What is customer segmentation and how to get started?
At Cronuts Digital, we want to talk about “customer segmentation” and provide you with a template so you can start segmenting your users and try to take actions to maximise your retention. It is a very common conversation when customers tell us about the high cost of sales acquisition or that sales in general are not as expected, especially organic sales. Trying to be as honest as possible, we always say that retention is probably one of the most important actions in what we call the conversion funnel.
This is when we have to say the typical cliché, “getting a new user is much more expensive than getting an existing one to repeat“. Let’s take a look at this example:
Consider a scenario where the cost of acquisition (CAC) is approximately 10 euros and the average purchase amount is 20 euros. At first glance, it might seem that a CAC of 10 euros is high relative to the purchase amount. However, if we factor in that, on average, each customer makes two purchases, the situation changes:
- LTV1 = Purchase – CAC = 20 -10 = 10
- LTV2 = Purchase 1 y 2 – CAC = 40 – 10 = 30
In other words, a good acquisition strategy helps us to make our database more profitable and also to understand to what extent we can increase or decrease our acquisition costs.
What questions should you ask yourself to segment your customers?
- Who are my best customers?
- Which customers are most susceptible to stimuli?
- Who has the potential to become the most profitable customers?
- Who are the lost customers that you don’t need to pay much attention to?
- Which customers do you need to retain?
- Who are your loyal customers?
- Which group of customers is most likely to respond to your current campaign?
Downloadable template
We don’t want you to think that this is a typical article where a lot is written but then little of what is said can be applied. In fact, we are looking for the opposite. We want to provide you with a Google Sheets template that will help you to do a customer segmentation based on the RFM (recency, frequency, monetary) model.
To be honest, the template on customer segmentation that we are offering you, we found it on the internet and we have improved it so that only with the following data:
- customer orders
- date of purchase
- customer
- quantity
You can make a customer segmentation based on the RFM model to better understand your customers. The first step is to copy and paste the fields mentioned above into the days tab:
What is the RFM model based on?
The RFM model is based on the Pareto Principle: 80% of the results come from 20% of the causes. Similarly, 20% of customers contribute to 80% of your total revenue.
People who spend once are more likely to spend again. People who make large purchases are more likely to make repeat purchases.
How is the RFM model calculated?
The RFM model is based on analyzing customer behavior through three key metrics:
- Recency: how recently a customer has made a purchase. This metric measures the time elapsed since the last purchase, with more recent purchases indicating higher engagement and potentially more valuable customers.
- Frequency: how often a customer makes a purchase within a specific period. This measures the number of transactions a customer has made, with higher frequency suggesting a more loyal and engaged customer.
- Monetary: how much money a customer spends over a given period. This metric assesses the total value of a customer’s purchases, with higher spending indicating greater value to the business.
By evaluating customers based on these three dimensions, the RFM model helps businesses segment their customer base, target marketing efforts more effectively, and identify high-value customers for personalized engagement and retention strategies.
An example would be the following:
Using the following criteria we will assign the segments based on RFM scores.
Description of each segment
- Champions: these customers have made recent purchases, buy frequently, and spend at the highest levels. They are highly engaged and valuable to the business.
- Loyal customers: they make frequent purchases and are likely to respond positively to promotional offers. Their consistent buying behavior indicates strong loyalty.
- Potential loyalists: recent customers who have made multiple purchases and spent a reasonable amount. They show promise for becoming loyal customers with further engagement.
- Recent customers: individuals who have made their most recent purchase not long ago but are not new to the brand. Their recent activity makes them valuable for ongoing engagement.
- Promising: recent customers who have made recent purchases but have not yet spent significantly. They have potential for growth with targeted marketing efforts.
- Customers needing attention: these customers have above-average spending and frequency but their last purchase date suggests they may need re-engagement to maintain their interest.
- About to sleep: customers with below-average frequency, spending, and recency of purchase. They are at risk of becoming inactive unless targeted reactivation efforts are made.
- At risk: customers who spent a lot and made several purchases in the past but have not engaged recently. They require strategies to rekindle their interest and encourage them to reconnect with the brand.
The base looks like this in the customer segmentation template:
In the customer tab, you can see metrics such as:
- Repetition
- average ticket
- The average total sales sum per customer
I already have my customer base segmented, what actions can I take to improve my retention?
Once we have the segmented base, it’s time to understand what can be done for each of the segments:
| Segment | Activity | Proposed actions |
| champions | They have bought recently, in addition to buying very often and spending as much as anyone else. | Reward them. They may actually be like-minded customers for new products. They can be ambassadors for your brand |
| Loyal customers | They spend very often with us and would potentially respond to some promotional action. | Try to generate an Upsell with higher value products. Ask for a review |
| Potential loyalist | A recent customer who has bought more than once with a reasonable amount of money. | You can offer some kind of loyalty program or recommend other products. |
| Recent Customers | The most recent purchaser and not a new customer | Try to improve or assist in onboarding |
| Promising | Recent customers but who have not spent a lot of money with us | Create brand awareness, for example by offering free trials |
| Customers needing attention | They are above average in frequency, money and date of last purchase | It offers limited offers, based on previous purchases, with the aim of reactivating them |
| about to sleep | They are below average in frequency, money and date of last purchase. If we act in any way we will lose it | Share quality resources. Recommends products that are frequently sold |
| at risk | He spent a lot and bought several times but it was a long time ago. We have to try to get him to reconnect with our product. | Send personalised emails, offer service renewals or additional products for past purchases. |
RFM analysis is a practical method for identifying your best customers, understanding their behavior, and conducting targeted marketing or email campaigns. By analyzing recency, frequency, and monetary value, you can gain valuable insights into customer preferences and purchasing patterns. This approach helps in enhancing sales, improving customer satisfaction, and increasing customer lifetime value through tailored engagement strategies.
At Cronuts Digital, we hope this post on the “customer segmentation template” has clarified the concept for you. With a better understanding of RFM analysis, you can start applying these insights to your valued customers immediately to optimize your marketing efforts and drive more effective results.
