What is RFM analysis? Segmenting ecommerce customers
How does RFM analysis work?
Take your order data. For each customer, look at three things.
- Recency. How long since their last order.
- Frequency. How many orders they placed.
- Monetary value. How much they spent in total.
Score each one, then combine the three scores. The combinations become segments, such as recent big spenders or long-quiet one-time buyers.
The scale is a choice. The same definition notes that implementations use slightly different values or scaling, and some weight one factor more than the others1.
Why use it?
It turns a flat email list into groups you can treat differently. That is the basic idea behind customer segmentation: splitting customers into groups that share behaviours, so each can be treated differently. RFM is one concrete way to do it, and it needs only order data.
It also helps you spot customers drifting away, which feeds a win-back campaign. And it gives a first read on where LTV, the value of a customer over time, is concentrated.
For ZFD: Our view is that RFM is a good first cut and a poor final answer. It tells you who, not why.
What RFM can't tell you
- Why customers behaved that way. A one-time buyer may have loved the product and had no need to reorder.
- What they will do next. RFM uses only historical data and may not predict future activity1.
- Whether your message worked. Segment A buying again after an email does not prove the email did it. Compare with a holdout, a group that did not get the message.
The broader programme is in customer retention strategy ecommerce, and the next step for lapsed groups in win-back email campaign ecommerce.
Worked example
Easily confused with
RFM analysis vs Customer segmentation
The general idea. RFM is one method.
RFM analysis vs Repeat purchase rate
The share of customers with two or more orders. A single figure, not a segmentation.
RFM analysis vs LTV
What a customer is worth over time. RFM only sorts customers by past behaviour.
FAQ
Does RFM analysis need special software?
No. Order data and a spreadsheet are enough to start. Email and CRM tools may calculate it for you.
Is RFM segmentation the same as RFM analysis?
Yes, in practice. RFM analysis produces the scores; RFM segmentation is the groups you build from them.
How often should RFM segments be refreshed?
Often enough that "recent" still means recent. It depends on how quickly your customers reorder.
Is RFM the same as customer lifetime value?
No. RFM groups customers by past behaviour. LTV puts a value on the relationship over time.
Sources
Let’s find what’s actually working.
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