RFM ranking – An effective approach to customer segmentation

Abstract

The efficient segmentation of customers of an enterprise is categorized into groups of similar behavior based on the RFM (Recency, Frequency and Monetary) values of the customers. The transactional data of a company over is analyzed over a specific period. Segmentation gives a good understanding of the need of the customers and helps in identifying the potential customers of the company. Dividing the customers into segments also increases the revenue of the company. It is believed that retaining the customers is more important than finding new customers. For instance, the company can deploy marketing strategies that are specific to an individual segment to retain the customers. This study initially performs an RFM analysis on the transactional data and then extends to cluster the same using traditional K-means and Fuzzy C- Means algorithms. In this paper, a novel idea for choosing the initial centroids in K- Means is proposed. The results obtained from the methodologies are compared with one another by their iterations, cluster compactness and execution time.

Keywords

• Customer segmentation
• RFM analysis
• K-Means
• Fuzzy C-Means
• Initial centroids