RFM

 

RFM stands for recency, frequency and monetary value. It has been used by direct marketers for more than 40 years as a segmentation tool to increase marketing return on investment (ROI). The basic premise of RFM is that customers who have purchased more recently, more frequently and have spent more with your company are your best prospects for future direct marketing campaigns. Like data mining/response modeling, the goal of RFM is to increase marketing ROI by communicating (via direct mail, call center, etc.) only with customers that are likely to respond. Done well, you increase your ROI as you attain almost the same number of sales by contacting only a fraction of your customer base.

RFM, business intelligence, data mining and optimization represent a common progression away from mass marketing for many organizations as their marketing efforts become more analytically based and targeted.
 

As depicted above, the adoption of each technique is a function of many factors. Consequently, a technique like RFM can still be a new and promising approach to many companies today. It is simple to understand, contributes to ROI, is inexpensive and can be utilized as a reliable stepping stone to more advanced techniques like data mining.

RFM in Action

RFM was initially utilized by marketers in the B-2-C space – specifically in industries like cataloging, insurance, retail banking, telecommunications and others. There are a number of scoring approaches that can be used with RFM. We’ll take a look at three:

RFM – Basic ranking

 

RFM – Within parent cell ranking

 

RFM – Weighted cell ranking

Each approach has experienced proponents that argue one over the other. The point is to start somewhere and experiment to find the one that works best for your company and your customer base. Let’s look at a few examples.

RFM – Basic Ranking

This approach involves scoring customers based on each RFM factor separately. It begins with sorting your customers based on recency, i.e., the number of days or months since their last purchase. Once sorted in ascending order (most recent purchasers at the top), the customers are then split into quintiles, or five equal groups. The customers in the top quintile represent the 20% of your customers that most recently purchased from you.

 

 

This process is then undertaken for frequency and monetary as well. Each customer is in one of the five cells for R, F and M (see below).

 

Experience tells us that the best prospects for an upcoming campaign are those customers that are in quintile 5 for each factor – those customers that have purchased most recently, most frequently and have spent the most money. In fact, a common approach to creating an aggregated score is to concatenate the individual RFM scores together resulting in 125 cells (5x5x5).

 

A customer’s score can range from 555 (the highest) to 111 (the lowest).