You may have read or heard about it before, the RFM model. And that’s not without reason, because we are very enthusiastic about this model and would like to tell you more about it.
RFM stands for Recency, Frequency and Monetary value. It is a way of dividing your customers into groups based on how recently a customer made a purchase from you, how often this happened and how much money was spent. In this way you can easily see which customers you are likely to lose and which are your most loyal top customers. Through marketing automation (triggers) you can then effectively approach these customers to reward them or to (actively) reactivate them. An ideal tool to increase your customer retention and Customer Lifetime Value!
How recent has a customer been to you? When did the customer do his last transaction in your webshop and/or store?
How frequent has a customer been? We look at the transactions that have been made within a certain time frame.
This is mainly about the amount of money the customer spent within a certain period. A distinction can be made between those customers who spend relatively a lot and those who spend relatively little.
Why is the RFM model so important?
What is the reason we are so enthusiastic about the RFM model? Because you can relatively simply sort and rank your customers into the most effective segments. You can also easily get insight into the customer behavior. We give you a number of advantages of the RFM Model:
- Insight in customer value
- Insight in which customer you are likely to lose
- Setting up a contact strategy: approaching each customer group in a different way
- Monitoring progress
- Increase CLV (read blog)
We can imagine that you would like to know who your best customers are, or which customers are the most loyal. And what about new customers? Are they coming back as well? Do you perhaps have customers that you are at risk of losing, or are there already loyal customers that you have lost? Through the RFM model you can get answers to all these questions. And respond to them directly.
- Top customers
Do you have customers who score high on Recency and Monetary Value, but low on Frequency? If so, you’re dealing with your top customers.
- Red Flag Customers
These customers score high on Frequency and Monetary Value, but low on Recency, so you’ve lost track of them for a while because it’s been a while since they bought something from you.
- Let them go
The customers who score low on all aspects are not your customers. You better not spend money on them, because you will earn almost nothing, rather lose on them.
How does the RFM model work?
Perhaps by now you have become enthusiastic about the RFM model and you would like to get started. But how does it work exactly? We will explain in general terms which steps you need to take in order to use the RFM model in the right way.
Step 1: Assign RFM, determine boundaries
A report can be exported from tritonX. It is wise to export data over a specific period, for example 36 months. Within this export, an analysis will show what the most appropriate limits on Recency / Frequency / Monetary value are for your organization. Data needed for this analysis are ‘last purchase date’, ‘number of transactions’ and ‘turnover’. Boundary values at the Recency level would be, for example, 6, 12, 24 and 36 months. All customers which fall between 0 and 6 months on Recency will be given a certain score.
Step 2: Dividing customers, assigning scores
To divide customers, you use the RFM scores. The more limit values, the more scores. Our advice is to work with 5 threshold values so you get 5 scores on R, F, and M level. This means 125(5x5x5) scores. This allows you to assign a score to each customer on both Recency, Frequency, and Monetary Value.
Step 3: Selecting customer groups
Because working with 125 groups is a challenging job, we bundle the scores into RFM groups. Think of groups like: one-time-buyer, sleeper, VIP, inactive or Red Flag. From now on you no longer have to select individual scores but you can easily select an RFM group and send them an appropriate and relevant message.
Step 4: Communication
Because you now have insight into the various customer groups, you know which groups need attention. Determine a separate contact strategy for each group, set up effective automations and monitor progress and developments.
Example of a contact strategy
We have just finished at Step 4, the step where you actually start communicating with your customers. Now you might be wondering what this could look like exactly? Therefore, we have an example of a contact strategy for you, to give you an idea of what this step should look like.
- One-time-buyers you are going to try to trigger to make a second purchase.
- Super VIPS are your best loyal customers, so how about a Christmas gift to thank them for this?
- The VIP Red Alerts spend a lot of money, but you’ve lost track of them for a while. These are the ones you’d like to see again. So you have to make sure that you can reactivate this group. For example, send them a personal card and/or let them know that a nice gift is waiting for them.
- The Sleepers or in-actives you have not seen for a while. You can approach them actionably with a good deal. Who knows, you might see them again.
Would you like to get started with the RFM model, but don’t know where to begin? That is not a problem. We are happy to look with you and discuss the possibilities. Please contact Ad Umans at email@example.com (0031 6 549 372 09).
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