RFM is a method used in online marketing that analyzes the value of a customer. It is often used in direct marketing and database marketing, and commonly in industries that offer retail products and professional services. RFM stands for Recency, Frequency, and Monetary Value. In this article, we provide more insight RFM, including the benefits that it can offer to improve marketing efforts and increase the success of a business.
While all customers are valuable assets to a business, some customers are more valuable than others. For example, someone who spends several hundred dollars on products over the course of a month is much more valuable than someone who spends $70 one every few months or once a year. How can a business owner determine which customers offer the most value? – By using the RFM method.
What Exactly is RFM?
RFM is an acronym that stands for:
- Recency – How recently a customer made a purchase. Customers who recently purchased something from a business are more likely to purchase something again than people who bought something in the distant past. This is very important, which is why it is listed first in the RFM method.
- Frequency – How often the customer makes purchases. People who purchase something on a frequent basis are more inclined to buy something again than someone who only buy something ones in a blue moon.
- Monetary value – How much the customer spends. Consumers who spend a lot will more likely make another purchase than someone who spends an insignificant amount.
RFM is based on the Pareto Principle, or the 80/20 rule, a law of sorts that states that 80 percent of affects are the result of 20 percent of causes; in other words, 80 percent of your revenue comes from 20 percent of your customers. With RFM, you can identify the top 20 percent of your customers and focus your marketing efforts and targeting that specific segment.
Data Required to Calculate RFM
In order to calculate RFM, you first need to collect pertinent data that relates to your customers. This data includes:
- The date of their most recent purchase.
- The amount of purchases that they made within a specific period of time (1 year, for example).
- The total number of sales from a customer. The average number of sales from a customer can be used, too.
How to Measure RFM
Once you have attained the information related to recency, frequency, and monetary, you can then devise a point system – scale of 1 to 10, for example – and assign points accordingly. The highest number of points represents the ideal customer behavior. For instance, you could give more points to:
- Those who purchases more recently than those who purchased something in the distant past.
- The customers who spent more than those who spent a lot less money.
- Your repeat or loyal customers instead of the customers who only shop once.
Another option is to define categories according to each attribute associated with RFM. For example, you might break recency down into three categories: people who made a purchase in the past 90 days; people who made a purchase in the last 91 to 365 days, and people who purchase something 365 days ago or more. Once you define categories for each RFM attribute, you can then create segments that come from the intersection of values. For instance, if each attribute was assigned three categories, the matrix you would use would have a total of 27 possible combinations. The segments that result can then be ordered from those that offer the most value (the highest recency, frequency, and value) to those that offer the least value (the lowest recency, frequency, and value).
Variations of RFM
There are several variations of RFM. These variations modify the method according to the particular needs or business that an organization does. Examples of variations include:
- LFRM. The addition of L stands for length of your relationship with a customer. For instance, it is much more likely that a customer that has been doing business with you for years will remain a customer in the future than someone who has only been a customer for the past few weeks.
- RFD. In this variation, monetary is replaced with duration (hence the D). This can be used to analyze customer behavior in regard to viewership, readership, or surfing. For example, the amount of time someone spends viewing a website.
- RFM-I. The addition of I in this variation stands or interactions. This variation of RFM takes into account the recency and frequency of marketing interactions with a customer.
How to Use RFM
Using RFM, you can find out who your most valuable customers are. With that information, you can make use of marketing strategies that are intended to encourage those customers to continue doing business with you; retargeting ads, for example. These more direct marketing efforts can lead to increased conversions and ROI and greater customer retention.
A Word of Caution
It’s important to note that you want to be careful when using RFM to enhance your marketing strategy. If you over-saturate the best customers with marketing, they could become annoyed and decide to move forward with a competitor. Additionally, you shouldn’t overlook customers with the lowest RFM ranking; instead, use this information as a way to make improvements to your efforts and increase the likelihood that they will return to your business and make purchases in the future.