RFM (Recency, frequency, and monetary value) is an analysis methodology enabling companies to segment their customers based on past purchases.
Main Benefits of RFM Analysis & Segmentation
RFM helps you:
- tailor your strategy based on customers’ past purchasing behavior
- transform occasional buyers into regular ones
- calculate customer lifetime value (CLTV, LTV), and identify most and least valuable customers
Explanation of RFM Analysis & Segmentation
RFM stands for Recency, Frequency, and Monetary Value, each of which refers to a distinct customer characteristic. They are key indicators of a customer’s potential future purchase amount, customer lifetime value.
Recency: How long has it been since a customer’s last interaction with your brand (typically a purchase, a visit to a website, or the usage of a mobile app, etc.)? The more recently a customer has interacted or transacted with your brand, the more likely that customer will be responsive to your messages.
Frequency: During a given time, how many times has a customer transacted or communicated with your brand? Customers who participate in activities on a regular basis are clearly more involved and loyal than those who do so infrequently. One-time-only clients are in another league altogether.
Monetary: This metric represents how much money a customer has spent for your company’s brands over a certain period. Those who have spent higher amounts should be handled differently from customers who have spent lesser. The average purchase amount (an important secondary factor to consider when segmenting customers) can be calculated by dividing the monetary value by frequency.
How to Apply RFM Analysis & Segmentation
- Assign Recency, Frequency, and Monetary values to each customer.
- For each of the three dimensions, divide the customer list into tiered groups (R, F and M).
- Depending on their RFM segments, create customized strategies (communication, sales campaigns, etc.) for each group.
See below possible customer segments of RFM:
Additional Tips and Readings
- For the basics of segmentation, you can read our Redesigning Segmentation During COVID-19
- Building personas of each segment will help your sales personnel visualize and understand the customers that she is responsible for.
- You should consider adjusting your USP for each segment.
- To determine the optimal investment level for each segment, you can conduct Break-Even Analysis.
- Alternative segmentation approaches that you may consider:
- During the launch period of new product categories, you can use Diffusion of Innovation.
- You can read Kotler’s Five Product Levels to define your segments based on needs and wants.
Contact us to determine strategic customer groups (segments) and to optimize your strategies per those segments.
