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.

• Topic Participants

• Nisha Angel J

  

• Hammer Group

• Juan

• Sticky Posts

• Tip of the Week - Spot Risky Sales with Conditional Formatting

  In Zoho Analytics, small tweaks can lead to big insights. One such feature is Conditional formatting based on other columns, your key to instantly spotting where sales success is overshadowed by product returns. Our tip this week shows you how to apply

• 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

• Zoholics Europe 2025: Your Ultimate Data Analysis (Zoho Analytics) Workshop Experience

  Why should you attend? This year, Zoholics Europe 2025 is putting data analysis centre stage. With a dedicated workshop designed to answer all your data-related questions, you’ll gain practical skills, real-time solutions, and expert insights that you

• Recent Topics

• Member Accounts in Related List

  Hi Team, Currently, when a parent account is associated with an account in FSM, there is no related list displaying the associated member accounts under the parent account’s related list section. To view member accounts, I have to manually search using

• how do i remove a specific Zoho Service from my account

  I no longer need Zoho CRM, ZRM Assist nor ZRM BugTracker. How do I remove them from the list of apps for my account?

• I Want migarte all invoice details to zoho sheets

  I want to migrate all existing invoice details to Zoho Sheet, and automatically update the sheet whenever a new invoice is created.

• were can i find my invoices i need this for my accountant

  were can i find my invoices i need this for my accountant, how can i get id direct to my email?

• ONLY email field not populating Writer fillable document (randomly)

  I have a Zoho Writer fillable document that has pulled all my data from my Zoho Sheets file, EXCEPT the email column. It pulled every data before and after that column with no issues. Screenshots attached. It's not my first time using the app or the feature,

• My number is marked as spam

  Hello Zoho Mail Support, My phone number was incorrectly flagged as “spam” during sign-up. This is my personal number, and I have not engaged in any spam activities. Kindly review and verify my account so I can proceed with my email setup. Thanks.

• Personnalisation des paramètres dans Zoho Mail

  Pourquoi cela compte-t-il ? La personnalisation des paramètres dans Zoho Mail permet aux administrateurs de configurer l’environnement de messagerie en fonction des besoins spécifiques de leur organisation. Que ce soit pour alléger l’interface pour certaines

• How To Save Data Into Zoho CRM Sandbox

  Hi Community, I want to save data into my zoho sandbox , for this I am using this api endpoint - https://www.zohoapis.com/crm/v8/Patients but I am getting this error - { "success": false, "message": "Zoho API request failed", "error": { "code": "INVALID_MODULE",

• Automate pushing Zoho CRM backups into Zoho WorkDrive

  Through our Zoho One subscription we have both Zoho CRM and Zoho WorkDrive. We have regular backups setup in Zoho CRM. Once the backup is created, we are notified. Since we want to keep these backups for more than 7 days, we manually download them. They

• Question about retrieving unsubscribed contacts (outside of lists) via API

  Hello, I am currently using Zoho Marketing Automation and would like to integrate it with our company’s core system. For this purpose, I am exploring the API options available to retrieve contact information. Specifically, I would like to know if there

• Getting “mandatory field missing: Service_Line_Items” When Creating Work Order via Zoho Flow Deluge

  Hi Team, I’m trying to create a Work Order in Zoho FSM with only a Service Line Item (no Parts). However, I keep getting this error: Work Order Response: {"code":"MANDATORY_NOT_FOUND","details":{"api_name":"Service_Line_Items"},"message":"required field

• How to customize the colors of the Client Portal login screen and add the company logo?

  As title, how to customize the colors of the Client Portal login screen and add the company logo?

• Daily updates/fixes and how to see what was changed?

  When I receive the notification that zoho was updated and I need to refresh it. How can I see what was changed or fixed? Sometimes they change things that effect my books and I need to know what they did. For example over this past weekend something was

• Upcoming Change: Snowflake Username/Password Authentication Deprecation – Action Required

  Hello Users, Snowflake has officially announced that username and password-based authentication will be deprecated by November 2025. You can find the official announcement [here]. If you're using a Snowflake connection in Zoho Analytics to import data,

• Why should I choose Zoho Inventory vs Odoo?

  Hello there! I have used Zoho in different companies I've worked in, and I have a positive perception of it. I am starting a new import business for pipes, tubes, fittings, valves, elbows, etc., which all have serial numbers, cast numbers, etc., so I

• Product Updates in Zoho Workplace applications | July 2025

  Hello Workplace Community, Let’s take a look at the new features and enhancements that went live across all Workplace applications this July. Zoho Mail Import bookmarks from Pocket Worried about losing your Pocket bookmarks? Don't worry we have got you.

• PLEASE FIX YOR BUGS

  PICTURES ARE BEING REJECTED DESPITE THEM FOLLOWING THE GUIDELINES ON DIMENTIONS.

• Kaizen# 204 - Answering Your Questions | Perform Field Updates before Blueprint transition via Client Script

  Hello everyone! Welcome back to another exciting Kaizen post. One of the questions we received through your Kaizen feedback was: “How can I update fields before Blueprint transition and how to prevent a transition based on a condition using Client Script?”

• Create online meetings for Booking Pages with Zoho Meetings and Zoom

  Greetings, We hope you're all doing well. We're excited to share some recent enhancements to Bigin's Booking Pages. As you know, Booking Pages let you create public pages to share your availability so that your customers can easily book time slots with

• Filters in audit logs

  Greetings, I hope all of you are doing well. We're happy to announce a few recent enhancements we've made to Bigin. We'll go over each one in detail. Previously, there were no filters available to narrow down data in audit logs. Now, we've introduced

• Enhanced help options in Bigin

  Greetings, We're excited to introduce a new enhancement to Bigin's Help section: a comprehensive Help Options panel that brings together all your support resources in a single, well-organized space. Previously, the Need Help? menu provided only a limited

• Zoho FSM API Developer Needed

  Hi, I’m looking for a developer with experience using Zoho FSM APIs. Scope: Connect WordPress website booking form to Zoho FSM Check availability (date, time, region) Create Work Orders + Service Appointments automatically Notify both customer and scheduler

• Revenue Management: #4 What if there are uncertainties in project or service delivery?

  Our previous post taught us how Zoho Billing makes life easy for businesses with its automated revenue recognition rule. However, certain businesses have more challenges that an automated system cannot handle, and there are certain situations where automated

• This mobile number has been marked spam. Please contact support-as@zohocorp.com

  Bom dia, estou tentando colocar o número 11 94287-6695 e esta com erro "This mobile number has been marked spam. Please contact support-as@zohocorp.com" pode me ajudar, por favor?

• Items Serial Tracking Issue

  We enabled Zoho Items inventory tracking then disabled it after some time now we want to enable it again When I check the missing serial number reports I see one item But I cant see any option to Add the serial numbers Where and how to add the serial

• Zoho Payroll integration with Zoho Books - unable to match multiple bank feeds to one wage payment

  For one employee's wage, I make two partial payments. Those bank feed transactions come into Zoho Books via bank integration. I make one pay-run for the month in Zoho Payroll and that comes into Zoho Books via the Zoho integration. Zoho Books doesn't let me match multiple bank feed transactions against a single wage item. Please fix urgently. I can't complete my books because of this.

• Add Checkbox Selection & Bulk Actions to Delivery Challans Module

  Hi Zoho Team, I’ve noticed that in the Sales Orders module, there are checkboxes beside each entry that allow users to select multiple records for bulk actions such as print, email, or delete. However, in the Delivery Challans module, this option appears

• Can't be able to check-in in laptop

  even after giving location access still i can't be able to check-in in laptop.

• Compensation Cess on Coal ₹400 per tonne. ?????

  The compensation cess rate varies by the type of product. And the cess is calculated based on the value of the product without GST. Coal, for example, comes with a cess of ₹400 per tonne. That means that if you sell 2 tonnes of coal that have a value

• 7 month over zoho book purchase but still not immpliments Golive

  7 month over zoho book purchase but still not immpliments Golive one problems zoho team short out then other problems come still very poor mangments and immliments team . struggling with the templates in ZOHO Books. Especially with the placement of some

• SMS to customers from within Bigin

  Hi All, Is there anyone else crying out for Bigin SMS capability to send an SMS to customers directly from the Bigin interface? We have inbuilt telephony already with call recordings which works well. What's lacking is the ability to send and receive

• Parent & Member Accounts (batch updating / inheritance)

  Hello, I find the Parent Account functionality very useful for creating custom views and reports, but was wondering if I can also carry out batch editing on all members (aka children) of a Parent Account at the same time. Alternatively, can I set members to automatically inherit the values of the parent? For example: We have a chain of supermarkets that buy our products. These supermarkets are all members of a Parent Account in our CRM. We release a new product and all of the member stores wish to

• Edit Legend of Chart

  I would like to edit the legend of the chart. Every time I enable the legend, I get a very unhelpful (1), and when I try to type to change to what I would desire, nothing happens, which is very frustrating. I've gone through your online tutorials and nowhere can I find a legend settings button. This seems a simple fix, where can edit the legend? Thanks.

• Extended timeouts for APIs beyond 40secs for to accomodate LLMs

  A 40 second max response time for API calls is fine when connecting to most services, however is unsuitable when dealing with LLMs (ChatGPT/Claude/Gemini) where the response timing is very uncertain. Is there any way to increase this? It would be great

• Deletion of Zoho Account

  To whom it may concern, Good day, My account has been created incorrectly in Zoho and I am not able to join my Company's Zoho account - attached screenshot for your kind reference Alphatronmarine - Portal Kindly advise procedure to delete this current

• Workflow for deposit to bank account

  Hello, Is it possible to make a workflow when a deposit is made to your bank account which is coupled to Zoho books? I want Zoho to sent an email each time a deposit is made to our bank account via a workflow. Regards, Steven

• Marking Retainer invoice paid through Deluge

  Hey Everyone, We have a scenario where we are collecting deposit payments on our website. Now, in zoho books, we need to create a retainer invoice and mark it as paid automatically using deluge just like we can mark normal invoices as paid. I have tried

• Create a new record in custom module vi custom button

  I have zoho books premium plan . I have 2 custom modules in zoho books. 1. Goods Receipt 2. Delivery Order, I need to select multiple records from Goods Receipt and create a new Delivery order from these multiple records. (like multilple sales order into

• Profile date settings

  At present I have "EEE, MMMM dd, yyyy" but this takes an exessive amount of column space, we should be able to input our own format. I would like to use "EEE, MMM dd, yy" - a much shorter version of the above but with the same abbreviated info, requiring

• Delivery Method Field in Sales Order Module

  In Books and in Sales orders, the "Delivery Method" field seems to allow for anything to be entered and it seems to store those entries for future use.  When you chose to convert a sales order to a purchase order, the related field is now called "Shipment

• Next Page