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Customer Segmentation with RFM
A guide on customer segmentation with RFM.
Definition of RFM
Recency, frequency, monetary value is a marketing analysis tool used to classify a company’s or an organization’s best customers by measuring and analyzing spending habits.
It is a well-known technique and easy to apply. We segmentize our customers according to their spending patterns.
It is commonly used in database marketing and direct marketing and has received particular attention in the retail and professional services industries.
The RFM model is based on three quantitative factors:
Recency: How recently a customer has made a purchase
Frequency: How often a customer makes a purchase
Monetary Value: How much money a customer spends on purchases
We standardize these numbers by their importance.
After we calculate RFM scores, we segmentize again according to the table ;
We ignored MONETARY [M] because logically if F[Frequency] and R[Receny] values are high, M value will be as well. And also, 2d table is much easier than 3d.
after updating our customers according to the table upstairs
It looks like ;
So let’s start with our business problem and see how RFM works in practice.
1. Business Problem
An e-commerce company wants to segment its customers and determine marketing strategies according to these segments.
