RFM Model Explained
What is an RFM Model? RFM stands for Recency, Frequency, Monetary Value. In simple terms, RFM can be simply explained as a marketing analysis tool that is used to get a clear picture of an organization’s best customers by considering certain factors. The RFM model is built based on 3 quantitative factors which are, Recency, Frequency & Monetary Value.
Now let’s break down those 3 quantitative factors to understand how companies strategize based on this model
Recency means, how recently a customer makes a purchase from the business. By considering the metrics the business can will get an insight to segment the customers. Because the chances of purchasing again in the future will be higher from the customers who purchased recently than the customers who have not purchased recently simply because the customers who have purchased recently will have the business/brand in his/her mind rather than those who have not. Based on this information the business can identify the inactive customers, and they will be able to put more marketing effort into them by planning to provide incentives or offers to win them back.
The frequency factor explains how frequently a customer makes a purchase. Frequency means the total number of transactions or average between the transactions made with the business by the customer. The more frequently the customers make transactions or engagement with the business, the more happy and satisfied with the business they are.
How much money a customer spends on purchases. The higher the purchase a customer makes the higher the revenue/profit for the business. Based on the monetary value of the customer the business will be able to segment the customers. For example, putting more effort into customers who have more monetary value on the transaction or encouraging them to purchase more benefits the business very strongly. These customers will play an important role in increasing the ROI and it will help the business to identify which customers should be prioritized
By analyzing the recency, Frequency, Monetary Value. The business will rank the customers from 1-5 using RFM values. These RFM ranks will help to segment the customers based on certain traits of each group, and engage them with relevant campaigns rather than segmenting on generally by just customer age or geography. For example, if a customer gets a score like 5,5,5 on this recency, frequency & monetary value his RFM rank will be 5, which shows the more potential of a customer who gets the score of 4,3,2, whose rank is 3.3 By providing certain ranks on these customers will help the business to plan their marketing efforts according to it.