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Marni McSween-Farmer Marco Luzuriaga Ross RyanAnnmarie Yoos
Collaboration Exercises #2, pg. 366
What does RFM stand for?RFM stands for Recency, Frequency &
Monetary AnalysisRecency: 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?
Collaboration Exercises #2, pg. 366
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
Collaboration Exercises #2, pg. 366
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 scoreUsing 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. (see spreadsheet – Supplier Rankings)
Collaboration Exercises #2, pg. 366
What is RFMPD Analysis?RFMPD includes 2 additional variables.P stands for Payment. This measures when the
company receives payment.Customers who pay quickly receive a P score of
1 with the slowest paying receiving a score of 5.D stands for Date. This is the date of the
customers last payment. Customers are sorted by decreasing D values.The final score is based on a value for R, F, M,
& P.
Collaboration Exercises #2, pg. 366
Uses of RFM AnalysisMarketing departments of any companyCustomer Service DepartmentsCustomer Relations DepartmentsRanking SuppliersRanking SalespeopleAirlinesCredit Card Companies
Collaboration Exercises #2, pg. 366
Strengths of RFM AnalysisCompanies 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 interpretCollaboration Exercises #2, pg. 366
Weaknesses of RFM AnalysisIt only looks at three variables and there may be
others that are more importantCustomers 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
Collaboration Exercises #2, pg. 366
Effectiveness of RFMP AnalysisCustomers scoring the top 20% also pay the
fastest. Companies will be able make money faster and this can be used to reduce other liabilities.
Customers in the lowest 20% are slow payers and companies can choose to limit credit or change payment terms to reduce the amount of outstanding debt.
Collaboration Exercises #2, pg. 366
1, 1, 1, 5 CustomersCustomer is one that has recently ordered,
buys frequently, spends large amounts of money but they are a slow payer.
To speed up the payment process, companies can change payment terms and offer incentives to pay earlier.
For example, if the due date is 30 days, but payments are received with 10 days, the buyer will receive a 2% discount off the bill (2/10 net 30).
Collaboration Exercises #2, pg. 366
5, 5, 5, 1 CustomerThis customer has not ordered recently or
frequently, spend small amounts of money but always pays on time.
This customer is spending more money with competitors.
Make an effort to find out why the customer is spending elsewhere to see if there is anything the company can improve on.
Collaboration Exercises #2, pg. 366
RFMP or RFM?RFMP is a better method because it include
the variable of payment. With more variables, you have a clearer picture of the customer’s value to the company.
RFMP also takes into account the customer’s payment history.
If a customer pays on time, you know that there are no cash flow issues.
Slow payers may be having financial problems which may increase in the future.
Collaboration Exercises #2, pg. 366
Using RFM for SalespeopleRFM 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.
(see spreadsheet – Salespeople Rankings)
Collaboration Exercises #2, pg. 366
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.
Collaboration Exercises #2, pg. 366