Customer Analytics is nothing without RFM

How do businesses know what customers are truly looking for?

To a business, customers are the most important.

It’s where they get most of their money from, which keeps the business healthy and alive.

It’s why businesses are so open to investing a decent chunk of their income into optimizing marketing strategies for their customer base.

But customers can be absolutely wild…

Some of them buy x amount of stuff and leave, while others might check the business website periodically and not buy anything because they can’t make up their minds.

A nightmare for businesses to keep track of.

But if you break down what I just said and look at it closely, you’ll notice some key elements.

There’s the recency of the visits and sales, the frequency of the visits and sales, and the monetary value of a transaction.

This is called RFM analysis and is what most businesses do to gain valuable insights into their customer base.

But what really is RFM analysis?

RFM stands for recency, frequency, and monetary.

It’s a data-driven marketing technique used to break down customer behavior into 3 major parts.

RFM Methodology

Every customer gets assigned a score on recency, frequency, and monetary value based on what happened during their transaction.

Most scores are from 1 to 5 (the highest score is 5), but the scale can vary.

Customer Segmentation

Based on the scores, customers are segmented into a variety of different groups.

For example, a group of customers can be separated into a high RFM segment or a low RFM segment.

A business would want to hold on to low RFM customers with personalized offers, whilst rewarding high RFM customers with certain perks because of their loyalty.

Benefits of RFM

Besides helping businesses get the most out of their customer base, there are far more insights a business could gather with RFM. Many of these include:

• Better customer understanding: Know what products customers might buy together the most

• Targeted marketing campaigns: Personalize the marketing based on a certain group to increase conversion rates

• Increased customer retention: Keep customers thinking about a product for a longer time

• Resource optimization: Minimize resource spending for only what is necessary

Conclusion

Since its creation in the 90s, RFM analysis is still one of the best tools businesses can use.

For targeted marketing strategies to increase growth, segmentation to boost profit margins, and more, the customer insights are endless.

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