Understanding RFM Analysis

Customer > RFM Analysis > Segmentation

Summary

The RFM Analysis Segmentation report helps categorize customers based on their recency, frequency, and monetary value, providing insight into customer loyalty and behavior.

Questions the report answers

• Which customer segments are contributing the most to revenue?
• How recently have different customer segments made a purchase?
• How frequently do customers in each segment purchase?
• How much does the average customer in each segment spend per order?

How to read the report

What is RFM Analysis?

RFM (Recency, Frequency, and Monetary) Analysis is a powerful method for segmenting customers based on their purchase history and behavior.

• Recency: How recently a customer made a purchase.
• Frequency: How often a customer makes purchases.
• Monetary Value: How much a customer spends over time.

Understanding the RFM Segments

The report uses these three metrics to classify customers into distinct segments:

• Champions: These are your best customers. They have purchased recently, buy frequently, and spend a lot. They are the ones who are most likely to respond positively to new offers, product launches, and loyalty programs.
• Loyal: Customers in this segment are frequent buyers but may not always spend the most. Engaging them with exclusive deals, rewards, and a loyalty program can keep them returning.
• Potential Loyalists: If nurtured correctly, these customers have the potential to become champions. They are relatively frequent buyers and are starting to show loyalty. Offering them personalized experiences or incentives could convert them into champions.
• Recent: Customers in this segment have made a recent purchase but haven’t had time to make more yet. Keeping them engaged and following up with relevant offers will help convert them to more frequent buyers.
• Promising: These customers have made some purchases but are not yet frequent buyers. Engaging them with special offers or discounts may help increase their purchase frequency.
• Need Attention: Customers who have not purchased recently but have bought multiple times before. They may need targeted win-back campaigns or reminders about what makes your brand unique to re-engage them.
• About to Sleep: These customers haven’t purchased in a while and are at risk of losing interest. Providing incentives like exclusive discounts or showcasing new products may help win them back.
• At Risk: Customers who haven’t purchased in quite a long time but have previously spent a good amount. A strong win-back strategy or reminder about their past purchase can re-engage them.
• Cannot Lose Them: High-value customers who haven’t purchased in a while. Losing these customers could have a significant impact on revenue. Personalized win-back campaigns are necessary to bring them back.
• Hibernating: These customers purchased a long time ago and have low frequency. They may have moved on to competitors, and winning them back might require more significant engagement efforts.
• Lost: Customers who have not made a purchase for a long time and were not big spenders. It’s unlikely that they’ll return, but a targeted reactivation campaign could still be considered.

Understanding the report

The report starts with a table that has several key metrics to help you understand the customer base:

• Number of Customers: It helps gauge the size of your customer base in each category.
• % of Total Customers: This percentage indicates how much of your overall customer base is represented by each segment.
• Total Customer Spend: Shows the overall value each segment contributes to your business in terms of revenue.
• Number of Orders, Average Customer Spend, and Average Orders per Customer: These metrics reveal how much an average customer in each segment spends and how frequently they order.
• Average Days Since Last Order: This metric helps identify which segments are slipping away.

Just below the table, three charts help you understand customer behavior in detail.

• RFM: Recency (Months Since Last Order): This chart displays the distribution of customers based on how recently they placed an order. It helps you identify when the majority of your customers last interacted with your business, allowing you to decide whether to run re-engagement campaigns accordingly.
• RFM: Frequency (Total Orders Count) - This chart represents the number of customers categorized by how frequently they have placed orders. It highlights different segments based on total order count, which helps determine how often customers are buying from you.
• RFM: Monetary Value (Total Customer Spend) - This chart shows the number of customers based on their total spending, broken into lifetime value (LTV) buckets helping you understand which segments are driving the highest and lowest revenue.

Glossary

Average Customer Spend:

The average amount spent by each customer. It is calculated by dividing the total customer spend (Sales Amount) by the number of unique customers.

Average Days Since Last Order

The average number of days since customers in a segment last made a purchase.

Average Orders per Customer

Average number of orders placed by each customer. It is calculated by dividing the total number of orders by the number of unique customers.

Total Customer Spend

The total amount of money spent by customers in a specific segment. This metric shows the total revenue contribution from each segment.

Number of Customers

Total count of unique customers who have made at least one purchase. It is calculated by counting the number of unique customers.

% of Total Customers

The percentage of total customers out of all customers. It is calculated by dividing the number of customers by the total number of customers.

Number of Orders

Total count of orders placed by customers. It is calculated by counting the number of orders.