RFM (Recency, Frequency, Monetary) analysis is a proven marketing model for behavior-based customer segmentation. It groups customers based on their transaction history – how recently, how often and how much did they buy.
RFM helps divide customers into various categories or clusters to identify customers who are more likely to respond to promotions and also for future personalization services.
Valuing customers based on a single parameter is insufficient.
For example, you can say that the people who spend the most are your best customers. Most of us agree and think the same. But wait! What if they purchased only once? Or a very long time ago? What if they are no longer using your product?. So..can they still be considered your best customers? Probably not. Judging customer value on just one aspect will give you an inaccurate report of your customer base and their lifetime value.
That’s why the RFM model combines three different customer attributes to rank customers.
If they bought in recent past, they get higher points. If they bought many times, they get a higher score. And if they spent bigger, they get more points. Combine these three scores to create the RFM score.
Finally, you can segment your customer database into different groups based on this Recency – Frequency – Monetary score.
As you can gauge, RFM analysis is a handy method to find your best customers, understand their behavior, and then run targeted email/marketing campaigns to increase sales, satisfaction, and customer lifetime value.
We have one type of customer segment with RFM analysis, here are 10 segments we recommend.
Think about what percentage of your existing customers would be in each of these segments. And evaluate how effective the recommended marketing action can be for your business.