Customer Segmentation Strategy: RFM Analysis
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Project Highlights:
This page provides an executive summary of the analysis. For the complete code, step-by-step data cleaning, and detailed statistical modeling, please refer to the Full Project Links at the bottom of this page.
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To ensure analytical precision, customer data was first processed through cleaning and standardization stages. RFM metrics were then calculated for each user to capture purchase recency, frequency, and monetary value. Based on these dimensions, a scoring system was applied to cluster customers into representative segments, such as Champions, Loyal, and Hibernating. The results were visualized to showcase score distributions, clearly defining the unique characteristics of each segment for targeted marketing.
📊 Segment Distribution Summary
| segment | count | avg_recency | avg_freq | avg_monetary | %_total |
|---|---|---|---|---|---|
| 01-Champion | 591 | 12.7 | 11.9 | 4383.4 | 15.4 |
| 02-Loyal Customers | 677 | 43.7 | 6.3 | 2237.0 | 17.6 |
| 03-Potential Loyalists | 453 | 26.7 | 2.0 | 614.6 | 11.8 |
| 04-Can't Lose Them | 68 | 123.4 | 8.8 | 2763.8 | 1.8 |
| 05-Need Attention | 188 | 61.3 | 2.4 | 930.6 | 4.9 |
| 06-New Customers | 35 | 16.1 | 1.0 | 238.9 | 0.9 |
| 07-Promising | 84 | 34.8 | 1.0 | 310.4 | 2.2 |
| 08-At Risk | 527 | 152.1 | 3.0 | 947.1 | 13.7 |
| 09-About to Sleep | 295 | 60.9 | 1.2 | 402.4 | 7.7 |
| 10-Hibernating | 928 | 200.7 | 1.1 | 326.0 | 24.1 |
By combining the Recency and Frequency scores, customers are grouped into 10 distinct segments, each representing a different type of purchasing behavior. The summary table above provides a clear overview of these segments.
💡 Analysis of Key Segments
- 01-Champion (15.4% of customers): These are best customers. They have bought very recently (average recency of 13 days), purchase very often (average frequency of 12 times), and spend the most (average of $4,383). They are the backbone of the business.
- 02-Loyal Customers (17.6% of customers): This is the second-largest and second-most valuable group. They spend a significant amount (average of $2,237) and purchase frequently (average of 6 times). While their last purchase wasn't as recent as the Champions (average of 44 days), they are still highly engaged.
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08-At Risk (13.7%) and 10-Hibernating (24.1%): These two groups combined represent nearly 38% of the customer base.
- At Risk customers used to spend a good amount (average of $947) and buy somewhat frequently, but they haven't made a purchase in a long time (average of 152 days).
- Hibernating customers have the longest time since their last purchase (average of 201 days) and the lowest frequency and monetary values among all segments. This is the largest segment, indicating a significant portion of the customer base is inactive.
- 03-Potential Loyalists (11.8% of customers): These customers are recent buyers (average of 27 days) but have a low purchase frequency. They have the potential to become Loyal Customers if nurtured correctly.
- 06-New Customers (0.9% of customers): This is a very small segment of first-time buyers who purchased very recently (average of 16 days). Their initial engagement is crucial for converting them into long-term customers.
🚀 Business Strategy Recommendations
Based on the segment analysis, here are some targeted business strategies:
💎 For High-Value Segments
Champions:
- Reward and Recognize: Offer exclusive rewards, early access to new products, and a premium loyalty program.
- Seek Advocacy: Encourage them to become brand ambassadors by asking for reviews and offering referral bonuses.
- Personalized Communication: Use their purchase history to provide highly personalized recommendations.
Loyal Customers:
- Upsell and Cross-sell: Introduce them to higher-value products or complementary items.
- Engage with Content: Keep them engaged with relevant content, newsletters, and community-building activities.
- Gather Feedback: Actively solicit their opinions on products and services to make them feel valued.
📈 For Mid-Value & Opportunity Segments
Potential Loyalists:
- Encourage Repeat Purchases: Offer a discount on their second or third purchase to build a habit.
- Introduce Loyalty Program: Onboard them into a points-based loyalty program to incentivize more frequent shopping.
- Personalized Follow-up: Send targeted emails based on their initial purchase to show them relevant products.
New Customers & Promising:
- Smooth Onboarding: Provide a welcoming experience with a clear guide on how to get the most value from their first purchase.
- Educational Content: Share tips, tutorials, or use-cases related to their purchased product.
- Check-in: Send a follow-up email to ensure they are satisfied with their purchase and to encourage a second visit.
⚠️ For At-Risk & Inactive Segments
At Risk & Can't Lose Them:
- Reactivation Campaigns: Launch targeted "we miss you" campaigns with personalized offers or significant discounts to win them back.
- Understand the "Why": Send out surveys to understand why they stopped purchasing and address any issues.
- Highlight Newness: Inform them about new products, features, or improvements since their last visit.
Hibernating & About to Sleep:
- Aggressive Promotions: Use a last-ditch effort with a high-value, time-sensitive offer to reignite interest.
- Low-Cost Communication: Keep them on a low-frequency mailing list for major announcements, but consider reducing marketing spend on this segment if they remain unresponsive.
- Cleanse the List: If they remain inactive after several campaigns, consider removing them from active marketing lists to improve efficiency.
🐍 Python Code: RFM Scoring Logic
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