As eComm professionals, we might think we owe our success to strategic thinking, unique products, or advanced marketing techniques.
Yes, all of the above play a considerable role in the success of our businesses.
However, sometimes we forget about the absolute rockstar and the key player in our journey: the customer.
You are responsible for creating positive experiences for your customers that keep your business going. Here’s the real reason why companies obsessed with customer-centricity are those that thrive.
And since we’re not mind-readers, we need a way to look at our clients and quickly understand who brings the most value and how we can serve them better.
Here’s where RFM Analysis comes in handy.
Let’s explore the topic further and see how you can use this methodology to keep your customers happy and returning.
What is RFM Analysis?
RFM Analysis is a way of grouping & organizing all your customers into segment based clusters according to customer behaviors:
- Recency – how much time has passed since their last purchase
- Frequency – how often do they buy from you
- Monetary – what’s the monetary value of their purchases
The goal of RFM analysis is to understand who is more likely to buy from you again and when they will do it.
RFM models provide a bird-eye view of your customer base and better understand customer behaviors and purchasing habits.
How does RFM Analysis work?
Nowadays, it is super easy to change brands. You only have to exit a shop and pick a different provider.
It doesn’t matter if we talk about fashion, home goods, or groceries. Customers will leave if you don’t provide relevant customer experiences.
And since you can’t keep your eye on all your customers, you must quickly identify your soulmates:
- those who buy more frequently,
- make more frequent purchases
- and bring more monetary value to your business.
Here is where the transition from clicks to relationships happens, and you become more relevant to your customers – if not all, at least to those who have the potential of bringing you the most customer lifetime value.
To get this view without guessing or relying on gut feelings, you want to deploy advanced segmentation techniques to split your customers into various segments.
RFM uses the purchase history to capture the Ideal Customer Profile and helps you tailor the messaging, brand positioning, and even product assortment to improve your CAC.
To achieve this behavioral segmentation, you give your customer base recency, frequency, and monetary scores.
RFM values range from 1 to 5, usually 5 being the highest.
Then, your customer base falls into customer groups based on their buying behavior.
You can predict future repeat purchases and customer loyalty and increase customer lifetime value with buying behavior.
RFM Analysis for Customer Segmentation
If you aren’t using RFM analysis, you are losing a lot of opportunities.
You don’t have a keen sight of your most valuable customers, don’t know how healthy your business is, and don’t understand your customers’ buying behaviors.
However, when you know and understand these facts, you are closer to decoding customer needs and preferences.
This brings you closer to creating meaningful relationships and becoming customer-centric.
RFM analysis is your ally in the eCommerce game. It helps you:
- Identify at a glance all types of customers you acquired.
- Conduct qualitative research to understand your power customers.
- Create targeted acquisition & reactivation campaigns.
- Optimize your customer experiences.
- Become and stay relevant in a hyper-competitive landscape.
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Benefits of RFM Analysis
RFM is a way of becoming way more profitable than you were.
There are many benefits to RFM analysis.
To sum up, you could say that splitting your customer base into RFM segments helps you pick your battles. I.e., it enables you to make more informed marketing strategy & product assortment decisions.
There are three main areas where RFM analysis comes in handy and helps you move the needle with more advanced stuff.
More effective marketing strategies
RFM as a concept was born in the 70s when direct marketing companies were trying to save money on advertising.
So, they came up with this model to avoid sending promotional leaflets to people who would never buy from them.
Fast-forward to today, when marketing is as expensive and challenging as ever.
The cookies are gone, more and more players come into the arena, and Ads are expensive and less effective.
So, RFM metrics help you identify your ideal customers and conduct qualitative research to understand why they are buying, what they love about you, and why they would (or wouldn’t) recommend you.
You use the way they verbalize their need for your products in your ads. Or you can create lookalike audiences based on your best customers.
Tl;dr – you become more relevant and advertise to the right people.
Better Product assortment
With RFM, you identify which products sell best and which are causing your customers to churn.
It’s just a matter of looking at the products bought by your best customers (sticky products). And the products which caused one RFM segment to fall into a less desirable one (toxic products).
With this crucial insight, you can identify your best-selling products and push them into your next acquisition campaign while getting rid of products causing your customers to churn.
Meaningful Customer Journeys
With RFM, you can get rid of the one-size-fits-all approach and craft personalized customer journeys for each segment.
For example, you can be more generous with the soulmates (highest scoring customers) than you are with the Don Juans (those with lower frequency scores).
Instead of giving each customer a 5% discount, you can prioritize the benefits and treat your customers differently because not all customers are created equal.
Your customer experience department can also benefit from RFM.
You can increase customer satisfaction by prioritizing tickets from high-scoring customers instead of getting overwhelmed and losing valuable customers left and right.
In the long term, this means more loyal customers and less churn.
Steps of RFM Analysis
If you want to build an RFM model, keep in mind that you can either do it manually (with Excel) or deploy a platform like Omniconvert Reveal to crunch the numbers for you.
Step 1 – You gather the data.
Gather all the data you get from your customers (across all your channels and touchpoints), bring it together, and build your customer profiles.
We advise you to make your life easier and use a Customer Data Platform, so you don’t risk omitting important data, just because it wasn’t centralised.
Step 2 – You set up your RFM scales.
As you know by now, RFM analysis is performed by giving your customers 1-5 scores, 5 being the highest.
Decide which is the scale you’re using. The bigger the company, the bigger the scale.
Step 3 – You designate the scores.
Take each criterion into consideration and designate the scores for each one. It’s a matter of translating recency, frequency, and order value into tangible scores.
Then, you move on to calculating RFM for each customer. You attribute the values (1-5 for recency, frequency, and monetary value), and the overall score is simply a combination of each value.
Step 4 – You Segment your Customer Base.
After performing the analysis, group the customers into effective customer segments according to their scores.
Do you need more help in building your first RFM Model? Or would you like to go even more in-depth with specific RFM segments? Read the Ultimate Guide on RFM Models and how to use them!
Step 5 – Craft strategies for specific segments.
Even if you’ve been customer-centric for a while, you can’t give each customer the same perks and attention.
You can’t treat every customer the same because that would be exhausting.
The RFM analysis will reveal which customers deserve your time and attention and which don’t.
You will realize that some segments have been expensive to acquire, demand a lot from your teams, and spend very little on your business. So you shouldn’t pamper them too much.
At the same time, you’ll also realize that other segments represent ideal customers.
For these segments, you should genuinely go the extra mile: concierge onboarding, outstanding customer experience, rewards, etc.
The final step in the analysis is deciding who deserves what – then acting on it.
Use Omniconvert Reveal to automatically segment your customers into RFM groups –with a 30-day free trial. Our disruptive software will handle the heavy lifting and number crunching, and give yourself time to breathe and focus on strategy and implementation. Check out Omniconvert Reveal here!
How to perform RFM Analysis?
RFM analysis identifies your business’s most important customers by grouping them according to their Recency, Frequency, and Monetary Value.
And it doesn’t stop here. Simply knowing isn’t enough; you must also act based on your customer data and the RFM scoring.
You have to target specific customer segments with more relevancy for their particular behaviors. Thus generating higher response rates, better response rates, and increased CLV.
Effective RFM analysis for customer behavior starts with asking the right questions:
- Who are the customers that spend the most?
- Who are the most loyal customers who return to my website and place another order?
- Who are the newest customers?
- What customers am I about to lose?
- Who have I already lost?
To get the answer, you set the scale for every branch in the analysis: the higher the score, the better the customer.
After analyzing customer behavior and placing each customer in their specific RFM group, your next step is to identify the champions.
Valuable customers with high monetary value and frequent purchases should participate in loyalty programs that keep them satisfied.
Valuable customers who stopped buying from and are in danger of churning could receive a courtesy call and ask about their experience.
You can get creative here and brainstorm with your teams to keep your power customers close. After all, they are the backbone of your business. They deserve recognition and special treatment.
Do you need inspiration? Or are you looking for best practices for customer segmentation through RFM? Check out the CVO Academy – the Complete Course on increasing Customer Lifetime Value and achieving true customer-centricity. Click here, read all about the Academy and enroll today!
The limits of RFM Analysis
While RFM analysis is robust, it comes with its own limitations.
When you only use three criteria to segment customers, much relevant info gets lost in translation.
So, you will know who is your power customers, those who love your products, but you miss out on information such as:
- Satisfaction score
- The CAC
- Average time-to-purchase
It’s important to understand that RFM analysis makes predictions and helps you craft strategies based on past behavior.
However, you will always find anomalies that mess up your customer data, such as a flash sale or a busy shopping season.
To avoid misleading numbers, pair RFM analysis with NPS segmentation and qualitative research – to get a more comprehensive view of your customers.
We always have two main options to carry out our day-to-day business. We either keep on the same track and carry on with what we’ve been doing until now.
Or we learn something new, become more competent and bring better results.
Basing your marketing campaign on RFM Analysis and creating unique customer journeys for each segment is a more innovative way to sell your product.
One soulmate can bring more monetary value than ≈300 bad-fit customers.
Wouldn’t it be foolish not to care for them and bring real growth into your organisation?
Frequently Asked Questions about RFM Analysis
RFM analysis represents a way to segment your customers, according to their contribution to your business: how recent they bought from you, how frequent they’re doing it, and how much monetary value their purchases have.
Since it’s too expensive and exhausting to give the seame treatment to all customers, you need RFM analysis to identify power customers and reward them, while also prevent churning from those in danger of leaving you.
To perform RFM analysis you need to give 1-5 scores to your customers, according to: Recency, Frequency, and Monetary value.
The RFM formula is simply a combination of each individual value for Recency, Frequency, and Monetary Value.
RFM metrics are the scores your customers get for Recency, Frequency, and Monetary Value. The higher the value, the more valuable the customer is.
An example of RFM score can be 5-5-5. customers with such high scores fall into the Soulmates segment and are considered high-value customers.