Recency, Frequency, Monetary Value (RFM)
The RFM is a marketing tool used to convey marketing analyses to see how the marketing strategy of an organization works. It uses a quantitative approach to draw conclusions about customers’ loyalty and buying behaviours.
RFM is short for the three basic attributes of a customer:
- Recency: how long ago a customer bought from the firm the last time.
- Frequency: how often a customer does shopping from the business.
- Monetary: how much of the firm’s revenue comes from the client.
RFM analysis sorts all the existing customers from highest to lowest by each feature. In theory, the system allows different scaling, but the traditional 1-5 ranking well suits the analysis purposes. The higher the score, the closer to the company’ target audience a customer is.
The idea of the tool seems to be borrowed from the publication of Jan Roelf Bult and Tom Wansbeek but its exact origin remains unknown. Named "Optimal Selection for Direct Mail", it appeared in the 1995 edition of Marketing Science.
The RFM analysis enables marketers to predict which clients are likely to return for next purchases. It is not only stores and service providers that can benefit from the RFM model. Non-profit organizations also connect to their donors, and knowing how interested their audience is can help to improve the fundraising results. Considering a person has made a donation before, they are more inclined to reengage and contribute more.
Below is a more detailed explanation of each criteria and general ideas as to the recommended direction of marketing efforts.
Recency. The business or brand remains in a customer’s memory if they have had recent engagements with it. On the other hand, in case it has been a long while since the customer’s last transaction with them, the possibility that such customer will return is lower.
This data can help business owners identify the lapsed customers and work out ways to win them back after a period of inactivity. The possible marketing solutions to target this audience segment, so called re-engagement campaigns, are aimed at reminding customers of the last time they purchased and offering them to do shopping again.
Frequency. How frequently a customer buys depends on a number of factors: the category a product falls into, its price in relation to the market price level and other specific characteristics - such as whether it needs to be restocked or requires replacement. If clear buying patterns can be seen, such as reminders to pay a visit when products are running out may be a part of the marketing strategy.
Monetary value. This aspect is purely about the customers’ readiness and ability to spend. At the first sight, marketers should be putting the highest-spending customers in the front line to keep them active and encourage them to buy more. While it does create a return on investment in the campaigns, the business could benefit more from the diversity in advertising. Even though ordinary buyers may not spend as much with each purchase, their consistency makes them worth the customer service costs.
Strategizing with RFM
RFM metrics are useful when a firm needs to analyze the customer revenue. By looking at the amounts that come from one-time buyers versus repeat customers, a business owner can make decisions on marketing priorities:Tracking those numbers over a long period can give a clear vision of how the levers a marketing manager pulls affect the customer base and which ones can drive business growth at low cost.
More often than not, an RFM analysis proves the old 82/20 principle that goes as "80% of business comes from 20% of the customers." With those numbers in hand, any marketing head should keep in mind that no top-ranking purchaser wants to be over-solicited, and targeting lower grade clients in marketing campaigns is worth efforts. Basically, the RFM system captures the current audience make-up and highlights customer segments for the company’s investment plan. Having said that, it should be regarded as a means to promote the company’s marketing development through the creation of new strategies, rather than sticking to the same old approach.