Developing customer segmentation strategy based on the RFM model

In eCommerce, you can’t give the same treatment to all your customers because they are not created equal. How do you know who deserves what? To put it briefly, you have to analyze your customer base, split customers into groups based on some rules or a segmentation model, and then tailor marketing strategies for each segment.

With so much data surrounding you, it might seem quite easy to generate some segments for your next campaign based on some demographic and geographic data.

However, if you’re interested in cultivating a customer-centric approach in your business, you need more advanced segmentation. 

“In the world of customer centricity, there are good customers… and there is everybody else.”

Peter Fader, in “Customer Centricity: Focus on the Right Customers for Strategic Advantage“

If you’re keen on understanding your customers, you need a model that can reflect:

• The history of your customers’ buying behavior;
• The current status of your customers;
• The prediction for the future evolution of the relationship between your brand and your clients.

In this post, I will show you how important and impactful it is to apply the right customer segmentation method for your eCommerce business and develop segmentation strategies based on the alternative you chose.

Talking about impact, did you know that focusing on the right customer segments can help you increase your customer retention rate by 30% in one year?

That’s pretty amazing, considering that on average, in eCommerce, 70% of the revenue is generated by repeat customers, who represent 30% of the total customer base.

Revenue vs. Margin by Customer Type (source: CVO Academy)

Great results start with great segmentation.

What is customer segmentation?

Customer segmentation is defined as the marketing technique that allows you to divide the customer base into smaller groups based on common traits. 

Segmenting customers enables you to manage them effectively, positively impacting the customer experience and your business in general, not just inside the marketing department.   

As you will find in most of the online resources, the most frequently used segmentation types are:

• Demographic segmentation;
• Geographic segmentation;
• Psychographic segmentation;
• Behavioral segmentation.

Here’s a brief description of these types of segmentation:

Demographic segmentation allows you to group your customers based on attributes like age, gender, occupation, education, family status, and income.

An example of a segment created based on demographic data could be “single men between 35-45 years old with a C-Level job and high income.”

Geographic segmentation helps with segmenting your customers based on information about their location and targeting people from specific regions, countries, or cities.

You could take the segment example from demographic segmentation and add a geographic layer, dividing the segment into: 

Psychographic segmentation enables you to group customers based on their psychological traits that influence their decision-making process: values, beliefs, attitudes, motivations, etc.

Adding a psychographic layer to the segment examples above, a store could target only “single men between 35-45 years old with a C-Level job and high income who prefer eco-friendly products.”

Behavioral segmentation helps you group customers by using data about past behavior that is also a predictor of future behavior generated by their experience with your store, products, services, support team.

An example of a segment defined using behavioral data could be “single men between 35-45 years old with a C-Level job and high income that only purchased once and haven’t come back in the last six months.”

> If you want to find more about these four segmentation models, check this article.

As an eCommerce business, you collect a lot of customer data during the online transaction process, and you might be tempted to experiment a lot with segmentation. It’s essential to start with the “why” before choosing a segmentation method and building customer segmentation strategies.

Why should you segment your customers?

Customer segmentation helps you identify who is worthy of your attention and who isn’t. After all, you want to is to invest your resources wisely and focus on win-win relationships.

Some of your customers have been so expensive but spent so little that you simply can’t afford to pamper them like the ones that buy again and again, spending a great deal of money with your store.

These loyal customers are your ideal customers. You should always go the extra mile for them. In eCommerce, that means concierge onboarding, outstanding customer experience, benefits, rewards, and appreciation.

Ok, but how do you know who your ideal customers are?

Ask yourself these questions:

• Who are the customers that spend the most?
• Who are the most loyal customers who return to my store and place a second/ third order, etc.?
• Who are the newest customers?
• What customers am I about to lose?
• Who have I already lost?

It won’t be easy to answer all these questions without a proven segmentation technique. Big online retailers, like ASOS and Amazon, actively use RFM to segment their customer database.

Why RFM segmentation? 

The main reason is identifying the ideal customers and being relevant depending on that customer’s value and level of activity. So, if they are absent, maybe you would want to reactivate them. And if they’re also valuable to your eCommerce brand, then you have to treat them better. 

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RFM segmentation – turning first-party data into gold

In the ’70s, companies used the RFM model (Recency, Frequency, and Monetary value) to help direct mailing marketers understand their audience. 

They used this customer segmentation model because direct mailing was expensive, so they wanted to save money. The RFM allowed them to separate those who regularly bought from those who stopped buying and weren’t worth addressing.

Today, big eCommerce companies chose RFM as their customer segmentation strategy to transform their first-party data into gold. 

RFM clarifies what is working and what’s not in your online business based on this valuable resource you already have: customer data you collect naturally as part of your interactions with them and the transactions they make with your store.

RFM stands for:

• Recency: How recently does the customer purchase?”
• Frequency: “How often do they purchase?”
• Monetary values: How much do they spend?

RFM segmentation analysis allows you to identify the most important types of customers by grouping them according to their recency, frequency & monetary values. 

Based on RFM Segmentation, your company can target specific clusters of customers with more relevancy for their particular behavior, thus generating higher response rates, increased loyalty, and better customer lifetime value.

RFM shows you who your most important customers are and helps you in defining the ideal customer profile. The higher their RFM score is, the higher the chances of keeping them close in the long run.

The RFM score is given based on a scale that is suitable to the number of customers your store has and allows you to evaluate each segmentation variable on a scale from:

• 1 – 3 if you have less than 30k customers;
• 1 – 4 if you have 30-200k customers;
• 1 – 5 if you have more than 200k customers.

For example, if a store has over 200k customers, the RFM score for the ideal customers would be “555”: 5 for recency, 5 for frequency, and 5 for monetary.

> To learn everything you need about effective customer segmentation through RFM Analysis, check out this blog post that gives you an in-depth walkthrough of how you can apply it to your business.

Let’s see examples of customer segments that result through RFM segmentation and how you should approach them according to what they mean to your business.

Examples of customer segments generated through RFM segmentation

To make RFM segments easier to understand, we gave them names in association with love life, which got us to 11 distinct RFM groups: 

• Soulmates
• Lovers
• New Passions
• Flirting
• Apprentice 
• Platonic Friends 
• Potential Lovers
• About To Dump You
• Ex-Lovers
• Don Juan
• Break-Ups

Once you define your groups, you can design a customer segmentation strategy that allows you to treat segments differently, according to their characteristics.

> In this guide to customer segmentation, you will find a detailed explanation about each customer segment: who they are, how to analyze them, and the best approach for each RFM segment. 

Let’s take a look at four of these customer types:

Soulmate customer

As you might guess, soulmates are your ideal customers, with the maximum score for recency, frequency, and monetary value.

Your goal is to keep them loyal long term, and that can only happen if you know them well enough to offer the best customer experience possible and delight them throughout their journey.

The Soulmate RFM segment also helps you define your ideal customer profile and use everything you know to attract more new customers like them.

Performing a customer journey analysis on Soulmates will reveal many insights about how you can attract new high potential customers, encourage customer loyalty, and improve customer experience management across various segments.

Here are some tactics you can include in your marketing strategy for the most valuable group you have:

• VIP access to products, services, and content;
• Thank-you notes in the delivery pack;
• Appreciation calls;
• Personalized online experience;
• Real-time alert for low NPS;
• Reactivation campaigns.

> Learn more about the Soulmates

Getting to know your Soulmates can generate radical changes in your company’s strategy.

That’s what happened with one of our clients, Otter, a shoe webshop. After we analyzed their customer base, we could see that they were losing 70% of their first-time buyers and targeting the wrong customers.

After they understood who their ideal customers actually were, they changed their approach. They started targeting audiences similar to their Soulmates, which led to an increase in the customer retention rate by 30% in one year by focusing on their most important segment.

> Discover the Otter case study

New Passion customer

The New Passion segment includes new customers that placed a high-value order recently. If you manage to keep them satisfied, they might become Soulmates, but if they don’t, they will end up in the Don Juan Segment, which you’re going to read about below.

How many new customers a store loses after their first order (source: CVO Academy)

You have all the data you need to treat New Passion customers well from the customer research you performed on your Soulmate segment. With New Passion, you will find out how skilled your teams are at transforming into tactics what you’ve learned through customer research.

Their customer journey has just begun. Surprise and delight are the keys to winning the New Passion customer’s trust. You have to nail customer experience with:

• Welcome gift and email;
• Thank-you letter;
• Real-time alert for low NPS;
• Introduction to the loyalty program;
• Access to VIP offers.

> Read more about the New Passions

About to Dump You customer

The About To Dump You segment includes inactive customers that used to buy from you frequently, but, for some reason, they stopped buying from you a while ago.

Your goal with this segment is to find the reasons that kept them from buying again and learn how you reduce customer churn that can be avoided and is not part of the natural churn.

If you want to reactivate the customers that used to bring a lot of value to your store, you have to use a non-transactional approach.

You might win back some of the customers in this segment if you:

• Make up for unsolved support tickets;
• Try to obtain customer feedback;
• Regain their trust;
• Send irresistible discount campaigns.

> Read more about the About to Dump You

Don Juan customer

Don Juan segment includes one-time buyers who placed a high-value order once and never returned to your store. They are New Passions that never turned into Soulmates even though they might have.

The same rule that we suggest for About To Dump You applied here, too: don’t try to get them to buy again before you understand their behavior. It might be hard to reengage with this segment type, but if you do, you will have valuable information you can use for creating better campaigns for New Passions.

> Read more about the Don Juans and the other ten groups in this guide to customer segmentation.

Your goal is to attract and engage the most valuable customers: Soulmates, Lovers, New Passions, and Flirting. These groups are more likely to become loyal customers and brand ambassadors if you keep them happy.

Identifying segmentation tools for your eCommerce

Sustainable growth in eCommerce is about developing a tight relationship with your customers. To achieve this goal, you need to invest in habit forming, being data-driven, and getting into your customer’s mind. 

Like many internal processes, customer segmentation can be automated. This way, your teams can spend minimum effort manually managing segments and investing their resources to create marketing strategies and campaigns tailored to the segments they want to grow. 

Manual segmentation analysis is bad for your eCommerce store, having multiple shortcomings:

• You’re wasting valuable resources on repetitive work instead of strategic tasks.
• Humans are prone to errors, and the more data you have, the higher the chances to mess things up during the segmentation process.
• Marketing segmentation that is not performed regularly becomes outdated and unreliable.
• You’re missing opportunities because you’re not acting in real-time. 
• You’re more tempted to change how you segment customers, leading to a lack of consistency and traceability.

To identify the right segmentation tool for your business, you must start with the end goal in mind. The software tool you choose should help you generate relevant business-wide segments, not just for your email marketing guy or your paid ads agency.

Sales, Marketing, Onboarding, Customer Support, all departments that directly impact customer experience, should understand and use the same segmentation tool. 

Using a tool like REVEAL, which includes features of segmentation software, helps you perform automatic RFM Segmentation that is constantly updated based on the customer data you’re collecting through your eCommerce platform.

In REVEAL, you can:

• Customize the RFM segments to fit your business model 
• See multiple reports that help you analyze your segments
• Make informed decisions about the strategies you should put in place for each segment.
• Use the RFM data you have to maximize the effectiveness of your email, SMS, ad campaigns, etc.

With the death of third-party cookies and the increase of CPA, more and more eCommerce businesses turn to RFM segmentation and using first-party data to keep their company growing sustainably. 

If you want to give RFM segmentation a try and see what it could do for your business, you can install REVEAL now and benefit from a 14-day free trial. We are more than happy to guide you through your learning process and help you discover the benefits of using RFM as your customer segmentation strategy.

LEARN MORE ABOUT REVEAL’S RFM SEGMENTATION TOOL

Frequently asked questions about customer segmentation strategy

What is a customer segmentation strategy?

Customer segmentation strategy allows you to treat customer segments differently, with messages tailored to their characteristics and behavior sent at the right time. Applying differentiated treatment helps you concentrate more on high potential customers, offer and get more value from your customers’ relationship with your brand.  

What are the types of customer segmentation?

The most frequently used segmentation types of customer segmentation are demographic, geographic, psychographic, and behavioral segmentation. Before choosing a segmentation type, it helps to know your goals, so start with “the why” in mind.

How do you create a customer segmentation strategy?

To create a customer segmentation strategy, you have to know what are your company goals. Is it customer acquisition, customer retention, or both? Based on your goals, you will prioritize your actions and design the best approach for each customer segment to help you achieve those goals.