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RFM Analysis

RFM (Recency, Frequency, Monetary) analysis is a technique used to segment customers based on their purchase history. It involves scoring customers on a scale from 1 to 5 based on their recency of last purchase, purchase frequency, and total monetary spending. This scoring allows companies to identify their best and worst customers. RFM analysis is then used to target promotions and incentives to high-scoring customers to increase engagement and spending, while also identifying opportunities to convert low-scoring customers. It provides a simple, data-driven approach to understanding customer behavior and informing marketing strategies.

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351 views14 pages

RFM Analysis

RFM (Recency, Frequency, Monetary) analysis is a technique used to segment customers based on their purchase history. It involves scoring customers on a scale from 1 to 5 based on their recency of last purchase, purchase frequency, and total monetary spending. This scoring allows companies to identify their best and worst customers. RFM analysis is then used to target promotions and incentives to high-scoring customers to increase engagement and spending, while also identifying opportunities to convert low-scoring customers. It provides a simple, data-driven approach to understanding customer behavior and informing marketing strategies.

Uploaded by

Zoeb Eisa
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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RFM Analysis

What does RFM stand for?


RFM stands for Recency, Frequency & Monetary Analysis Recency: When did the customer make their last purchase? Frequency: How often does the customer make a purchase? Monetary: How much money does the customer spend?

What is RFM Analysis?

RFM Analysis helps companies decide which customers to give select offers and promotional items. It is a way for companies to find ways to increase customer spending. Companies can use it to target lost customers and give them incentives to purchase items RFM Analysis can help companies keep track of their customers and build a relationship that can increase sales and productivity. It also identifies minimal losses customers spend low dollar amounts in small quantities

How does RFM Analysis work?


First, customers are divided into 5 equal sized groups (20% in each group) Customers are then given an R, F, & M score Using a score of 1 to 5, 20% of the most recent customers get an R score of 1. The second most recent get an R score of 2 and this continues until all 5 groups receive a score. The 5 groups are reorganized to repeat the procedure for the F & M scores.

Uses of RFM Analysis


Marketing departments of any company Customer Service Departments Customer Relations Departments Ranking Suppliers Ranking Salespeople Airlines Credit Card Companies

Strengths of RFM Analysis


Companies have data that can be used for target marketing. Marketing budgets will be focused on customers who are more recent, more frequent and spend more. Specific targeting can increase profit and reduce costs; companies gain by not spending on customers who will not add value You can offer incentives to middle scoring customers to increase their purchases Analysis is quick and easy to interpret

Weaknesses of RFM Analysis


It only looks at three variables and there may be others that are more important Customers with low RFM scores may be ignored, even though they may have legitimate reasons for spending more with other vendors. Opportunities may be missed to solidify business relationships leading to loss of future sales and referrals. A customer with a low recency value and high spending could be ranked lower than a customer who made a recent purchase and spends 10 times less

How to code your customers by Recency

12/20/2013 You need the most recent purchase date. Divide the database into 5 exactly equal parts.

4
3

Number 5 ( the most recent ) Down to 1 ( the most ancient ) 11/20/2012

2
1

How to code your customers by Frequency


You need the total number of times that the customer has made a purchase from you.
3.254 5

4
Average products purchased per month 3

2
1

How to code your customers by Monetary

We need the total amount spent on our products or services,per month,per year or in some other way.

$12,456

Average amount purchased per month

4
3

2
1

$10

RFM Code Construction


R
5 4 3

F
35 34 33 32 31

M
335 334 333 332 331 Twentyfive sorts

2
1 Database

One Sort

Five Sorts

Using RFM for Salespeople


RFM Analysis of Salespeople gives managers a clear picture of how a salesperson is performing You can analyze the amount of revenue generated per person and compare different salespeople It is also possible to identify opportunities for additional training, promotion or employment termination.

RFM or No RFM?
RFM is best suited for companies who offer a rewards program. They are able to track spending and can offer their high profile clients incentives to spend more. RFM is worst suited to companies who provide products that are unique and will not be purchased in large quantities.

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