RFM: A Simple Way to Grow Your Business
If asked who your best customers are, you might consider them based solely on dollar volume. Big spender, great customer. Makes sense, right?
Not necessarily. Dollars spent are one part of what you need to know. Considering only the dollar value of a customer leaves off other indicators that help tell the tale of potential future earnings.
It’s common business sense that mining your customer base is one of the wisest ways to increase revenue. If you’re in need of ranking your customers, then a simple RFM analysis might be just what you’re looking for.
RFM refers to Recency, Frequency, and Monetary.
• Recency is when the customer ordered last. The more recent the better.
• Frequency refers to how often the customer ordered.
• Monetary refers to dollar volume.
RFM analyses are relatively simple to structure. Anyone can put together a sound RFM system without special programs. It can be easily done using excel. RFM analyses source from direct marketers who needed analytic tools to filter data sets into more responsive and more manageable groups of data.
In an RFM study, you’ll be creating 5 groups of data for each segment and assigning them numbers 1 through 5. For example, when segmenting recency, the most current 20% of all orders will be labeled as “5.” Next 20% as “4,” and so on until you have five equally populated groups. Then you’ll do exactly the same for frequency, and monetary values.
What results is a customer file broken into 125 cells. “555” will be the most recent customers, the top repeat purchasers, and those who buy at the highest dollar volumes. “111” will be your weakest, least frequent customers.
A word of caution: Since RFM analyses are used for direct contact strategies – outbound email and other direct-to-customer tactics – there understandably might be a tendency to overuse the top prospects and underuse the lower prospects. Be careful of this. Anyone on your customer list, even 111 customers, will be more responsive than cold prospecting. Don’t neglect the lower tier, and make sure that your marketing contact strategy includes them to some degree. Also, be careful of making generalizations without testing assumptions. For example, if you believe that customers in cell 255 will be more responsive than those is 525 or 552, test to prove your assumption.
The Bottom Line: RFM analysis is a relatively simply way to learn more about your customers, and to fine-tune your marketing and sales strategies to make them more effective. Customers are the lifeblood of all business, so the more you know, the better decisions you’ll make.