How do you prioritize customer segments with RFM?

1 What is RFM?

RFM is a marketing analytics framework that assigns a score to each customer based on three metrics: recency, frequency, and monetary value. The more recent a purchase or interaction with your brand, the more often it occurs, and the higher the amount spent or revenue generated, the higher the score. This score can then be used to segment customers into different groups and tailor your marketing messages and offers accordingly. By leveraging RFM, you can gain valuable insights into which customers are the most valuable for your business.

2 How to calculate RFM?

In order to calculate RFM, you need to have data on your customers' transactions or interactions with your brand. You can choose any time period that suits your business, such as a month, a quarter, or a year. Then, you need to calculate the recency, frequency, and monetary value metrics for each customer based on the chosen time period. Afterwards, divide your customers into equal groups based on their values and assign a score to each group. For example, you can use quartiles, quintiles, or deciles and assign 1 for the lowest group and 4 for the highest group. Finally, combine the scores for each metric to create a RFM score - for example, a customer with a recency score of 4, a frequency score of 3, and a monetary value score of 2 would have a RFM score of 432.

3 How to prioritize customer segments with RFM?

Once you have calculated the RFM scores for your customers, you can use them to prioritize your customer segments and design your marketing strategies. For instance, customers with the highest scores such as 444 or 443 are likely to be loyal and high-spending customers who you can reward with loyalty programs, exclusive offers, or referrals. Alternatively, customers with low recency scores but high frequency and monetary value scores, such as 244 or 143, are valuable customers who have not purchased or interacted with your brand for a long time; you can try to win them back with reactivation campaigns, discounts, or feedback surveys. Finally, customers with low frequency and monetary value scores but high recency scores, such as 411 or 312, are new or occasional customers who have recently purchased or interacted with your brand; you can try to increase their engagement and retention with cross-selling, upselling, or personalization.

5 How to measure the effectiveness of RFM?

RFM is a useful tool for customer segmentation, however, it is not a one-time exercise. You need to monitor and measure the effectiveness of your RFM segments and adjust them as needed. To evaluate the performance of your RFM segments, you can use metrics such as customer lifetime value, customer retention rate, customer acquisition cost, and return on investment. By tracking these metrics, you can gain insight into how your RFM segments are contributing to your business goals and optimize your marketing budget and resources accordingly.