Customer Segmentation with RFM? What’s that!
RFM is a method used for analyzing customer value. You can classify your customers and can describe the right customers who need attention, support, etc. After, you only need to specify your action.
RFM stands for the three dimensions:
- Recency — How recently did the customer purchase?
- Frequency — How often do they purchase?
- Monetary Value — How much do they spend?
Process of RFM Analysis
RFM analysis numerically ranks a customer in each of these three categories, generally on a scale of 1 to 5 (the higher the number, the better the result). The “best” customer would receive a top score in every category.
For example, if you are a domestic appliance seller, frequency is not an important metric for your customer analysis. So it would be best if you focused on RM criteria to optimize your sales. Another common model is the RF Model, especially if you are analyzing a single product. You can see the segments prepared by the RF criterion by looking at the picture below.
Categories after calculating RFM scores:
RFM analysis is also a good customer churn indicator because it examines how recently a customer has purchased, how often they purchase, and how much they usually spend. You can easily detect if there’s a drop-off in a customer’s purchases or average spend and identify customers who are ready to leave your business.
Analyzing RFM Segmentation
Let’s delve into few interesting segments:
- Champions are your best customers, who bought most recently, most often, and are heavy spenders. Reward these customers. They can become early adopters for new products and will help promote your brand.
- Potential Loyalists are your recent customers with average frequency and who spent a good amount. Offer membership or loyalty programs or recommend related products to upsell them and help them become your Loyalists or Champions.
- New Customers are your customers who have a high overall RFM score but are not frequent shoppers. Start building relationships with these customers by providing onboarding support and special offers to increase their visits.
- At-Risk Customers are your customers who purchased often and spent big amounts but haven’t purchased recently. Send them personalized reactivation campaigns to reconnect, and offer renewals and helpful products to encourage another purchase.
- Can’t Lose Them are customers who often visit and purchase but haven’t been visiting recently. Bring them back with relevant promotions, and run surveys to find out what went wrong and avoid losing them to a competitor.
Benefits of RFM Analysis
Boost remarketing strategy: helps your customers to purchase more frequently with mail and other ad types.
More loyal customers: although some customers buy from you, they are not completely loyal to you. That is, you may need to make them feel special and show some attention. You can utilize your advertising and promotion activities by determining this audience with RFM analysis.
Reducing churn rate: retain customers is less expensive than acquiring new customers. With RFM segmentation, you can identify your customers who will churn and take action before they give up on you.
Increasing sales: One of the main ways to increase revenue is to increase sales, isn’t it? RFM analysis can help you identify the audience you should target from among your customers.
The brand, we trust: your brand visibility and credibility will increase if your champion segment is strong. As you reward your champion audience, their attitude towards you will make it easier for other potential customers to come. This is one of the simple ways to gain organic customers.