Key Performance Indicator

The RFM model is a widely recognized method for segmenting and analyzing data. However, simply clustering customers based on RFM is not enough. To extract truly actionable insights, we need to complement RFM analysis with key performance indicators (KPIs)A key performance indicator (KPI) is a quantifiable metric used to measure the performance. KPIs help assess progress by providing actionable insights into critical aspects of performance.. They help us assess the effectiveness of campaigns and overall business performance.

Creating an equally weighted KPI

From these three metrics, we create an equally weighted KPI. Let’s call it OverallScore. For recency, we have only one cluster (cluster zero). For frequency and monetary value, we have five clusters each. The higher the cluster number, the higher the frequency or monetary value. Both are desirable from a sales perspective. Since we want the three metrics to be equally weighted, we simply add the results.