus worried it would be beyond me.  I've looked at a lot of the developer documents and I'm not able to make a lot of sense of them.  Thank you in advance to anyone who knows the

    • Issues with Zoho Sheet in Mac

      I have downloaded the Zoho App from App Store but It is failing to Save As, Open & Download Operations. App Store

    • Weekly Sales Summary

      Is it possible to generate a weekly report in Zoho Books to show -$$ amount of estimates generated -# of estimates generated by Salesperson -$$ amount of Sales Orders created -$$ amount of Invoices generated

    • Can I write a check in Zoho Books with no associated bill?

      This currently does not seem possible, and I have a client that desperately needs this function if I am able to convert them with Quickbooks. Thank you in advance for your reply. 

    • OpenAPI Specs are just plain wrong

      The provided yml files for generating the OpenAPI specs are absolutely riddled with errors and inconsistencies. From missing fields on the objects, to just incorrectly named resource objects. I'm having to go through and manually changing the spec to

    • Why Sharing Rules do Not support relative date comparison???

      I am creating a Sharing Rule and simply want to share where "Last Day of Coverage" (Date field) is Greater than TODAY (Starting Tomorrow). However, sharing rules don't have the option to compare a date field to a relative date (like today), only to Static

    • How create a draft via workflow?

      I wish to create a workflow rule for specific emails that creates a draft response - not an automatic email reply, but just a draft with a set response ready to be verified by an agent who can then manually select recipients. Alternatively, the workflow

    • About Meetings (Events module)

      I was working on an automation to cancel appointments in zoho flow , and in our case, we're using the Meetings module (which is called Events in API terms). But while working with it, I'm wondering what information I can display in the image where the

    • Custom Footer – Zoho Writer Document

      Hello everyone, I’m having an issue adding a custom footer in a Zoho Writer document. I would like to insert my company information (including a logo + address) in the footer. The problem is that when I add these elements, the main content of my pages

    • From Zoho CRM to Paper : Design & Print Data Directly using Canvas Print View

      Hello Everyone, We are excited to announce a new addition to your Canvas in Zoho CRM - Print View. Canvas print view helps you transform your custom CRM layouts into print-ready documents, so you can bring your digital data to the physical world with

    • Workflow Down/Bug

      We have a workflow that sends an email to one of our internal departments 10 minutes after a record is created in a custom module. The workflow actually works correctly. However, we have now noticed that on January 8, between 3:55 p.m. and 4:33 p.m.,

    • Report grouping

      I have added a grouping in a report but it is not working how i had expected. I wanted to group a summary on a field named Size but when i add the grouping the report is still showing me each record and making a summary at the bottom of the report. What

    • Social Media Simplified with Zoho Social: Preview your Instagram grid before posting

      For a platform like Instagram that relies on visual appeal, it's important that you plan your image and video content in a way that holds your audience's attention. Planning your grid ahead of time gives you the benefit of understanding how your posts

    • FSM - Timesheet entires for Internal Work

      Hi FSM Team, Several of my clients have asked how they can manage internal timesheets within Zoho FSM. Since their technicians already spend most of their day working in FSM, it would be ideal if they could log all working hours directly in the FSM app.

    • VAT rates - exempt and out of scope

      Good Evening, UK based company here. I am a bit confused in respect of setting up VAT rates for exempt goods and services; at present I am simply leaving the VAT rate blank in the transactions in order to prevent any VAT appearing in the VAT return. When

    • Are there settings for hyperlinks?

      Clicking a hyperlinked cell in Sheet creates this little pop-up with the actual hyperlink inside. Is it possible to have a 1-click link where if you click the cell it opens the link directly with no pop-up?

    • Next Page