Businesses constantly look for their most valuable customers to create better marketing campaigns. They customize their product or website for them, come up with special offers for certain types of customers, etc. Here’s a simple way to find your most valuable customers.
RFM Analysis is a method used to analyze customer value.
RFM stands for
1. Recency – How recently did the customer purchase?
2. Frequency – How often do they purchase?
3. Monetary Value – How much do they spend?
Most businesses keep data about customer purchases. All you need is a table with customer name, date of purchase and purchase value. You can assign a scale of 1 to 5 where 5 is the maximum value. Purchase value is prorated to fit the scale. For example in a service based business you can have:
1. Recency = 5 – number of months that have passed since the customer last purchased
2. Frequency = number of purchases in the last 12 months (maximum of 5)
3. Monetary = value of the highest order from a customer (benchmarked against $5k)
You can create also categories for each attribute instead of using a scale. For Recency, customers can be grouped into 3 categories : customers with purchases within the last 3 months, 3-6 months and 6-12 months.
Once you have defined categories for each attribute, you can create groups from the combination of their values. If there were three categories for each attribute, you can have 27 possible combinations (groups). You can also collapse certain groups, if they are too small to be useful. You can order them from most valuable customers (highest recency, frequency, and value) to least valuable customers (least recency, frequency, and value). Identifying the most valuable groups can help you create special offers for them.
It’s quite easy to implement. No specialized statistical software is required. The results are readily understood by business people. In the absence of other targeting techniques, it can give a lift to response rates for promotions.
Although RFM analysis is a useful tool, it does have its limitations. You must be careful not to over solicit valuable customers with the highest rankings. Also customers with low group rankings should not be neglected. They should be engaged to become better customers.
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