In this article, you will learn about RFM Analysis, RFM Model, RFM Segmentation, Customer Retention, and Customer Intelligence Platform.
Psst, hey you… yes, you!
You are drowned in an ocean of data. You are running reports, preparing presentations for the next marketing meeting, and wondering what the hell should be done in the next quarter to turn things around and engage your customers better.
You know that the only way to get to your customer’s heart is by knowing who they are. But somehow, this always lands at the end of the list with zero priority.
The problem is, there’s just too much focus on reporting and not enough attention paid to understanding and engaging with the people who actually buy from you every day.
As a result, when the new quarter begins and the marketing budgets are being released, you stick with the same old strategy and pray it’s going to work this time as well.
What if you stopped for a moment, put that “client-centricity” buzzword to work and asked yourself some questions?
In not so many words, what’s your relationship with your customers? Is it a long-lasting love relationship, or are you heading towards a nasty breakup with half of the customers in your database?
Whether Customer Retention is a new concept for you or not, you now have the tool you need to start building your own customer retention strategy, and the best part is that our software, REVEAL, allows you to access all the customer retention metrics you need from the same interface.
What is RFM (Recency, Frequency, Monetary)?
RFM represents a strategy for understanding and analyzing your customers based on three factors: Recency, Frequency, and Monetary Value. The goal is to predict which clients are more likely to buy again in the future. RFM model is a proven marketing strategy based on customer behavior segmentation. It groups customers based on their purchase history – how recently, with what frequency and of what value did they buy.
What if I told you the RFM analysis is just a few clicks away, and it will help you shed some light on your customers’ behavior within your shop?
Let’s think about…
The loyal customers, who have showed you constant love (R = 4 – 5, F = 3 -5, M = 3 – 5);
The ‘young lovers’ who want to know more about you (R = 4-5, F = 1 – 3, M = 1 -2);
The unfaithful ‘Don Juans’, who are flirting with the next hot thing in eCommerce (R = 1, F = 1, M = 5);
The ones who are about to dump you because you’re not paying them attention (R = 2 – 3, F = 1 – 5, M = 1 – 5);
Those ‘ex-lovers’ who already left you for the competition (R = 1, F = 1-5, M = 3-5);
And the bad break-ups who might want their money back (R = 1, F = 1 – 5, M = 1 – 2).
Do you recognize these types of customers?
Well, they are right now in your database, waiting for you to discover them, engage them and speak their language.
So, how can we help?
No hero has ever accomplished anything without a trusted sidekick. Harry Potter had Ron Weasley, Holmes had Watson. Here, at Omniconvert, we have REVEAL as our disruptive software ( trust me on this and continue reading).
For the past seven years, we’ve been building Customer Retention strategies for eCommerce players from all around the globe. In a nutshell, by knowing (1) how recently a customer bought from you, (2) how many orders he placed, (3) and the total value of those orders, you can detect the love level this customer has for you and can prepare an appropriate experience for them.
We thus set out on a journey to using RFM analysis with our clients. While on that journey, we first stopped and asked ourselves: how can we design a segmentation that saves time, is easy to use and gives instant access to whoever is hiding in the data? Our objective was to handle the heavy lifting of number crunching and give marketers time to breathe and focus on creating relevant marketing strategies for each customer segment.
Not long ago, we realized the magical powers of the RFM analysis -one of Customer Retention`s most powerful metrics. That is why we have integrated it into REVEAL, our Customer Value Optimization software.
Here is how it works
REVEAL is a Customer Value Optimization software that can help you monitor and nurture your customers and tailor your marketing actions based on their buying behavior. It also helps you understand their satisfaction with your products and services.
REVEAL collects your data through a feed and accesses the data related to your customers, products, categories, and orders placed. It provides you with a smart reporting dashboard that gives you insights into how your eCommerce customers buy, how frequently they do so, who your top customers are, and which ones are thinking of leaving you.
RFM analysis reveals data anomalies that will allow you to understand which are the most important groups of customers you have, when you weigh your customer acquisition costs against the margin they generate.
REVEAL applies RFM Segmentation and automatically displays customer groups such as VIP, Active, Dormant and Lost customers so that eCommerce professionals can reward each group according to its value.
RFM segmentation is a method of identifying the most important types of customers by grouping them and giving scores to their recency, frequency and monetary values.
This allows companies to target specific clusters of customers with greater relevance for their particular behavior – thereby generating higher response rates, increased loyalty, and better customer lifetime value.
For each segment, we display how many customers there are in the segment and their revenue as a group.
If, for example, you know you have a lot of “Passionate new customers” in your database (bought recently, placed very few orders or very high value) who bring you an important chunk of your revenue, you may want to understand what made them choose you and what you can do to make them stay for more than a one-night stand, through an online survey.
What are the maths behind this?
⇒ We use your historical data. More specifically, we look at the minimum and maximum values for Recency (R), Frequency (F), and Monetary values (M) from your store;
⇒ We then split the data for R, F, and M into five groups with the use of quintiles (see table below);
⇒ Each bucket will receive a score from 1 to 5 (1 being the lowest) (see table below).
eCommerce stores have different sales cycles. Depending on what is being sold, a customer with 10 orders placed may receive a score of 5 (for a store where sales cycles are long) and a score of 1 (for a store where sales cycles are short)
⇒ Each one of your customers will receive points for Recency, Frequency, and Monetary based on buying patterns in relation to all the other customers;
|Points||Recency (days since last purchase)||Frequency / Monetary values (number of orders and orders value)|
|5||within the last month||customers who are in the top 5% in the database|
|4||within the last 3 months||customers who are in the top 20% in the database|
|3||within the last 6 months||customers who are in the top 30% in the database|
|2||in the last year||customers who are in the top 60% in the database|
|1||more than a year ago||the customers who spent and bought the least|
⇒ After points are being assigned, each customer in your database will receive a unique score. This score will constantly change based on the customer’s interaction with your store.
RFM score = 555 | RFM score = 234 | RFM score = 115 | RFM score = 313
⇒ We group similar scores into 11 RFM Groups and display them on the dashboard, where you can see them, and from where you can take a further business decision based on your conclusions;
⇒ For each group and sub-group of customers, we display how many customers there are in there and the revenue they have brought so far.
What can you do with these groups?
Now you know who’s hiding in your database. Good, it’s time to act!
⇒ We have revealed your customer groups. Once REVEAL is up and running, you will instantly see these groups in your Dashboard. This means that by simply applying a filter and downloading a CSV, you can get the email addresses of the “True Lovers” and prepare a pampering campaign just for them.
You know you have a lot of “About to dump you” customers (R = 2 – 3, F = 1 – 5, M = 1 – 5). They are disengaging from you. Think about a re-engagement campaign that would bring them back on your website. Send them a personalized email, asking what happened that made them stop visiting you.
You have your “Soulmates”. They are your ideal customers. Reach out to them and see your store through their eyes. Maybe think of re-designing your web experience, with their help, or reward them for being loyal to you for so long.
⇒ REVEAL is also integrated with the Omniconvert web personalization platform. This means that you can apply A/B tests, overlays/pop-ups or online surveys only on a selected customer segment. Our product has a native integration with Omniconvert platform allowing you to instantly jump from one platform to another and run your experiments.
Like the “Flirters” (R = 4, F = 1-2, M = 4-5), they are active and have placed 1-2 orders of high value. Use your charms and make them order more. Create an online survey and see what triggers them.
You also have your “Apprentices” (R = 4-5, F = 1-3, M = 1-2), those new customers who are very active but new to your store, and so they are not spending too much. Prepare an online survey and find out more about what they are looking for.
As with any love relationship, your customers go through many love stages with your store. When you know which is which, you can give them their own special treatment in pricing, email campaigns and website experience based on the value they bring you.
OK, if you are reading this it means you have reached the end of the story.
Whether you skimmed the article or actually read it, it doesn’t matter. If there is one thing you should take away with you, it is the need to reach out and know your customers for a long-lasting relationship.
Ready to meet your customers?
I am leaving you with Valentin’s video on what RFM analysis is about and how it can help marketers like you.
Frequently asked questions about RFM analysis
Recency, Frequency, and Monetary value (RFM) is defined as a method that helps you analyze and understand your customers based on their score on each of these three factors – Recency, Frequency, and Monetary Value. Understanding the meaning of RFM is vital for your customer retention strategy. RFM model is a proven marketing strategy based on customer behavior segmentation. It groups customers based on their purchase history – how recently, with what frequency and of what value did they buy.
The RFM analysis starts with proper segmentation based on the RFM variables. The first thing you need to do work on is to assign a score from 1 to 5 for Recency, Frequency and Monetary values. The results of your RFM analysis will allow you to group customers based on their purchase history. Now that you have these segments, you can see who are your most valuable customers and find ways to increase customer retention among different RFM groups.
You can use RFM segmentation to target specific clusters of customers with greater relevance for their particular behavior. Your growth marketers can generate better strategies based on these segments, thereby generating higher response rates, increased loyalty, and better customer lifetime value.
The RFM Score formula is a relatively simple one. It’s based on giving a score to each customer for each of the three variables, based on their transactional history. You can use a scale from 1 to 5, where 1 represent s the lowest and 5 is the highest score for each variable. If you use this scale, a good RFM score is 555.
You can use the RFM model to analyze customer segmentation. As a result, you will have an accurate representation of your customer database by leveraging the full potential of your first-party data. For a proper customer segmentation, use RFM variables: Frequency (very frequent buyers, medium frequency buyers, one transaction only buyers), Recency (most recent customers, medium recency customers, least recent customers), Monetary value (customers who spend the most, above-average monetary value, average, low monetary value).
RFM analysis helps you analyze and understand your customers based on three factors: Recency, Frequency and Monetary values. By using this method, you generate valuable insights to change your strategy and improve ROI. The customer segmentation based on RFM modeling signals some potential pain points related to your brand, products, or shopping experience.
Recency refers to how recently a customer bought from you. You can set your own scale to calculate recency depending on your sales cycle. For example, you could use a scale from 1 to 5: 1 – more than a year ago, 2 in the last year, 3 within the last 6 months, 4 – within the last 3 months, 5 – within the last month. If one of your RFM segments have low recency, it’s a sign that they might have switched to the competition although they had been loyal to you, and it’s worth finding out why. Also, you’ll see a general decrease in order recency in the deal hunters segment.