RFM is a way of ranking your active customers based on profitability and frequency on a scale of 1–5. Your most active customers will get a 5 and the least active ones will get a 1. RFM ranking is a great tool to understand who your top customers are and where to put in extra efforts to increase sales.
The RFM calculation is based on three factors:
- Recency – How recently the contact made a purchase
- Frequency – How frequently the contact makes purchases
- Monetary – How much money the contact has spent
The ranking is calculated regularly on your active customers based on the criteria: Has made a purchase in the last X days (often 365 days). This will determine the amount of days of historical transactions that will be included in the RFM calculations.
In other words:
- When the last purchase was made during these 365 days
- How often the customer made a purchase in the last 365 days
- How much the customer has spent during these 365 days
The top 20 % for each factor will be assigned a 5, the next a 4, and so on. All customers will have a number between 1 and 5 for each factor. This results in many different combinations to use as criteria in your segmentation, analysis or as a valuable input to your overall customer data management.
The model can be used to create a strategy to retain, reward and develop customers. Example:
| R | F | M | Classification | Action |
|---|---|---|---|---|
| 5 | 5 | 5 | Top customers | Reward |
| 4–5 | 4–5 | 2 | B customers | Motivate purchase |
| 1–2 | 1–2 | 1–2 | C customers | Retain |
| 3 | 3 | 3 | B customers | Develop |
| 3 | 1–2 | 4 | B customers | Drive to store |
| 3 | 4 | 4 | B customers | Develop |
| 3 | 4 | 4 | A customers | Reward |
| 1 | 2 | 1 | C customers | Retain |
Regular stores based on RFM
Engage has a term called Regular store that is used to connect a customer to a specific store based on their buying behavior (= RFM). To ensure a fair grading, each factor is weighted between 0 and 100 and it is up to you to decide how this should be set up. Example:
If you consider recency, frequency and monetary to be equally important the weighted value will be 33/33/34 for each factor. But if you consider frequency and monetary to be more important than recency the weighted value can be set to 40/40/20.
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