RFM Analysis

RFM Analysis
RFM Analysis:
• RFM analysis is a marketing technique used to quantitatively rank and
group customers based on the recency, frequency and monetary total of
their recent transactions to identify the best customers and perform targeted
marketing campaigns. The system assigns each customer numerical scores
based on these factors to provide an objective analysis. RFM analysis is
based on the marketing adage that "80% of your business comes from 20%
of your customers.
RFM analysis ranks each customer
on the following factors:
Recency:
• How recent was the customer's last purchase? Customers who recently made a
purchase will still have the product on their mind and are more likely to purchase
or use the product again. Businesses often measure recency in days. But,
depending on the product, they may measure it in years, weeks or even hours.
Frequency:
• How often did this customer make a purchase in a given period? Customers who
purchased once are often are more likely to purchase again. Additionally, first
time customers may be good targets for follow-up advertising to convert them
into more frequent customers.
Monetary:
• How much money did the customer spend in a given period? Customers who
spend a lot of money are more likely to spend money in the future and have a
high value to a business.
Steps of RFM Analysis
The steps below provide a high-level overview of how an RFM Analysis and segmentation is
executed.
Build RFM Model
• In order to build an RFM model, marketers need to assign a recency score, frequency score
and monetary score to each unique customer. The raw data, which can be collected from a
customer database from previous transactions, is then compiled in a spreadsheet or database.
Divide the Customer Segment
• Next, divide the RFM database into tiered groups for each of the three values of the RFM
score. Tier designation is based on the greatest to the least. For example, tier one for monetary
value is assigned to the high spenders and tier five is assigned to the lowest spenders.
Select the Targeted Customer Group(s)
• The third step involves the selection of the segmented customer group with high customer
value. Organizing the RFM segment, marketers can begin to assign titles to segments of
interest, such as best customers, biggest spenders, faithful customers and at-risk customers.
Craft a Personalized Marketing Strategy
• Finally, craft a unique marketing strategy designed for each RFM segment focused on their
behavioral patterns. Utilizing the RFM Analysis, marketers are able to effectively
communicate their messaging to customers in a way aligned with customer behavior.
RFM segment:
Best customers:
• These are the customers who earn top scores in every category. They’re loyal,
willing to spend generously and likely to make another purchase soon. Such
customers are primed to respond well to loyalty programs. They’re more likely
to be interested in new products launched by marketers. And because they’re
committed to the brand and its products, it probably makes less business sense
to offer them discount pricing. Instead, increase CLTV by suggesting big-ticket
items and recommending products based on past purchases.
Big spenders:
• This customer segment is based on only one of the three metrics: customers
with top scores for monetary value. Typically, marketers target this segment
with luxury offers, higher subscription tiers and value-add cross-/upsells that
increase average order value. Again, it probably makes sense not to shrink
margins by offering discounts.
Loyal customers:
• This is another customer segment that takes into consideration only one of
the three metrics: customers with top scores for frequency. Despite making
purchases often, they aren’t necessarily your biggest spenders, so consider
rewarding them with free shipping or similar offers. Advocacy programs
and reviews can also be effective ways to engage these customers.
Faithful customers:
• Customers who score high for frequency but low in monetary value tend to
respond best to product recommendations based on past purchases, as well
as incentives tied to spending thresholds (e.g., a free gift for transactions
above the brand’s average order value).
Churn customers:
• Customers who have been in your top tier in the past (best, big spenders
and/or loyal) but who now score low for recency and frequency present a
special opportunity. Marketers should consider targeting them with
messages aimed at retention, such as discount pricing, exclusive offers and
new product launches. With the help of your CDP, you can even create
specific customer journeys aimed at re-engaging and retaining at-risk
customers.
Benefits of RFM Analysis:
• The RFM Model is based on the transactions between the user and the
company, helping it identify the firm’s best clients.
• Traditional methods focused on using variables like Psychographic and
Demographic factors to group its customers by utilizing sample audiences
to predict the behavior. Since these were carried out manually and relied
heavily on skilled researchers, the old methods were prone to human error.
• Conducting an RFM Analysis on your targeted customer group along with
sending personalized campaigns to high-value targets has the following
benefits for say an eCommerce store:
Increased Conversion Rate:
• Personalized campaigns lead to higher Conversion Rates since customers
are engaging with the products they are interested in.
Increased Revenue/ Profits:
• RFM Analysis can help you understand the necessary tweaks that need to
be made to your Marketing campaign for specific focus groups to increase
your Sales and outreach in the process.
Increased Personalization:
• By effectively dividing your customer base into customer segments, you
can focus on creating personalized offers for each segment to help boost
your Sales numbers.
Increased Response Rate:
• RFM Analysis allows you to elicit a greater response rate from your
customers because you have a highly personalized campaign to cater to
their specific needs, leading to an increase in customer transactions and
effective interactions.
Increased Customer Retention:
• RFM Analysis gives you the right set of tools to increase your Customer
Retention Rate because this allows you to go after the customers that are
likely to Churn and come up with personalized campaigns to appeal to
their interests as a first step of going after not-so-happy customers. For
customers that are happy with your product, you could roll out new
incentives and offers based on the findings of your RFM Analysis, that
make them want to stick with you
Limitations of RFM Analysis:
While RFM segmentation is powerful, it does have limits.
• When performed manually, it’s prone to human error.
• RFM analysis is also based on just a few behavioral traits, lacking the power
of the advanced predictive analytics now available.
• Some businesses may use RFM analysis as an excuse to bombard high-
ranking customers with messages and thus reduce response rates on
campaigns that could otherwise be highly effective.
• Neglect customers with low rankings even though many of them may be
worth cultivating.
• For example, RFM model may fail to account for the impact of past
promotions or seasonality on RFM analysis. Likewise, a customer may have
very little activity with the brand one month, yet be ready to engage in
purchasing behavior the following month due to a birthday or anniversary.

RFM Analysis

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