Acquiring new customers is important to success, but retaining customers is critical to profitability and long-term growth. An earlier article explained how to track retention by calculating and tracking customer and revenue retention metrics. That used to require lots of spreadsheet work, now connecting Tally Street to your cloud-based accounting software makes it easy and automatic.

Know how to drive growth through smarter customer acquisition and retention!? Part of the answer is to focus your new sales efforts on the right subset of customers who are most similar to your best current customers AND to retain your best current customers. The key to doing this is through customer segmentation. 

Automatic Customer Segmentation Using RFM+T

Most small and midsize businesses (SMBs) don’t have the time, resources and tools to do their own customer segmentation. But SMBs do have accounting systems filled with customer sales data that can be processed to automatically segment your best from your worst customers (and everything in between).

We do this using RFM, a tried-and-tested model that sophisticated marketers have used for years. We made a few tweaks to the traditional model, then applied a combination of smart software and human intelligence to automatically group customers into categories that SMBs can quickly start using to make better decisions. 

One of those tweaks was to add “T” to the original RFM model. Most business-to-business (B2B) companies make some or all of their sales on credit, eg, net-30 payment terms. Extending credit to customers greases the sales process, but customers who frequently pay late are a drag on cash flow. So we added a fourth component to include timely payments as part of the overall customer value.

  1. Recency: The last time the customer made a purchase. We use the date of the most recent invoice or sales receipt.
  2. Frequency: The number of times the customer made a purchase. We add up the total number of invoices and receipts for each customer.
  3. Monetary value: The amount of money the customer has spent. We use the customer’s known lifetime value (LTV), which is the sum of all their invoices and receipts.
  4. Timely payment: The time it takes customers to pay for their purchases. We use the Tally DSO, a very accurate measure of the average number of days each customer takes to make a payment.

After compiling the sales and payment data for each customer, our software individually evaluates and scores customers on R, F, M and T. We then use the individual scores and the aggregate scores to segment every customer into one of the following categories:

  • Champion: Your very best customers, they buy often, spend a lot, and pay well
  • Good: Solid customers who have been generating reliable sales and payments
  • Promising: Mostly newer customers who will hopefully move up to Good or Champion
  • Don’t Lose Them: Former Champions or Good customers who haven’t purchased recently
  • Give Attention: Previously Good or Promising customers who might be saved
  • Hibernating: Maybe asleep or could be lost (churned)
  • Possible Mismatch: Might not have been a good fit with your business
  • Late Payer: Your worst paying customers, including potential Champions and Good customers
  • New: Customers who made at least one purchase but haven’t made a payment yet.

B2B Customer Segmentation Examples

Once our software does the hard work of analyzing and tagging each customer, it’s easy to start comparing performance across segments. In the following example, the 33 customers tagged as Champions have the highest average lifetime value (LTV), purchased an average 126x each, and pay in an average of 18 days. It’s definitely worth digging into what the Champions have in common (eg, bought the same products, has the same sales rep) so you can find and make more of them! 

Late Payers near the bottom of the table look a lot like Champions, except they take an average of 81 days to pay, 350% longer than Champions. An effort to improve collections from those 23 Late Payers looks like a quick way to create more champions and boost cash flow!

Customer SegmentCustomersAvg LTVAvg # of PurchasesTotal Sales over TTMAvg Tally DSO
Champion33$183,450126$1,711,00518
Good69$55,99918$681,21619
Promising38$1,7721$56,9761
Don’t Lose Them13$25,1486$012
Give Attention8$14,2996$020
Hibernating29$13,3254$012
Possible Mismatch46$1,2311$01
Late Payer23$122,22739$735,24981
New1$39551$3955

To see who those Late Payers (and potential champions) are, you can switch to the customer-level details in the Tally Customer Sheet. In the table below, we quickly see that Bailey Group has the 3rd highest LTV, about 8x the average for Late Payers, but takes an expensive 77 days to pay. Speeding up collections from Bailey Group should be a top priority.

CustomerSegmentLTV# of PurchasesTTM SalesPrev TTM SalesTally DSO
Langosh and SonsChampion$1,638,417129$698,175$451,24933
Hintz Sauer IncChampion$1,067,922589$183,140$237,1321
Bailey GroupLate Payer$964,48477$196,467$332,32977
Lehner Hyatt CorpDon’t Lose Them$84,9384$84,93810
Herzog GroupGood$82,98227$24,206$28,82953
Feeney – ZemlakDon’t Lose Them$81,2499$20,67128
Schulist and BartonGood$77,76514$756$286746
Will, Rath & HesselGood$68,53149$4730$12,25544
Harber Bros LLCGive Attention$67,1675$33,59955

Customers further down the ranks present great retention opportunities. Lehner Hyatt Corp, Feeney – Zemlak, and Harber Bros LLC appear to be Promising or Good customers — except they haven’t made any recent purchases. Identifying these high churn risk customers as early as possible gives sales and support teams the opportunity to save them and grow them into better customers.

Get Your Own Customer Segmentation Results

Getting results for your own business customers is easy and free! You can connect Tally Street to QuickBooks, Xero or Sage Intacct and receive results based on your customer sales data in about five minutes. The only requirement is that you keep sales invoices and receipts in the accounting software you use. Start your free trial, you can cancel any time.