RFM-Analysis
RFM (Recency, Frequency, Monetary) Analysis is a marketing technique used to determine quantitatively which customers are the best ones by examining how recently a customer has purchased (Recency), how often they purchase (Frequency), and how much the customer spends (Monetary).
Recency(R): Customers who purchased more recently are more likely to purchase again than are customers who purchased further in the past.
Frequency(F): Customers who have made more purchases in the past are more likely to respond than who have made fewer purchases.
Monetary: Customers who have spent more (in total for all purchases) in the past are more likely to respond than those who have spent less.
Benefits of RFM Analysis
- Increased customer Retention
- Increased response rate
- Increased Conversion Rate
- Increased Revenue
Table with key RFM Segments
| Segment | RFM | Description | Marketing |
|---|---|---|---|
| Best Customers | 111 | Customers who brought most recently, most often and spend the most | No price incentives, New products and loyalty programs |
| Loyal Customers | X1X | Customers who bought most recently | Use R and M to further segment |
| Big Spenders | XX1 | Customers who spend the most | Market your most expensive products |
| Almost Lost | 311 | Haven't purchased for some time, but purchased frequently and spend the most | Agressive price incentives |
| Lost Customers | 411 | Haven't purchased for some time, but purchased frequently and spend the most | Agressive price incentives |
| Lost Cheap Customers | 444 | Last purchase long ago, purchased few and spend little | Don't spend too much trying to re-acquire |
Interpreting the RFM Analysis
Let us suppose we receive the below result
| Customer | Recency(R) | Frequency(F) | Monetary Value(M) | RFM Class |
|---|---|---|---|---|
| Etha K. | 4 days | 58 orders | $2869 | 1-1-1 |
| Jerold Sporer | 50 days | 1 order | $44 | 3-4-4 |
| Anie Hettinger | 47 days | 2 orders | $156 | 3-2-1 |
Result:
- Etha K. belongs to the "Best Customer" segment --
She purchased recently (R=1), frequently buys (F=1), and spent the most (M=1). - Jerold Sporer is about to enter the "Lost Cheap Customer" segment --
He has not purchased in a while (R=3), bought few (F=4), and spent little (M=4). - Anie Hettinger is a type of "Almost Lost Customer" segment --
She has not made a purchase for some time (R=3), she bought somewhat frequently (F=2), but she is in the group who spent the most (M=1).