RFM AnalysisSegmentation Modelling

What does RFM stand for?

O Recency – How recently the customer purchased?

O Frequency – How often the customer purchases?

O Monetary Value (or sometimes Margin) – How much they spend?

IntroductionO Breaking customers into groups is a

natural tendency.O Companies want to know who are

their best customers, who are their worst customers, who has potential, who is new and so on.

O Marketing and sales departments do this regularly and often.

O Their goal is to expend limited effort to achieve maximum return.

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.

RFM ModellingO RFM Modelling is a way of

segmenting customers.O RFM is widely used by direct

marketers of all types for selecting which customers to target offers to.

RFMO The objective is to find out who are

the most likely buyers, who make purchase most frequently, who spend the most and who have the greater probability of coming back for repurchase.

O RFM analysis helps to identify consumer segments and customer profiles having such characteristics.

Strengths of RFM Analysis

O Companies have data that can be used for target marketing.

O Marketing budgets will be focused on customers who are more recent, more frequent and spend more.

O Specific targeting can increase profit and reduce costs; companies gain by not spending on customers who will not add value

O You can offer incentives to middle scoring customers to increase their purchases

O Analysis is quick and easy to interpret

Weaknesses of RFM Analysis

It only looks at three variables and there may be others that are more important

Customers with low RFM scores may be ignored, even though they may have legitimate reasons for spending more with other vendors.