RFM segmentation
Category: Marketing
RFM Segmentation
RFM segmentation is a marketing method for classifying and analyzing customers based on their purchasing behavior. It helps companies identify which of their customers are most valuable and how to communicate with each group more effectively.
The RFM acronym comes from three key dimensions:
- R - Recency: How recently did the customer make a purchase?
Logic: Customers who purchased recently are more likely to respond to new offers or advertising messages than those who haven't purchased in months. - F - Frequency: How often does the customer shop?
Logic: Customers who shop frequently are more engaged and loyal. - M - Monetary: What is the total monetary value of all the customer's purchases?
Logic: Customers who spend more money are obviously more valuable to the business.
How does it work in practice?
The process involves several steps:
- Data collection: For each customer, data is collected on:
Date of last purchase (for R)
Number of purchases over a specific period (e.g., for the last year) (for F)
Total amount spent over a specific period (for M) - Rating assignment: Each customer receives a rating (usually from 1 to 5) for each of the three dimensions.
5: Highest rating (e.g., for "Recency": purchased within 1 month)
1: Lowest rating (e.g., for "Recency": purchased more than 2 years ago) - Combining ratings: The three numbers are combined to form an RFM score for each customer (e.g., 5-5-5, 1-1-1, 5-1-3, 3-5-4, etc.).
- Customer segmentation: Customers with identical or similar scores are grouped into segments. Each segment has distinct characteristics and requires a different marketing approach.
Examples of RFM segments and how to act with them
Here are some of the most important segments:
| RFM Segment (Sample Score) | Characteristics | Marketing Strategy |
|---|---|---|
| Champions (5-5-5) | Purchase recently, frequently, and spend a lot. They love your brand. | Reward them. They are your best ambassadors. Offer them exclusive benefits and notify them about new products first. |
| Loyal customers (4-5-5, 5-4-4) | Purchase regularly and with high value, but haven't purchased recently. | Bring them back with a personalized offer or remind them that you miss them. |
| New customers (5-1-1, 5-2-2) | Made their first purchase recently, but haven't yet established a behavior pattern. | Welcome! Focus on building relationships. Send them content that introduces them to your brand and encourage them to make a second purchase. |
| At risk customers (3-3-3, 2-3-3) | Purchased regularly in the past, but haven't been active for some time. | They definitely have interest. Launch a "we miss you" campaign to bring them back before they are completely lost. |
| Sleeping customers (2-1-1, 1-1-2) | Purchased in the distant past, but not recently. They may have lost interest. | Try to win them back with a very attractive offer (e.g., large discount). If they don't respond, it may not be worth investing more in them. |
| Cannot lose them (1-1-1) | Never purchased or purchased only once a long time ago. | Avoid sending expensive marketing materials. You can direct them to more general campaigns or exclude them from certain emails. |
Benefits of RFM segmentation
- Easy to understand and apply: Doesn't require complex statistical models.
- Actionable: Results are easy to interpret and lead to specific marketing actions.
- Personalization: Allows you to personalize your messages and offers according to each group's behavior.
- Increases ROI: By focusing your resources on the most valuable customers, you increase the return on marketing investments.
- Improves customer retention: Helps you identify customers who are about to leave and act before that happens.
In conclusion
RFM segmentation is a powerful but simple tool that transforms raw sales data into valuable business information. It helps companies make more intelligent and effective marketing.