RFM Analysis

Segmentation Modelling

What does RFM stand

for?
O Recency How recently the customer

purchased?
O Frequency How often the customer

purchases?
O Monetary Value (or sometimes Margin)

How much they spend?

Introduction
O Breaking customers into groups is a

natural tendency.
O Companies want to know who are
their best customers, who are their
worst customers, who has potential,
who is new and so on.
O Marketing and sales departments do
this regularly and often.
O Their goal is to expend limited effort
to achieve maximum return.

What is RFM Analysis?

RFM Analysis helps companies decide which

customers to give select offers and

promotional items.
It is a way for companies to find ways to
increase customer spending.
Companies can use it to target lost customers
and give them incentives to purchase items
RFM Analysis can help companies keep track
of their customers and build a relationship
that can increase sales and productivity.

RFM Modelling
O RFM Modelling is a way of

segmenting customers.
O RFM is widely used by direct
marketers of all types for selecting
which customers to target offers to.

RFM
O The objective is to find out who are

the most likely buyers, who

make purchase most frequently,
who spend the most and who
have the greater probability of
coming back for repurchase.
O RFM
analysis helps to identify
consumer segments and customer
profiles having such characteristics.

Strengths of RFM
Analysis
O Companies have data that can be used for

target marketing.
O Marketing
budgets will be focused on
customers who are more recent, more
frequent and spend more.
O Specific targeting can increase profit and
reduce costs; companies gain by not spending
on customers who will not add value
O You can offer incentives to middle scoring
customers to increase their purchases
O Analysis is quick and easy to interpret

Weaknesses of RFM Analysis

It only looks at three variables and

there may be others that are more

important
Customers with low RFM scores may
be ignored, even though they may
have legitimate reasons for spending
more with other vendors.