RFM offers a simple method for evaluating your customers. First, you need a spreadsheet with columns for customer IDs and RFM scores. However, if you've never scored your customers before, the process might be confusing, so here are a few examples to get you started if you decide to rank customers using the values 1 through 5.
Recency refers to how recently a customer made a purchase within a designated period. Individuals who purchased a product or service most recently would receive a score of 5.
For example, let's say you're comparing 2 customers:
- Customer A purchased a product yesterday.
- Customer B bought a product last week.
In this case, customer A would receive a 5, while customer B would likely receive a 4 or 3, depending on how recently other customers have made a purchase.
Frequency refers to how often a customer shops during a specific period and can effectively measure customer loyalty. As you likely already know, loyal customers are more cost-effective to retain than new customers are to acquire. For example, if customer A makes 2 purchases in a month and customer B makes 8 purchases in the same period, customer B would score higher in the frequency column.
Monetary value examples
Monetary value is often one of the most important RFM factors for businesses because you may have clients who don't purchase very often but make larger purchases when they do. Some industries may also experience low recency and frequency but high monetary value scores depending on consumer behavior.
For example, consumers don't need to purchase a new car every year, so the auto industry typically focuses most on monetary value instead of frequency or recency. Assigning scores for monetary value can help you identify your highest paying customers, which may be the most valuable to your business even if they don't purchase products often.
Again, let's consider customer A and customer B. Customer A spends $5,000 on your website in a month for 2 products. Meanwhile, customer B only spends $2,000 for 8 products. In this example, customer A would receive a higher score for monetary value.
Looking at the examples for all the RFM factors: even though customer A doesn't purchase as frequently as customer B, they still bring more value, ultimately becoming the target audience. While customer B is more loyal, they're part of another segment.
Calculating RFM is easy, and anyone can do it as long as they have access to sales data. Again, you'll need columns for customer IDs and each RFM factor. Here are the steps for calculating RFM:
Every customer will receive a score between 1 through 5 for each of the 3 categories. Therefore, your target audience will be the customers that score the highest when combining their points.
After determining your scoring method, you can review your customer relationship management software (CRM) and sales data to score each customer individually in every category. Then, to get their final value, you'll add their combined scores to help you determine which customers are your target audience. You can segment clients with lower scores and market to them differently.
3. Improve customer communications
Your RFM analysis will provide information about your top customers, allowing you to prioritize them in your marketing strategy and offer personalized campaigns to entice them to make repeat purchases.
Using RFM at your business
Using RFM as part of your marketing strategy can help you identify your top customers and find new ways to market to them based on their buying behaviors. Segmentation is crucial to improving engagement and increasing conversions for any business, regardless of size. With RFM, you can improve your marketing efforts throughout every stage of the customer journey and even personalize transactional emails to build loyalty.
Mailchimp makes it easy to understand your customers with our audience dashboard. Plus, you can use the RFM model to build targeted, personalized email campaigns by segmenting customers. Ready to improve your engagement rates? Try Mailchimp's email marketing platform to target the right customers at the right time.