Reading this simple guide about RFM segmentation will change how you analyze, approach, and value your customers. All you need to know about your customer is right there, in your transactional data that reveals customer behavior.
If you’re tired of guessing who your best customers are, what you could do to retain them and transform them into loyal customers, you need to try RFM segmentation.
In this in-depth guide about RFM customer segments, you’re going to find answers to some of the most burning questions:
- Who are your best and worst customers?
- How to use existing data to understand them better?
- How to approach each segment?
What is RFM segmentation?
RFM segmentation is a method that allows you to analyze your customers based on three main variables: recency, frequency, and monetary value. Segmenting your customers based on their historical transactional data enables you to optimize customer loyalty and lifetime value.
Based on RFM Analysis, which assigns scores to your customers showing how valuable they are for your business, you can identify the most valuable and important customers. These are the customers you should concentrate on if you want to achieve customer-centricity, your source of profits for the long term.
But, as professor Peter Fader said in his book, “Customer-Centricity: Focus on the Right Customers for Strategic Advantage,” customer-centricity isn’t something you can achieve unless you align your company’s products and services with your most valuable customers’ wants and needs. Understanding RFM segments helps you achieve that.
How do you calculate the RFM score?
You have all the data you need to find Recency, Frequency, and Monetary values in your historical data. You just have to set a scale to measure each variable and calculate the total score. To analyze customers based on RFM, marketers usually apply a:
- 1 to 5 scale if you have more than 200k customers;
- 1 to 4 scale if your store has 30k – 200k customers;
- 1 to 3 scale if you have below 30k customers.
On these scales, 1 is the lowest score, and 3, 4, or 5 is the highest a customer can receive.
Based on the score each customer gets, you will know who is your power customers, high potential customers, at-risk customers, and lost customers.
For example, if you have over 200k customers and see a customer with an RFM score of 555, you know that is one of your loyal customers, so you better look at what makes them stick with you when trying to optimize your loyalty programs.
When calculating RFM regularly, you’ll also notice that some customers have a 115 score. Based on their low recency and frequency and high monetary value, you’re looking at “Don Juans,” those types of customers that only purchase once, and then they’re gone forever.
One of the most significant benefits of RFM is that it helps you understand customers’ behavior using purchase history data to help you generate effective customer segments that can be used in all your marketing, sales, and customer success efforts.
> If you are new to this concept, we encourage you to read “What is RFM?” before analyzing each customer segment type.
Why do companies use the RFM model for customer segmentation?
Every company wants to understand customer behavior. With so much data to handle, many freeze in front of their CRM or eCommerce platform without knowing where to start from.
Companies that choose the RFM model are companies that want to:
- Identify what customer segments they have;
- Perform qualitative research and find customer motivations and needs;
- Use the insights to create better experiences and more relevant campaigns to encourage desirable behavior.
The beauty of the RFM model is that it allows you to analyze customer behavior using data you already have – each customer’s purchase history. All the work you have to do is look at your customer base size to choose the correct scale for you, set the intervals for each variable of the RFM model, and apply those “rules” to all your customers.
At the end of this process, you will better understand how your customers are distributed throughout the different segments you’re about to learn in the following sections.
RFM segmentation examples: The names of the RFM segments
“Soulmates,” “Lovers,” ‘Don Juans” are some of the names we have chosen for the RFM segments because, let’s face it, the relationships with your customers aren’t very different from the ones in real life.
The association with the love life makes understanding each customer type very intuitive.
Soulmates are your ideal customers, of course, the ones that keep your business alive. New Passions are customers who have just placed their first order and who show great potential and deserve the best onboarding ever so they could evolve into Soulmates. Otherwise, as time passes and they stop at their first order, they become Don Juans, and you don’t want those types of customers.
Fader said that “in the world of customer centricity, there are good customers… and there is everybody else.” So, we start the guide with the best customer segment and then explore the high-potential, at-risk, and lost customers, as there’s always more than meets the eye.
Soulmates are your ideal customers, with a perfect score of 555.
The score shows you that they purchased recently, have frequently been buying in the past, and spend a good amount of money buying from your store.
Your biggest focus should be on keeping them engaged in the same behavior by designing experiences that delight them and also attract more new customers that are just the same.
How to analyze the Soulmates segment?
To ensure you’re not losing them, you’ve got to measure, measure, measure.
Start with the basics: calculate what percentage of your total number of customers are Soulmates, measure and monitor their share of margin and revenue.
One of the biggest mistakes companies make when analyzing segments is to look at the revenue each segment brings. In this particular case, you shouldn’t follow the revenue road to measure the value of your Soulmates.
Don’t be fooled by the fact that the Soulmates segment doesn’t seem like it’s bringing you too much revenue. The historical Soulmate revenue share is usually around 20-25%. So, as a rule of thumb, you are on the right path if >20% of the last month’s revenue was generated by Soulmates.
How to approach the Soulmates segment?
The Soulmates represent the most valuable segment for your business, so they deserve VIP treatment. Go the extra mile for them.
They have been sustaining your business for a long time, so it’s essential to invest time in research and understand why they have been with you for such a long time.
Was it the product, the experience, your branding?
It would be best if you found out.
The Net Promoter Score surveys will help you measure their experiences.
The Jobs To Be Done interviews will help you gather essential insights around your product, services, and overall shopping experience.
Once you get the Soulmates figured out, there are a few things you can do to make sure customers stay and, most importantly, they are happy to stay:
- Be grateful
Send your Soulmates a handwritten thank-you note after the 5th order and tell them how much their loyalty means to you and your brand.
- Be Assertive
Along with your customer support superstars, create a concierge program, and enroll your soulmates into it.
- Be accountable
Make sure your soulmates benefit from priority support and that your team is aware of the value they bring to your business.
- Show that you care
Even if they are your ideal customers, it doesn’t mean they cannot be the ideal customers for your competition. Even if it looks like you got them in your pocket, that can change at any time. Measure their satisfaction with your services, products, and their experience pre and post-delivery every time.
You’ll want to apply your learnings to your other segments so you can reproduce the same behavior among customers with high potential.
You know when you are going on multiple dates with a fantastic person, but there is always something more you wish you could do to convince them you are the one for them?
That is what the Lovers segment includes: amazing people you want around for the long haul, but you need to fix something within your business to give them space to stay.
How to approach the Lovers segment?
Your goal is to transform the Lovers into Soulmates by delivering value at every touchpoint of the customer journey so you can increase purchasing frequency and monetary value.
This way, you can create a bigger group of loyal customers who like to frequently spend a good buck in your store and increase profitability.
How to analyze the Soulmates segment?
Just as with the Soulmates, you need to give them extra attention and research their behavior deeply.
Ask yourself, “How can we market our products better to these people?“
Differently from the case with Soulmates, on the Lovers segment, you need to understand more about the friction they encounter within their experience with you or in the customer journey, what makes them cautious before opening their wallets wider.
The Net Promoter Score is essential in this case too, and the questions should be tailored based on their RFM Score and focused on identifying the biggest purchasing blockers.
Sometimes, Lovers are reluctant because they haven’t built the optimal level of trust with your brand to allow them to spend more and more often.
To build trust with this segment, since you are already doing something good, you have to make sure you ask the right questions and improve the gaps in your customer journey based on the answers you will receive.
New Passions Segment includes new customers with high monetary values. If treated right, they might have a good chance to become Lovers or even Soulmates.
Remember that eCommerce brands lose 70-85% of their new customers after the first order.
It’s your chance to apply all the learnings you gathered from the qualitative research on your Soulmate & Lovers Segments.
How to analyze the New Passions Segment?
There is a lot of guessing involved in dealing with new customers as there is nothing that can tell you for sure what their future behavior will be:
- A customer that bought from you today for the first time, with a discount and has a low order value, might come back within your buying cycle and spend more.
- A customer that comes and spends a lot of money on their first purchase might never come back to purchase from you again.
There is no way of eliminating the guessing when the data is not conclusive, as in the case of the New Passions Segment. To understand this segment, we first need to look at the dynamics and behaviors of new clients cohorts over time.
As an eCommerce brand, you have cohorts of new customers coming every month. Most brands (based on aggregated data from 1200+ REVEAL users) lose 70-85% of new customers after their first order.
In the example below, which uses aggregated & randomized data from the fashion vertical, you can see how the tendency is usually that, after the 1st order, a new customer churns immediately after. The rest of the cohort has a 15-30% chance to order the second time.
You can also see that the existing customers end up ordering up to 5 times when the retention rate is 60%, but they slowly begin to churn.
So, there are two major drops in the Customer Journey:
- The drop of new customers is normal and sometimes even welcomed if you have the margins to afford it.
Unfortunately, amongst them, there are always customers with high order value – The New Passions – that you lose every month but can become essential to your long-term margin if nurtured. If there’s something broken in the customer journey, it needs to be mapped and fixed ASAP.
- The drop of existing customers shows that the customers tend to churn after five orders when you don’t intervene in their journey.
Besides the natural churn rate of new customers, you might also see churn among existing loyal customers who left you because you ignored them and didn’t monitor customer journey.
How to approach the New Passions segment?
If you want to retain customers in the New Passions segment, implement a unique onboarding process for the newly acquired customers with a high AOV.
In the onboarding process, you want to measure experience pre and post-delivery after the first order, offer direct contact with their customer support team, a better unboxing experience, and so on.
Based on the Net Promoter Score responses, you can send them specific non-transactional email flows to provide them with value and help customers build trust with the brand. If the NPS were not satisfactory, the customer support team should take them over and help them resolve their problems/ frictions and offer the best solutions moving further.
The flirting customer segment also includes new customers who placed their first order but not as recent as New Passions and not as valuable.
As we said before, even if you got these customers to purchase from you two times, it doesn’t mean they can bring more value to your business in the long term.
How to analyze the New Passions Segment?
Take what you learned from the qualitative research on your Soulmates and Lovers and implement it into all the channels you are using to communicate with your Flirting customers and ensure their customer experience is top-notch.
How to approach the Flirting Segment?
If time goes by without you managing to make them come back, Flirting customers (and New Passions too) will move in another segment: “About to Dump You” because their Recency score will go down.
Just like for New Passions, you need an onboarding process that offers them value and helps you win their trust.
Remember, natural customer churn will happen anyway, and as said before, sometimes it can be a blessing in disguise. Your focus should be on the right customers, at the right time, on all the channels you communicate with them.
The Apprentice is a segment of customers who have placed 1-2 orders, and their monetary value is low. It doesn’t mean that if they spent once or twice just a few bucks in your store, they don’t have the potential to spend more in the future.
But here is the trick. These customers haven’t built a relationship with you based on trust yet, so they are cautious about spending with you. In many cases, they purchase similar products from other stores just like yours because they haven’t made up their minds yet on who to be loyal to and open their wallets wider.
How to analyze the Apprentice Segment?
Your job is, again, to do qualitative research. Find out what keeps these customers from being more engaged with your brand.
Understanding the common frictions, if any, or better yet, understanding what keeps them from being more engaged with your brand is essential.
The secret with this group is that the research can help you understand more if it’s worth keeping them or understanding buying behaviors better.
How to approach the Apprentice segment?
The only way to beat the natural guessing with these new customers that are not backed up by relevant data is to simply talk to them.
The biggest benefit of understanding this group is not transactional. It is to understand their behavior and what stops new customers from trusting you.
Those insights are extremely important and will help you position your brand, services, and products better for the cohorts of new customers to come.
Once you gather information about their blockers and frictions, you should be able to address them better via all your channels (ads, email, website).
Platonic Friends and Potential Lovers
These two segments are pretty similar based on the reason why customers end up in them.
It’s where your customers from the New Passion and Flirting Segments end up before they are about to churn.
Their recency is lower, and the frequency is unchanged (they don’t order again after a while), even if both groups used to bring your brand a pretty good share of margin because there was no research previously done on them.
Most likely, the communication between the brand and the customers of these segments was purely transactional.
You might still get a chance to activate them, but you need to:
- Go back and do qualitative research to identify what is stopping them from buying from you again;
- Remind them of the reasons they chose you in the first place.
You should never forget that your Ideal Customers are the Soulmates, so using the research gathered with them can be used as a template for future acquisitions campaigns.
About To Dump You
About To Dump You is a segment of inactive customers who haven’t ordered in a while.
You can identify this segment using RFM Analysis: their Recency score is 2-3 , and the Frequency and Monetary Value can be anywhere from 1 to 5.
Your goal is to identify only customers who had a high frequency and monetary value within this segment and try to either bring them back or understand what happened in the journey that made them almost give up on you.
Not all customers in this segment are created equal. Many of them are just bargain hunters or low-value customers who just purchased 1-2 times and never returned. You need to stop acquiring customers like this.
How to analyze the About To Dump You segment?
For this particular segment, guessing is not possible anymore as you already have enough sample size to analyze.
Gather answers to the following questions:
- What products have these customers purchased previously? What is the product they have purchased on their last order?
- What are their preferred product categories?
- What were the NPS responses for pre-post delivery experience from the previous purchases?
- What were the common threads in the Support Tickets they have opened?
Knowing this, you will be able to have a better understanding of how granular you can and should go with the research regarding why they have stopped purchasing.
How to approach the About To Dump You segment?
Once you understand those reasons, you can start crafting reactivation campaigns via ads, email, and website.
The channel you decide to pursue reactivating these customers should be the same channel they have used to purchase from you in the past. If the customers were more active via Facebook with their previous purchases, there is no reason to reach them only by email. Talk to them on their own terms and preferred media.
How to get them back, you might ask? Simple, try not to do that. Not in an obvious way, of course. Even if the goal is transactional, the process shouldn’t be.
Be humble and allow your customers to speak their minds about their experience with your store over time. If there are any objections and issues that you can address, do that first. Inviting them to your “welcomeback20” discount campaign won’t work. Undoubtedly, the pricing and the lack of discounts were not the reason they lost interest in you.
Once you get your answers, it’s time to put your creativity to work and save that relationship.
Many companies are still charmed by the acquisition-focused culture, making them chase a quick buck over a long-lasting relationship with a customer.
The Ex-Lovers segment is where all the customers with high order values and high frequency from the “About to Dump you” segment end up. They gave up on you months ago. Clearly, there are some reasons for why that has happened.
There are a lot of things that might put your customers off. Some brands sell low-quality products that make even the most frequent customers leave them because they feel frustrated and cheated.
Without playing the guessing game, these are the top reasons customers leave companies:
How to approach the Ex-Lovers segment?
While it might seem that your primary objective for the Ex-Lover group is to win them back, that is not always the case. Just like in real life, sometimes relationships don’t work. And for both of the parties involved in the relationship, closure is important.
In this context, we define closure as understanding why the relationship between your brand and your lost customers didn’t work out.
The way you will collect that data is essential, but your mindset is the more critical part of the research process. Learning what puts customers off, angers them, and what they dislike about your brand can be essential for your long-term strategy.
This particular customer segment is very interesting. Call them Don Juans or One-night Stands; it doesn’t matter.
These customers came and purchased from you one time but had a high order value. After that first order, they never came back. Why did they leave? This is what matters.
How to analyze the Don Juan segment?
As in the case of new customer types of segments, here, with the Don Juans, you won’t play the guessing game. This particular segment has a data history that you can use to understand them better.
We look at three things:
- Recency Score 1 – means they haven’t purchased in 1 year (based on the default RFM Points Settings);
- Frequency Score 1 – means they have placed just one order;
- Monetary Score 5 – means they have placed a high-value order.
Based on this historical data, we can say that this customer segment has churned after the first order.
Was it the product? Was it the overall experience with your store and services?
That’s for you to find out.
How to approach the Don Juan segment?
This group can be instrumental, and again, not for a transactional objective.
The objective is to re-engage them for a conversation and understand what happened after the first order that had them so put off by your brand. Their answers can help you close that gap after the first order, where usually most of the new customers drop.
Understanding the space between what makes customers purchase from you the second time is essential because it gives you what to work with to improve the customer journey and the customers’ touchpoints with your brand.
Do you know those bad relationships that, when they end, feel like a blessing?
Well, this segment is where those relationships end.
With the customers in this segment, you don’t need closure as you do with the Ex-Lovers.
The reason for that is because the customers in this segment have two main characteristics:
- They are low-valued customers who only purchased a few times in the past, have a high product return rate, purchased sporadically, and only if incentivized with a discount.
- They are part of the natural 15-25% churn rate.
This segment of customers is a segment you should be ok with letting them go.
Ex-Lovers, Don Juans, and Break-ups are all lost customers, so the best benefit from these segments is non-transactional. The outcome might be transactional, but that can only happen if you invest the time and effort to:
- Research your consumers’ behavior;
- Understand buying patterns;
- Monitor their experience across all the channels you communicate with them.
RFM segmentation puts things into perspective. Now, after reading all about each customer segment type, you should have more clarity on what you should prioritize first.
Identifying the Soulmates, Lovers, New Passion, and Flirting segments is a big first step.
Understanding the RFM Scores for each segment is important because each segment of customers has different scores, and different behavior imposes different treatment.
But let’s face it, quantitative analysis won’t move the needle. It would help if you had context. And the context will only come if you take time to apply qualitative analysis to your segments. The conclusions of your research are the foundation for your future optimizations.
So, are you ready to find all about your RFM segments?
We don’t encourage you to perform manual customer segmentation analysis because it has many shortcomings. Instead, we recommend you do it automatically because it is the most effective customer segmentation alternative for RFM Analysis and brings you a dynamic overview of your business, letting you act in real-time when you need to.
Frequently asked questions about RFM segmentation
RFM segmentation is a customer behavior segmentation model that allows you to group customers based on three variables – Recency, Frequency, and Monetary Value.
RFM model is a marketing strategy that uses customer behavior data to segment customers based on their purchase recency, frequency, and monetary value.
RFM is a segmentation model used by marketers to generate customer segments based on existing transactional data. RFM segmentation is generated based on three variables: recency, frequency, and monetary value.
A maximum RFM score indicates that a customer is loyal to your brand. The customers that receive the maximum score for Recency, Frequency, and Monetary Value are your loyal customers. If you’re using a 1 to 5 scale, where 5 is the maximum, then the best RFM score is 555. Any RFM score close to the top values is a good score.