The RFM model for calculating customer value and segmentation
Introduction
The RFM model is a proven tool in customer relationship management (CRM) that helps companies determine the value of their customers and divide them into different segments. It is based on three key metrics:
- Recency: When did the customer last shop?
- Frequency: How often does the customer shop in a certain period of time?
- Monetary (monetary value): How much money does the customer spend during this period?
By analyzing these three dimensions, companies can target their marketing strategies and improve customer loyalty.
How the RFM model works
1. Recency
Recency measures how much time has passed since a customer’s last purchase. Customers who have recently purchased tend to be more receptive to marketing efforts.
Example:
- Customer A made a purchase 10 days ago.
- Customer B made a purchase 50 days ago.
Here customer A has a higher recency rating than customer B.
2. Frequency
Frequency indicates how often a customer made a purchase in a certain period of time. More frequent purchases indicate stronger customer loyalty.
Example:
- Customer A has purchased 8 times in the last 6 months.
- Customer B made 3 purchases in the same period.
Customer A receives a higher frequency rating here.
3. Monetary (monetary value)
Monetary value refers to the total amount spent by a customer in a specific period. Higher spending indicates a more valuable customer.
Example:
- Customer A has spent 500 euros in the last 6 months.
- Customer B spent 200 euros.
Customer A will receive a higher Monetary rating.
Application of the RFM model
To apply the RFM model, customers are evaluated on each of the three metrics and divided into categories. Typically, each customer is rated on a scale of 1 to 5, with 5 being the best rating.
Example: Suppose we have the following data for three customers:
Customer | Recency (days) | Frequency (number) | Monetary (Euro) |
---|---|---|---|
A | 10 | 8 | 500 |
B | 50 | 3 | 200 |
C | 20 | 6 | 300 |
Based on this data, an assessment could look like this:
Customer | Recency Score | Frequency score | Monetary Score |
---|---|---|---|
A | 5 | 5 | 5 |
B | 1 | 2 | 2 |
C | 4 | 4 | 3 |
Segmentation and marketing strategies
After customers have been assessed, they can be divided into different segments. Examples of segments are:
- Top customers: High values in all three dimensions. These customers should be cared for with exclusive offers and special service.
- Growth potential: High frequency and monetary values, but low recency. These customers could be reactivated through targeted campaigns.
- Occasional buyers: High recency, but low frequency and monetary. Here you could try to increase the purchase frequency.
Example of segmentation:
Segment | Criteria | Marketing strategy |
---|---|---|
Top customers | R=5, F=5, M=5 | Exclusive offers, VIP programs |
Growth potential | R<=2, F>=4, M>=4 | Reactivation campaigns, special incentives |
Occasional buyer | R=5, F<=2, M<=2 | Increase purchase frequency through discounts and promotions |
Conclusion
The RFM model is a powerful tool that helps companies better understand their customer base and develop targeted marketing efforts. By analyzing the timeliness, frequency and monetary value of purchases, companies can use their resources more efficiently and sustainably strengthen customer loyalty.
Acceleraid@RFM model
For over 10 years, we have been successfully developing and implementing systems that help our customers get more sales from transaction data. For this purpose, we use various scores and models, among other things, which help you to monetize customer potential automatically and in real time. We have extensive experience with integration into existing system landscapes and have designed this process so flexibly that we can seamlessly integrate with all relevant DMPs and CDPs on the market.
Contact us now to find out which methods and options are most efficient for your company to successfully activate and reactivate your customers!-