RFM = Recency, Frequency, Money (Monetary Value)
This is a numerical representation of the value visitors or customers have in the eyes of a business, used to determine how to improve customer retention and focus marketing efforts. It is a useful segmentation metric based on the premise that a customer who spent recently, spent a lot and spends often is the most valuable type of customer.
Not only is it very easy to get lost in methods to calculate an RFM metric but also every business has different needs when it comes to this metric and might no even need all three elements. This is why I am not explaining the details here, while I am sure to post many articles on it later, which will be linked here.
However, below is a simple explanation of how customers rank using this method:
- Spent recently and spends a lot and often.
- Spent recently and does often; or spends a lot and often; or spent a lot recently.
- Spent recently; or often; or a lot.
As you see, it is not hard to imagine why the first group are the most important to cater to as they have proven to come back and spend a lot. The second tier has three groups that can be ranked different depending on the business, but still is home to customers that deserve some attention to either start spending more or coming back more often. And lastly the third group—again sortable witihin, based on the goals and needs of a business—needs work to move up to one of the other groups.
At a high level, a business can make much more educated decisions in allotting acquisition and retention marketing budgets within insight into its RFM distribution: the percentage of customers that fit into each group. More granularity, specific customers canbe targeted with custom promotions and offers to generate more predictable revenue.