RFM Analysis – Why it’s So Important

The first two questions I ask when I talk to a prospective client are:  “Do you know who your BEST customers are?”  and “What do they look like?”  The reason I ask these questions is that many companies are so focused on bringing new customers aboard that they forget the importance of the customer relationships they currently have.  Studies have shown that it is far more costly to find new customers than it is to cultivate and grow relationships with curent customers.

“BEST” customers are those who have:

a)  Bought from you recently

b)  Buy frequently

c)  Spend alot of money on your products & services.

One of the best, if not THE best tool to understanding who your BEST customers are is Recency, Frequency, and Monetary or RFM Analysis.  RFM Analysis is a tool that is used to segment your customers into clusters based on their buying behavior.  Depending on the size of the database, customers are assigned a ranking number between 1 & 3 or 1 & 5 for each RFM parameter.  The three scores are assigned to a RFM cell with 333 or 555 being the highest.

I take this a step further by then assigning each RFM Cell to a Tier – either A, B, or C.  We then use these tiers to develop marketing programs that strengthen the relationship (Tier A), build the relationship (Tier B), and review the relationship (Tier C).

RFM coding should be calculated on a monthly or quarterly basis in order to leverage the highest benefit from your database.  Calculating RFM and integrating it with a active strategy of regular communications with your customers will prove most profitable.