Each one of your customers is a unique individual with personalized spending habits. Some customers will order a large quantity at once, while others purchase smaller quantities more often. Marketing towards these two customers would need to be approached in different ways.
RFM (Recency, Frequency, Monetary value) analysis is the tool that measures the data of your customers purchases to evaluate their patterns and sort them based on the three factors.
- Recency is how recently a customer made a purchase
- Frequency is how often they purchase
- Monetary value relates to the amount of money the customer spends
Together, these data points can predict the likelihood a customer will return. This data helps you make optimal marketing decisions. Knowing how much revenue comes from new vs returning customers can give you the information you need to know to be able to turn occasional buyers into regulars.
RFM works by analyzing your company’s CDP, scoring each customer on a scale in each of the three categories. So, for example, depending on the purchase cycle of your company’s product or service you might evaluate customers for recency on a scale of 1-5, with a score of 5 indicating the customer had made a purchase from your company within the last week, and a score of 1 indicating that their last purchase was 10-12 months prior.
Evaluating each category together can give you a clear picture as to where to put your money and energy in your marketing strategies. Recent customers could help as an example of what is doing well that keeps them coming back. Regular customers do not need as constant of notifications as infrequent shoppers.
Unnecessary reminders can serve the opposite effect. Customers who may have a low monetary value score could be sent incentives and deals to encourage them to buy more products.
RFM analysis is based on the marketing axiom that “80% of your business comes from 20% of your customers. Most commonly RFM analysis measures customers based on the scale of 1-5 with ‘555’ being the most ideal customer. Certain deals may work better for these high rating customers than the low rated ones. Unique marketing strategies to fit your customers behaviors creates a better response rate.