RFM Analysis: Learning to Segment Customers

RFM analysis is a method of segmenting a large number of customers according to three criteria: frequency of purchases (Recency), recency (Frequency) and the amount of investment by the consumer (Monetary).

RFM analysis is closely related to the Pareto principle , according to which 20% of efforts and 20% of customers bring 80% of all profits. The purpose of such analysis is to identify the part of consumers from which the most money comes, and also to distribute the rest into groups depending on their value to the company.

Why do you need RFM analysis?

RFM analysis is used to identify different value segments of consumers to which different marketing approaches are applied. Doing this manually is too labor-intensive.

This tool makes it easier to determine which clients are not worth spending time and money on, and which ones you definitely need to work with.

Depending on the results of RFM analysis, we understand how Ivory-Coast Phone Number List to interact with customers from each segment. For example, those who recently made their first purchase for a large amount can potentially fall into the category of loyal customers. To do this, you need to take certain measures: prepare a mailing by email, SMS or in chat bots with a description of the company’s advantages and a profitable offer.

Where RFM analysis is used

This method is most effectively used in B2C companies with a client base of ten thousand contacts. RFM analysis can also be used in the B2B sector, but in this case it is better to reduce the number of segments: B2B has much fewer contacts, and identifying 27 or more consumer groups is irrational from a cost perspective.

The results of RFM segmentation are used when composing email and messenger mailings, when creating telephone scripts for the sales department and, in general, for building effective communication with different groups of clients, as well as for adjusting launched advertising campaigns.

If the target action is not a purchase, but, for example, watching a video, RFM analysis is also suitable.

Advantages and Disadvantages of RFM Analysis

RFM analysis, like any other method, has its pros and cons.

Advantages :

• helps reduce the costs of marketing campaigns thanks to high-quality targeting;
• finds application in various fields: e-commerce, direct sales, NPOs and everything related to mailings;
• the method can be used in combination with other marketing tools;
• helps increase loyalty through more targeted mailings.

Flaws :

• if you have a small contact base, this method does not produce a significant effect – it only slightly exceeds the costs of segmentation;
• not suitable for businesses with one-time sales;
• the method is retrospective and cannot be used to make forecasts;
• to analyze large customer bases, you will need special software and scripts;
• requires constant updating.

Mechanics of RFM analysis

Let us go into a little more detail about the indicators on the basis of which the analysis is performed:

• Recency – the period of time since the last purchase.
• Frequency — characterizes the frequency of purchases.
• Monetary – the amount of expenses – reflects the volume of investments on the part of the client, usually in monetary terms, but not necessarily.

Next, we will consider each indicator separately.

Data collection

The first step is data collection. The analysis period depends on the specifics of the activity, but, as a rule, data for the last year or two is used. There are a number of mandatory parameters:

• client identifier – this can be full name, phone number, email, nickname on the website, etc.;
• date of last purchase;
• the number of purchases or other conversion actions made by the client;
• the amount of the client’s investment – in the form of money, time and viewing depth, or other value.

To avoid having to systematize the data manually, download it from your CRM to Microsoft Excel or Google Sheets. Then add 5 more columns:

• current date – fill in the lines with the formula TODAY;
• number of days since the customer’s last purchase;
• columns labeled R, F, M.

CRM SendPulse is convenient and free. It makes it easy to automate sales and centrally manage deals. All customer information is stored in one place, and deals can be created automatically, for example, when placing an order on the website. You can set up automatic mailings for specific events via email, SMS, Viber or chat bots.

CRM integrates with all SendPulse services, including the website builder and web push notifications. There is a built-in task manager for managing work tasks.

Consumer assessment and grouping

Now we proceed to assessing consumers by each parameter and distributing them into groups. As a rule, RFM analysis uses a three-point assessment system and identifies three groups, but with a significant amount of initial data, there may be four, five or more. We will consider the classic version.

Time of purchase

Buyers need to be divided into three groups depending on the number of days that have passed since the last purchase or other target action. The criteria may differ for different areas. In our case, the assessments look like this:

• from 181 days – “bad”, we assign a value of 1 to this group;
• from 91 to 180 days – “normal”, we put the number 2;
• up to 90 days – “good”, rating 3.

Some marketers give 1 point for the best result and 3 for the worst. Do what you feel most comfortable with.

Let’s fill in the “Number of days since last purchase” column. To do this, you need to calculate the difference between the current date and the time of the customer’s last purchase using a formula and drag the cell down to the end of the table.

In our case, we have already defined the criteria for a bad, normal, and good rating. If you want to divide all customers into three equal groups based on how recently they purchased, use the PERCENTILE.INC formula in Excel for 33% and 66%. In our example, the group of recent customers would include those who made a purchase in the last 58 days. The second group would include those people who ordered from 59 to 269 days ago. And everyone who bought the product earlier would be the third group with the worst rating of 1.

You can set up sorting in the desired column “from Z to A” – this will make it easier to assign ratings and assign clients to the appropriate groups.

Purchase frequency

Now let’s distribute consumers by frequency of purchases or other target actions. The criteria again depend on the field of activity. In our example, they are as follows:

• 1 purchase – “bad”, rating 1;
• from 2 to 4 – “normal”, number 2;
• from 5 – “good”, we give 3 points.

You can use the PERCENTILE.INC formula if you want to divide your customers into three equal groups, or sort them in ascending or descending order for ease of rating.

Attachments

In the same way, distribute consumers into groups depending on the amount of expenses. In our example, the estimates look like this:

• from 5000 – “good”, rating 3;
• from 1000 to 4999 – “normal”, rating 2;
• less than 1000 – “bad”, score 1.

RFM Summary

If you used a three-point rating scale, then after distributing customers into groups, you will have 27 segments: from the worst 111 to the best 333. Some segments may be empty, for example, if you do not have customers who have made a large order once a long time ago. Groups can also be combined if the difference between the indicators is small.

You need to give each client an overall rating for all three indicators. This can be done using the formula:

If you need to quickly see customers in each segment, use filtering.

How to communicate with different segments

Different groups of consumers require different marketing approaches. First of all, describe in more detail the characteristics of each segment, determine their value and think through the strategy of work. The main goals: to retain the best; to return those leaving and, if possible, those lost; to wake up the “sleeping” and convert them, as well as newcomers, into loyal customers.

The Lost

As a rule, customers from the 111 segment are irretrievably lost. You can try to get them back with a special offer or a big discount, but do not put in too much effort – it is not worth it.

Customers from segments 112 and 113 can also be considered lost with a high probability, but they once made large purchases from you, so it makes sense to make some effort. Remind them how great you are, tell them about new products and promotions, offer a discount promo code, share useful materials. But if you fail to return these customers, do not worry too much. In this case, delete inactive contacts from the subscriber base so that your letters do not end up in spam for other recipients.

 

Rare

Consumers from segments 121, 122, 123 did not make purchases often and have not returned for a long time. Remind them of yourself with a useful newsletter and find out with a survey what they would be interested in buying and under what conditions. Inform them about a profitable promotion timed to coincide with some news event .

Sleeping

Customers from segments 211, 212, 213 have bought not so long ago, and you have a good chance of getting repeat orders. Remind them why it is profitable to work with you, prepare a personal selection of products or advice. Invite them to participate in a special promotion with good discounts. You can ask for an opinion about a completed purchase and offer to leave a review for some bonus.

Former loyalists

Segments 131, 132, 133 include those who used to make frequent purchases with different receipts, but have not remembered you for a long time. Try to reawaken their interest. The same measures as with the previous group may work here. In addition, think about the issue of motivation in the long term in the form of a loyalty program and additional bonuses for regular customers.

In the first letter of the newsletter, you can write that you miss your “favorite clients” – show that you remember them and are waiting for them. To understand why there have been no purchases for a long time, conduct a survey to find out the reasons.

Recent

Customers from segments 311, 312, 313 have only recently met you, and your task is to try to earn their loyalty. Show concern: send out a newsletter on how to care for the product or prepare a selection of life hacks on its use. Invite them to social networks for additional useful content and prizes.

Don’t forget to send a thank you note after the purchase and promise to resolve any issues that may arise. You can offer a discount on the next order because of the acquaintance.

But do not abuse this, especially if the check was high – it is advisable to malta phone number library single out such consumers in a separate group, these are potential VIPs. Invite them to events, offer participation in the loyalty program. A bonus for a review or for a referred friend in this case will work better than a regular discount.

Loyal

Segments 321, 322, 323, 331, 332 are good clients who have already appreciated your advantages, and there is no point in bombarding them with mailings once again. Notify about major sales and special offers, sometimes send useful articles and expert reviews.

Segment 323 consumers are almost perfect. To motivate them to buy more often, first find out what they would like to see in the assortment. They may be satisfied with everything as is, but there is a chance to increase their activity.

Offer related products to those who buy for less. For example, a home peeling set would be well complemented by a restorative mask and moisturizing emulsion, and a hat and scarf with a fashionable print would go well with a winter down jacket.

Ideal

333 — those who buy frequently, for large amounts and have visited the store quite recently. In general, the ideal type of client, which brings up to 80% of profit. Your task is to keep them in this state for as long as possible.

Don’t offer discounts, because these consumers are already good buyers. You can interest them with special offers: an exclusive product or service, a VIP client card with additional privileges, personal consultations with an expert, and the like. Show these people that they are really important, show care after each purchase. Useful materials work well if they are unique information.

If there are few such clients and the checks are very large, you can prepare personalized mailings.

In the example below, the company thanks the bm lists client for their loyalty, talks about a special program for launching courses, and invites them to a webinar where they can get valuable insights.

How often to review segments

Consumers often move from one segment to another: previously loyal customers may “fall asleep” and newcomers may become VIPs. It is necessary to periodically review the selected segments and update the results of RFM analysis. The frequency depends on the following factors:

• consumer life cycle;
• service life of a product or service;
• the period during which the client will have time to make a repeat order.

A large store that sees large daily purchases should update its RFM analysis monthly or less frequently. If the product has a long shelf life and customers come infrequently, you can review the segments a couple of times a year.

Additional factors need to be taken into account: seasonality, holidays, promotions. If you sell products with a short shelf life, and some of your regular customers do not buy anything for a month, seasonality may be at play. Do not rush to transfer such consumers to other segments