Not all customers can be treated equally. Some of them are your budding champions and needed to be treated with care while some others are almost lost unless a whole campaign is focused towards them.
RFM analysis helps segment these customers on the basis of Recency (When was the last time your services were used?), Frequency (How frequently are your services needed?) and Monetary value (How big is the customer monetarily?). While the champion got a loan sanctioned just last month, is active financially and deals handsomely; the almost lost cases might be faring poorly in at least two of these categories. The RFM analysis helps you know who they are before it’s too late.
What can RFM help Answer?
- Who are my best customers?
- Which customers are at the verge of churning?
- Who has the potential to be converted into a more profitable customer?
- Who are your loyal customers?
- Who are lost customers that you don’t need to pay much attention to?
- Which are the customers you must retain?
- Which group of customers is most likely to respond to your current campaign?
To Highlight
The 80/20 rule
For many events, roughly 80% of the effects come from 20% of the causes
Similarly, 20% customers contribute to 80% of your total revenue.
People who spent once are more likely to spend again. People who make big ticket purchases are more likely to repeat them. Pareto Principle is at the core of RFM model. Focusing your eff orts on critical segments of customers is likely to give you much higher return on investment!
Customer Segments with RFM Model
| Customer Segment | Activity | Actionable Tip |
|---|---|---|
| Champions | Bought recently, buy often and spend the most! | Reward them. Can be early adopters for new products. Will promote your brand. |
| Loyal Customers | Spend good money with us often. Responsive to promotions. | Upsell higher value products. Ask for reviews. Engage them. |
| Potential Loyalist | Recent customers, but spent a good amount and boutght more than once. | Offer membership / loyalty program, recommend other products. |
| Recent Customers | Bought most recently, but not often. | Provide on-boarding support, give them early success, start building relationship. |
| Promising | Recent shoppers, but haven’t spent much. | Create brand awareness, offer free trials |
| Customers Needing Attention | Above average recency, frequency and monetary values. May not have bought very recently though. | Make limited time offers, Recommend based on past purchases. Reactivate them. |
| About To Sleep | Below average recency, frequency and monetary values. Will lose them if not reactivated. | Share valuable resources, recommend popular products / renewals at discount, reconnect with them. |
| At Risk | Spent big money and purchased often. But long time ago. Need to bring them back! | Send personalized emails to reconnect, offer renewals, provide helpful resources. |
| Can’t Lose Them | Made biggest purchases, and often. But haven’t returned for a long time. | Win them back via renewals or newer products, don’t lose them to competition, talk to them. |
| Hibernating | Last purchase was long back, low spenders and low number of orders. | Reward them. Can be early adopters for new products. Will promote your brand. |
| Lost | Lowest recency, frequency and monetary scores. | Revive interest with reach out campaign, ignore otherwise. |
Customize your marketing campaigns based on the insights from RFM. Combine with Customer Lifetime value analysis to identify high value high risk customers that need immediate action!