RFM: Customer Segmentation Technique
RFM: Customer Segmentation Technique
Customer retention requires effective communication - the right message for the right people.
What is RFM Segmentation?
The RFM customer segmentation model is a simple way to segment customers. The resulting segments are easy to understand and help marketers target campaigns better. R, F, and M stand for :
Recency – How recently did the customer purchase?
Frequency – How often do they purchase?
Monetary Value – How much do they spend (each time on average)?
RFM analysis is popular for three reasons:
It utilizes objective, numerical scales that yield a concise and informative high-level depiction of customers.
It is simple – marketers can use it effectively without the need for data scientists or sophisticated software.
It is intuitive – the output of this segmentation method is easy to understand and interpret.
Origins of RFM
RFM traces its origin back to 1995 when it was cited by Bult and Wansbeek in an issue of Marketing Science. Used in the context of direct mail, it showcased how the three criteria could be used to better estimate demand, reducing costs on printing and shipping, leading to enhanced returns. With the rising sophistication of computing power, RFM has become easier to apply in businesses due to the computerized customer histories of today.
Benefits of RFM Analysis
The RFM Model is based on the transactions between the user and the company, helping it identify the firm’s best clients. Traditional methods focused on using variables like Psychographic and Demographic factors to group its customers by utilizing sample audiences to predict the behavior. Since these were carried out manually and relied heavily on skilled researchers, the old methods were prone to human error.
Conducting an RFM Analysis on your targeted customer group along with sending personalized campaigns to high-value targets
Boost remarketing strategy: Helps your customers to purchase more frequently with mail and other ad types.
More loyal customers: Although some customers buy from you, they are not completely loyal to you. That is, you may need to make them feel special and show some attention. You can utilize your advertising and promotion activities by determining this audience with RFM analysis.
Reducing churn rate: Retaining customers is less expensive than acquiring new customers. With RFM segmentation, you can identify your customers who will churn and take action before they give up on you.
Increasing sales: One of the main ways to increase revenue is to increase sales, isn't it? RFM analysis can help you identify the audience you should target from among your customers.
In brand, we trust: If your champion segment is strong, your brand visibility and credibility will increase. As you reward your champion audience, their attitude towards you will make it easier for other potential customers to come. This is one of the simple ways to gain organic customers.
A 4-step approach to RFM analysis
Now that we’ve understood the benefits and basis of RFM, here are the steps involved in practically conducting RFM analysis on your customers.
Step 1: Assign Values to Customers Typically, marketers have an extensive database of existing customers that lists purchase information, browsing history, previous response rates, and demographics. To begin your analysis, you’ll need to assign recency, frequency, and monetary values to each client. Recency is the amount of time since your customer’s last interaction or transaction. This can be conveyed in hours, days, weeks, or months. Frequency refers to the number of transactions the customer made within a defined period of time. Monetary concerns the amount the customer spent during a particular time period. Whether utilizing specialized software or an Excel spreadsheet, you should compile the information for ease of use.
Step 2: Narrow Down the Segments Once you’ve divided the customers into those three categories, you’ll want to further segment them into tiered groups of either two, three, or four. Each should represent a degree on the scale from most to least. For example, within the recency category, four tiers will segment the contacts based on the most recent transactions to the least recent. This system results in 64 sections. A three-tiered approach creates 27 segments, while a two-tiered system leaves only eight. It’s not recommended to use more than four tiers.
Step 3: Define the KPI that Matters to You Next, you’ll want to select the groups you’re interested in marketing to. This involves defining the key performance indicators (KPIs) that matter most to your marketing efforts. Are you more concerned with the recent purchasers, the less frequent, or the group that spends the most money? Maybe you’re intrigued by multiple KPIs such as customers who frequent the store the least but spend a large amount each time they visit. What’s driving them to buy in such high volumes so infrequently, and can you get them to visit more frequently? Each KPI you focus on will result in new questions. You can also assign each group a name based on their habits. For instance, those in the monetary category and in the most frequent tier can be labeled high-spending customers.
Step 4: Develop Your Messaging Now that you’ve determined your segments, you can begin crafting your message, tailoring it to each specific sector. Adding personalized and custom messages to each mail piece increases your response rate and return on investment (ROI). For example, for your customers that frequently shop with you and spend a high amount of money, your overall message should ensure they feel valued. Loyal customers should experience a sense of appreciation when they receive your postcard or letter. Newer high-spending customers are a great opportunity. You’ll want to capture their future business by offering incentives such as coupons, discounts, or other specials. Active customers who spend less should also be given incentive opportunities such as rewards or offers for persuading friends or family to try the brand.
Things to Remember :
Understanding the importance of RFM criteria to your business, and recognizing the importance and relevance of each, is essential to getting maximum returns from this model. This will help businesses in choosing the correct criteria, and create the right filters for segmentation.
RFM is a model based on historical data and helps forecast future behavior based on past interactions. It is essential to remember that it can be used to target existing customers only, and helps only indirectly in acquiring new customers.
Conclusion
The RFM model ensures effective marketing practices in a world where creating a customer-centric experience is of utmost importance.
The RFM model, when used in conjunction with traditional models of segmentation, can help businesses visualize new and existing customers differently, and create favorable conditions to maximize customer lifetime value. Finding the right balance between focusing on new and existing customers, along with recognizing behavioral nuances within them, will help businesses create personalized customization, leading to brand trust and loyalty.