What is RFM Segmentation and Can It Help You?
In times of uncertainty, companies are looking for anything to help them reach their business goals. One of the greatest assets you have is your target audience. Knowing them, the best ways to connect with them, and who among them is most likely to buy can make a huge difference in your success. One tool that can empower your efforts to capture and utilize that information to your advantage is a method called RFM segmentation.
What is RFM Segmentation?
RFM stands for recency, frequency, and monetary. Using RFM metrics helps you to do a thorough analysis of your customers and communicate in a way that resonates with them and aligns with their behaviors. The RFM segmentation approach helps you identify portions of your target audience that are ripe for relationship cultivation and special treatment. The definition of RFM analysis means calculating a score based on three things:
Recency: How long ago was your customer’s most recent purchase? The less time that has passed since their last purchase, the more likely your product or service will be top of mind for your customers. Depending on the item, recency may be measured in days, weeks, months, or years.
Frequency: How often do they purchase this good or service? Customers are more likely to purchase a product they have bought already, and new customers are poised to become repeat customers.
Monetary: How much does a customer or client spend in a certain period. High spenders are more likely to be frequent spenders.
Benefits of RFM Customer Segmentation
Recency, frequency, and monetary analysis can result in good things for your business. It helps you make decisions on how to personalize your outreach and increases conversion. Additionally, many marketers like it because it is:
Objective: With RFM scores, marketing decisions are made on measurable, numerical information.
Simple: The RFM formula is pretty easy to understand and apply.
Intuitive: Many business owners can figure out how to utilize the insight provided by RFM scoring.
Drawbacks of Marketing with RFM
The RFM model can be used for relatively simple audience segmentation, but its success does carry some caveats. First, the RFM segmentation is based on buying history, and doesn’t provide insight into other important buying habit factors like age, gender, ethnicity, and socio-economic status. And because it uses historical data by its nature, it’s not foolproof in predicting future behavior.
How to Use the RFM Scoring Method
To get started using the RFM approach, you must dig into all of your valuable marketing data, assigning each customer or client with a score for each category of recency, frequency, and monetary. You can use whatever scale you’d like, but most businesses use a one to five scale. Add up each score and sort the customers lowest to highest. You can score each consumer with an average of their combined scores, or you may want to give more weight to some categories over others depending on your industry.
Then you can break those customers into groups, based on their buying habits and the most effective way to engage them. Some examples of RFM segments include:
Whales, Champions, or Core: These customers are the definition of what a good RFM score is. They get your top score in all three categories.
New: These are your customers with a high recency and low frequency score.
Potential Loyalists: They may be middle-of-the-road when it comes to frequency and monetary, but they are great candidates for long-term engagement.
Lapsed or At-Risk: They will have a high monetary score but a low recency one. They may be worth working to reactivate.
Knowing your audience is critical for effective marketing. RFM segmentation is another tool you can add to your toolbox to help you make informed decisions about how and where you focus your marketing efforts. At Paradigm, we provide traditional and digital marketing strategy and consulting services, specializing in marketing strategy development, creating and executing cohesive plans and campaigns that drive customer awareness. We utilize various marketing disciplines and tools, leveraging each to achieve business growth and profitability for our clients. As your business and marketing strategy shifts, we can adapt with you by analyzing your current plans and advising you on how to remain successful in the changing environment. Contact us today to get started.