Akiba Digital – An RFM based Customer Segmentation Model
Overview
Implementing market segmentation models comes with its own challenges. Depending on the need and task at hand, things can get very complex very quickly, but with the right expertise and thought leadership there is so much you can accomplish by using a brilliant segmentation model.
Our client came to us with a similar query. A huge customer base and the need to implement a strategic approach to market their business. We proposed Implementing an RFM based Customer Segmentation Model.
By categorizing the customers based on three key performance indicators Recency, Frequency, Monetary – also known as KPI, we focused on achieving a system that would generate relevant and valuable customer segments for our client’s business.
Problem
They wanted a system that would perform customer segmentation, grouped by different demographic and financial factors.
Solution
The first indicator in the RFM model is Recency. It analyzes the freshness of a customer’s activities in terms of its interaction.
The second metric is the Frequency which answers the question – how often does a customer purchase from your business?
The third KPI is the Monetary indicator which is the purchasing power of the customer.
For the model to compute these metrics, it needs segregated data. We extracted customer information from RDBMS through SQL queries. We used various clustering techniques like
DB scan
Agglomerative clustering
K-means
and by combining the strength of above techniques through Ensemble learning, we devised an aggressive clustering algorithm, segregating customer data by financial and demographic information.
Challenges
Implementing market segmentation models comes with its own challenges. Depending on the need and task at hand, things can get very complex very quickly, but with the right expertise and thought leadership there is so much you can accomplish by using a brilliant segmentation model
Our client came to us with a similar query. A huge customer base and the need to implement a strategic approach to market their business. We proposed Implementing an RFM based Customer Segmentation Model.
By categorizing the customers based on three key performance indicators Recency, Frequency, Monetary – also known as KPI, we focused on achieving a system that would generate relevant and valuable customer segments for our client’s business.
The Final Solution
We came up with an RFM model with these salient features:
