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RFM Analysis

Understanding and Utilizing Customer Segments

Updated over a week ago

RFM summary

What is RFM Analysis?

RFM Analysis is a powerful tool that helps you segment your customers based on their purchasing behavior. By evaluating Recency, Frequency, and Monetary value (RFM), you can identify different customer groups, understand their behavior, and tailor your marketing strategies accordingly. This method gives you insights into your most loyal customers, those at risk of leaving, and everyone in between.

The Components of RFM

- Recency (R): How recently did the customer make a purchase?

- Frequency (F): How often does the customer make a purchase?

- Monetary (M): How much money does the customer spend on purchases?

Each customer is scored on these three metrics, usually on a scale of 1 to 5, with 5 being the highest.

RFM Segments and Their Definitions

Here are the key RFM segments and what they mean for your business:

Champions

- Definition: Buy often, spend a lot, and made a purchase recently.

- Actions: Reward them. Ask them for reviews. They can be early adopters for new products and collections.

Loyal Customers

- Definition: Spend often and in good amounts. They are also engaged with relevant promotions.

- Actions: Upsell higher-value products. Ask for reviews. Ask for referrals and engage with them; send free gift cards, pizzas, handwritten notes, etc.

Promising

- Definition: Recent customers who spend decent money and have bought more than once.

- Actions: Offer subscription and loyalty programs. Provide recommendations. Ask for reviews. Send gifts, handwritten cards, etc. Make one-on-one personalized phone calls.

New Customers

- Definition: Recent buyers but most likely just one-time buyers.

- Actions: Provide post-sale support. Give them “early success,” offer free gift cards. Start a one-on-one relationship.

Need Attention

- Definition: Customers who have average to below-average RFM scores.

- Actions: Make limited-time offers. Recommend new products or services based on their passion/problem.

Should Not Lose

- Definition: Made large and frequent purchases but have not purchased in a long time.

- Actions: Win back through special offers. Talk to them, survey them, don’t lose them to competition.

Sleepers

- Definition: Spent good money but have not purchased in a long time.

- Actions: Send emails and messages to reconnect. Provide helpful resources.

Lost

- Definition: Lowest RFM scores, bought a small amount a long time ago.

- Actions: Try to revive interest with reach-out campaigns, otherwise ignore.

Warm Leads

- Definition: Bought once or twice fairly recently but have not spent much.

- Actions: Reach out personally and provide proactive support. Learn about them and build relationships.

Cold Leads

- Definition: Customer at risk of being lost, with below-average RFM scores.

- Actions: Reach out through SMS or email to revive interest. Get feedback.

RFM Score Breakdown

Each customer is assigned an RFM score based on their purchase behavior. FM score is the mean of F-score and M-score.

Segment

R-score

FM-score

Champion

5

5

Loyal

3,4,5

4,5

Promising

4,5

2,3

New Customers

5

1

Warm Leads

4

1

Cold Leads

3

1

Need Attention

2,3

2,3

Shouldn’t Lose

1,2

5

Sleepers

1,2

3,4

Lost

1,2

1,2

How to Conduct RFM Analysis

Manually

1. Data Collection: Gather data on your customers' purchase history.

2. Calculate Scores: Assign scores for Recency, Frequency, and Monetary values for each customer.

3. Segmentation: Group customers based on their RFM scores into the predefined segments.

4. Action Plan: Develop marketing strategies tailored to each segment.

Automatically with DataDrew Analytics

Datadrew simplifies this process by automatically calculating RFM scores and segmenting your customers. With DataDrew Analytics, you can:

- Visualize RFM Segments: View your customer segments in an intuitive grid format.

- Create Audiences: Build customer audiences based on their RFM scores for targeted marketing campaigns.

- Take Action: Push these audiences to marketing platforms like Klaviyo and Facebook to execute your campaigns.

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