Contents
- What is RFM analysis?
- Who is RFM analysis suitable for?
- How to segment clients using RFM?
- How often to review segments?
What is RFM analysis?
RFM analysis is a powerful method that allows for the segmentation of clients based on three key metrics: recency, frequency, and monetary value. This approach helps to identify those clients who bring the most profit and build more effective communications with them. The abbreviation RFM stands for:
- Recency — how recent the client's last purchase was;
- Frequency — how often the client makes purchases;
- Monetary — the total amount of all the client's purchases.
By using these parameters, companies can divide their clients into various groups, allowing for the adaptation of marketing strategies. For example, VIP clients can receive exclusive offers, while those who haven't purchased in a long time might be offered discounts to encourage repeat purchases.
Who is RFM analysis suitable for?
RFM analysis is a universal tool that is suitable for any business, but particularly effective for companies with extensive client databases, starting from 10,000 addresses. This allows for the identification of up to 27 segments, each of which can have targeted marketing strategies created. For instance, some groups can be activated through special promotions, others through personalized offers, and yet others simply through reminders.
With a small number of clients, such detailed segmentation may prove ineffective, as there is not enough information for analysis. However, for large companies, the value of RFM analysis increases significantly, allowing for a more precise understanding of client needs and behaviors.
How to segment clients using RFM?
The essence of RFM analysis is to divide clients into groups based on the three metrics: recency, frequency, and monetary value. Each metric can be divided into three equal groups, assigning each group numerical designations from 1 to 3:
Segmentation criteria:
- By recency (Recency):
- 1 — long-time clients;
- 2 — relatively recent clients;
- 3 — recent clients.
- By purchase frequency (Frequency):
- 1 — purchases very rarely;
- 2 — purchases infrequently;
- 3 — purchases frequently.
- By purchase amount (Monetary):
- 1 — small amount;
- 2 — medium amount;
- 3 — large amount.
For example, a client who purchased a long time ago and made one small purchase may be assigned to group 111, while a client who made a recent purchase of a large amount and does so frequently will have the code 333. It is important to understand that the ranges for each value are defined individually for each business.
After segmentation, there can be a maximum of 27 unique segments; however, the number may be lower if there are no clients in the database that meet certain criteria. If the segments are large enough, each can be individually targeted. It is also possible to combine similar groups for more effective interaction.
How often to review segments?
Regularly updating segments and reanalyzing RFM are important stages in maintaining the relevance of marketing strategies. The frequency of segment reviews depends on the dynamics of the client base. For large online stores with high sales volumes, data updates may occur every month or two. In contrast, for companies with infrequent purchases, it may be sufficient to revisit the RFM analysis once a quarter or every six months.
The goal of the reanalysis is to assess changes in client status, which allows for the elimination of unnecessary communications, such as reactivation emails, for clients who have already returned to active purchasing.