Understanding who your customers are and what they want is a fundamental part of any successful business. Yet as a business grows, so does the customer base, and it can become increasingly challenging to create a one-size-fits-all customer profile. This is where the concept of customer segmentation comes in.
What is RFM Analysis?
RFM is a marketing technique that allows you to segment your audience according to their relevance to your business. This is done based on three criteria: Recency, Frequency and Monetary Value. RFM analysis is one of the most efficient methods to identify high-value targets and increase conversion rates. In this post we’ll cover how to use and calculate this advanced metric in order to improve your marketing and sales results. RFM stands for:
- Recency: Number of days since the last purchase or order.
- Frequency: average orders during a certain period (for instance, number of monthly purchases or the entire customer lifecycle).
- Monetary value: total order amount during a specific time frame.
It is a very useful method indeed! It provides answers to questions as…
- Who are your best clients?
- Who are your most loyal customers?
- Which clients are about to leave?
- Who should be considered a “lost” client?
- Which clients are worth the extra effort?
- Which client segment will react favorably to your current/next campaign?
The answers to these questions are the starting point for new strategies focused on reaping the following benefits:
- Higher efficiency: marketing actions (and their impact) are optimized
- Higher conversion rates: CVR increases.
- Better loyalty-building practices: Customer retention improves.
- More interaction: Response rates increase.
- More revenue: Sales are boosted.
How does it work?
To put it simply, RFM analysis takes three key customer variables into account to create a ranking that groups customers according to their business value. This means that if a client recently completed a purchase (Recency), they will get more points. If they made multiple purchases (Frequency), they will be placed higher. And if they spent a bigger amount of money on their orders (Monetary value), they will also have a higher score. When we combine these three factors, we can create a RFM ranking.
|C3||119||1||3||4||310||4||1-4-4||Cannot Loose Them|
|C10||116||1||7||5||812||5||1-5-5||Cannot Loose Them|
In order to discover distinct customer categories based on their real behavior and to implement more successful tactics, RFM segmentation is particularly helpful for eCommerce platforms. For each audience group, the chart below displays segment terminology, behavioral specifics, and viable marketing approaches.
|Segment||Questions to ask||Dashboard views|
|Champions||Bought recently, order often, and spend the most.||Reward them. Can be early adopters of new products. Will promote your brand. Most likely to send referrals.|
|Loyal||Orders regularly. Responsive to promotions.||Upsell higher value products. Ask for reviews.|
|Potential Loyalists||Recent customers, and spent a good amount.||Offer membership/loyalty program. Keep them engaged. Offer personalized recommendations.|
|New Customers||Bought most recently.||Provide onboarding support, give them early access, start building relationships.|
|Promising||Potential loyalist a few months ago. Spends frequently and a good amount. But the last purchase was several weeks ago.||Offer coupons. Bring them back to the platform and keep them engaged. Offer personalized recommendations.|
|Need Attention||Above average recency, frequency and monetary values. May not have bought very recently though.||Make limited time offers, Recommend based on past purchases. Reactivate them.|
|About To Sleep||Below average recency, frequency and monetary values. Will lose them if not reactivated.||Share valuable resources, recommend popular products/renewals at discount, reconnect with them.|
|At Risk||Made biggest purchases, and often. But haven’t returned for a long time.||Win them back via renewals or newer products, don’t lose them to competition, talk to them.|
|Hibernating||Last purchase was long back, low spenders and low number of orders.||Offer other relevant products and special discounts. Recreate brand value.|
|Lost||Lowest recency, frequency and monetary scores.||Revive interest with reach out campaign, ignore otherwise.|
Customer Segmentation Report
RFM will give businesses the ability to comprehend their customers based on how recently they have made a purchase, how frequently they make purchases, and how much they spent per basket. This will assist decision-makers in classifying customers into various groups and making appropriate marketing efforts. It will increase customer happiness while simultaneously maximizing income and cutting expenditures.