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RFM Analysis for Customer Segmentation

RFM Analysis is a customer segmentation technique that evaluates Recency, Frequency, and Monetary value to identify valuable customers and tailor marketing strategies. It involves calculating raw RFM values for each customer and assigning scores to determine customer types, which can guide marketing actions. The analysis can be applied in retail settings to enhance customer loyalty, reduce churn, and optimize promotional efforts.

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Aathmika Vijay
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9 views13 pages

RFM Analysis for Customer Segmentation

RFM Analysis is a customer segmentation technique that evaluates Recency, Frequency, and Monetary value to identify valuable customers and tailor marketing strategies. It involves calculating raw RFM values for each customer and assigning scores to determine customer types, which can guide marketing actions. The analysis can be applied in retail settings to enhance customer loyalty, reduce churn, and optimize promotional efforts.

Uploaded by

Aathmika Vijay
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

RFM Analysis

What is RFM Analysis?


RFM stands for:
Recency (R): How recently a customer made a purchase.
Frequency (F): How often they purchase.
Monetary (M): How much they spend.

It is a customer segmentation technique used to identify


valuable customers and tailor marketing efforts.
Use RFM in a Retail Shop
• To identify loyal customers.

• To reduce churn by targeting dormant customers.

• Before launching loyalty programs or personalized offers.

• When you want to optimize inventory or marketing ROI.

• For seasonal promotions or festivals.


RFM Analysis
Calculate raw RFM values for each customer

Recency (R): R = Today’s Date - Date of Last Purchase

Frequency (F): F = Number of Purchases


Monetary (M): M = Total Spend
Assign RFM Scores
•5 = most recent, most frequent, highest spend.
•1 = oldest, least frequent, lowest spend.
Combine scores (e.g., R=5, F=4, M=3 → RFM = 543)
Data Needed Description

Customer ID Unique identifier

Purchase Date Date of each transaction

Purchase Amount Amount spent in each transaction

Transaction ID (Optional) for detailed analysis


Customer Last Purchase Total Orders Total Spend
C001 2025-05-20 12 ₹15,000
C002 2025-03-01 5 ₹4,500
C003 2025-05-25 20 ₹25,000
C004 2025-01-10 3 ₹2,000
C005 2025-04-15 8 ₹8,000
Assume today's date: 2025-05-26

Sample Calculation
Calculate R, F, M values
Customer Recency (days) Frequency Monetary

C001 6 12 15,000

C002 86 5 4,500

C003 1 20 25,000

C004 136 3 2,000

C005 41 8 8,000

C001 => 20-05-2025 26-05-2025 = 6,


C002 => 01-03-2025 26-05-2025 = 86,
C002 => 25-05-2025 26-05-2025 = 1.
Rank each metric (1 to 5)
Recency (lower = better)
Customer Recency Score (R)

C003 1 5

C001 6 4

C005 41 3

C002 86 2

C004 136 1
Frequency (higher = better):

Customer Frequency Score (F)


C003 20 5
C001 12 4
C005 8 3
C002 5 2
C004 3 1
Monetary (higher = better)

Customer Monetary Score (M)


C003 25,000 5
C001 15,000 4
C005 8,000 3
C002 4,500 2
C004 2,000 1
Combine RFM Scores
Customer R F M RFM Score
C003 5 5 5 555
C001 4 4 4 444
C005 3 3 3 333
C002 2 2 2 222
C004 1 1 1 111
Interpretations
RFM Score Customer Type Action

555 Champions Reward, Upsell

444 Loyal Customers Retain, Engage

333 Potential Loyalists Encourage further buying

222 At Risk Send win-back campaigns

111 Lost Customers Offer deep discounts


Practice Problem
Total
Customer Last Purchase Total Spend Today's
Purchases
ID Date ($) Date
(Freq)

C001 2025-05-20 10 500 2025-05-26

C002 2025-04-15 7 350 2025-05-26

C003 2025-05-25 15 750 2025-05-26

C004 2025-01-10 3 120 2025-05-26

C005 2025-03-01 5 200 2025-05-26

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