RFM Segmentation

Do you know how much your customers are worth to your organization? This might seem like an odd question at first, as most business owners and managers are simply concerned with attracting as many customers as possible, regardless of how much those customers may be worth. However, this is an important topic to consider, as understanding the value of your customers will tell you a lot about how much you can spend in your marketing efforts.

To learn more about the value of each of your customers, you may want to look into RFM segmentation methodology. If you already keep information on customers purchases – which you should be doing – you may have everything you need to build an RFM database.

RFM Segmentation

That database could then quickly become one of your biggest marketing assets, as it can give you a great perspective on how much your customers are worth, which ones are worth the most, and which ones visit most frequently.

In the title of this method, RFM stands for the following –

  • Recency
  • Frequency
  • Monetary

Unfortunately, simply seeing the title of this method spelled out really isn’t going to do much for you in terms of putting it into action. Therefore, you may find it helpful to read on to the content below, where we touch on each of these three elements in greater detail.

Recency, Frequency and Monetary

Recency

One of the three elements of this model is recency, which is a measure of how recently a given customer made a purchase. Obviously, customers who have recently made a purchase from your company are going to be of greater value than those who you haven’t seen in years. It is important to include recency in this segmentation model because it is going to keep your marketing efforts current and relevant. Without considering recency, you might wind up spending valuable marketing dollars trying to communicate with customers who have long since moved on from your brand.

There are a number of ways in which recency can be measured when putting together your own RFM segmentation model. One option is to simply count how many months it has been since a customer last made a purchase. Or, done another way, you could measure recency by placing all of your customers into one of three categories. Those categories could be customers that have made a purchase within 30 days, customers with a purchase between 31-90 days, and customers who haven’t made a purchase in at least 90 days.

Your Most Valuable Customers

Ultimately, the framework you use to measure recency is going to depend on your industry, the frequency with which people make purchases, and your marketing goals.

Frequency

As a marketer, you should not only be interested in when customers made their last purchase, but also how frequently they have purchased in the past. This is another element that gives you a good idea of the value of a specific customer. Someone who buys regularly from your company is naturally going to be of a higher value than someone who may only spend money once in a while. While recency is an important piece of this puzzle, it would be relatively useless without frequency. For instance, if a customer just made a purchase yesterday – but that is the only purchase they have ever made – they are not likely to be as valuable as someone who came in last month and can be expected back next month as well.

Frequency is a relatively easy statistic to track, once you set the framework for your business. Commonly, frequency will be measured by the number of purchases that a given customer has made within the last 12 months. Someone who has made six purchases in twelve months will have a higher frequency, and greater value, than someone who has made just four purchases in that same time span. If your business sells more expensive items, you may have a lower overall frequency, meaning this statistic could be better measured over a two or three-year time frame.

Monetary

No analysis of customer value would be complete without a look at the actual monetary impact of your customers. After all, you want customers who spend a lot of money when they choose to do business with you, so going after those customers again and again will be a winning formula.

RFM Segmentation and Customer Value

Just as was the case with the other two attributes, this is another element that you are going to need to measure on a scale that makes sense for your business. Do you sell low-priced items? If so, you could break customers up by $10 increments. Or, if you sell high-dollar goods, breaking them up by every $100, or even $1,000, may make the most sense.

The goal at the end of the RFM segmentation process is to come away with a score that you can assign to each customer in order to determine their value to your business. Customers who score high on the scale are highly valuable, and they are going to be worth more in terms of how much you spend on marketing efforts. It makes sense to invest heavily in the group of customers at the top of your RFM segmentation scale since those people are likely to keep delivering value over time.

On the other hand, you don’t want to spend too much time and money on marketing efforts toward people who have shown little inclination toward becoming long-term, high-frequency customers. In fact, those who rank near the bottom of your list are candidates to simply be ignored by the marketing department altogether. Whether these people score low because they spend little money or buy with a low frequency, it would be a mistake to invest resources into them if they aren’t going to provide you with a solid return.

Focus on buyers who have proven that they will benefit your company and then spend the rest of your time looking for more customers who can go into that category. RFM segmentation is easy for many businesses to implement thanks to the availability of the needed data, so consider putting this method to use for your company in order to clearly identify your best customers.

You can read more about RFM Segmentation in our free eBook ‘Top 5 Marketing Principles’. Download it now for your PC, Mac, laptop, tablet, Kindle, eBook reader or Smartphone.

Key Points

  • RFM segmentation gives you a score that you can assign to each customer in order to determine their value to your business.
  • RFM stands for: Recency, Frequency, and Monetary.
  • Recency is a measure of how recently a given customer made a purchase.
  • Frequency is a measure of how often a given customer has made a purchase.
  • Monetary is a measure of how much money a given customer has spent with you.
  • RFM segmentation is easy for many businesses to implement thanks to the availability of the required data.

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