RFM: A powerful tool for customer segmentation and targeted marketing

Gary A.
Seitz
RFM: A cool tool
What is RFM?
R = Recency
Last purchase or meaningful transaction (donation)
F = Frequency
How often there is a dollar-earning transaction
M= Monetary
The sum of all revenue generated
Why RFM?
Past behavior is best predictor of future

– Segmentation is quantifiable way to distinguish
between best & worst customers
– RFM is quick, descriptive way to segment a
marketing database based on purchase
behavior
– It is not a statistical or predictive model
Recency
 Most powerful predictor of who is likely to buy

 Time-frame since last transaction
 “High-end” date on the database, not “today’s date”
Recency Customers Response Revenue Resp Rate Avg Sales
0-3 months 38,457 1,597 $42,571 4.2% $26.66
4-6 months 29,472 961 $19,274 3.3% $20.06
7-9 months 21,947 422 $6,231 1.9% $14.77
10-12 months 16,473 247 $2,547 1.5% $10.31
13-18 months 11,648 114 $954 1.0% $8.37
19-24 months 15,982 88 $341 0.6% $3.88
25+ 26,482 91 $188 0.3% $2.07
TOTAL 160,461 3,520 $72,106 2.2% $20.48
Frequency
 Second most powerful predictor of response

 How often a buyer has a dollar earning transaction
– Purchase or donation
– Exclude credits
 Timeframe or Lifetime transactions
 Is not number of units (i.e. 3 shipments)
Frequency + Recency
Recency Freq Customers Response Revenue Resp Rate Avg Sales

0-3 months 3x+ 12,978 582 $15,201 4.5% $26.12
0-3 months 2x 5,325 201 $5,074 3.8% $25.24
0-3 months 1x 20,154 488 $10,025 2.4% $20.54
0-3 months 38,457 1,271 $42,571 3.3% $33.49
4-6 months 3x+ 10,873 452 $11,054 4.2% $24.46

4-6 months 2x 4,287 143 $2,984 3.3% $20.87
4-6 months 1x 14,312 250 $4,874 1.7% $19.50
4-6 months 29,472 845 $18,912 2.9% $22.38
Monetary
 Least powerful predictor

 Useful to avoid mailing low value customers
 Sum of all revenue earned
 Exclusive of tax and shipping
 May be actual dollars, or an average
Frequency + Monetary
A$ B$ C$ D$ E$
5x+
Impact of adding Monetary
4x – Who to market
3x
– How to market
2x
Direct Mail offers:

1x Loyalty programs
“Comps”
Personalized offers
Eliminating frequent “bargain shoppers”
Getting Started with RFM
Recency
 Assign 6 to 8 letter codes for time segments
appropriate for your business
 Use quarters for first year: 0-3 mo, 4-6 mo
 Group years (months) 13-24 mo, 25-36 mo
A = 0-3 months E = 13-24 months

B = 4-6 months F = 25-36 months
C = 7-9 months G = 37-48 months
D = 10-12 months H = 49+ months
Frequency
 A simple 1, 2, 3 (3x+)
 Triers ~ buyers ~ highers
 1x buyers are new customers!
Give them special treatment
Convert them to 2x ~ but not too long
Monetary
 Use 3 to 8 letter codes in reverse value
 Accumulated or Average value
A = $10,000+ E = $500 - $999

B = $5,000 - $9,999 F = $100 - $499
C = $2,500 - $4,999 G = $1 = $99
D = $1,000 - $2,499 Z = $0 (returned)
RFM score
Kevin O’Leary
RFM = B2D
B = 4–6 months since last transaction
2 = 2 transactions
= $1,000 - $2,499
2013 COUNT 2012 COUNT 2011 COUNT 2010 COUNT 2009 COUNT 2008 - COUNT FREQ + MONETARY RECENCY - Last Transaction
A1A 4 B1A 2 C1A 7 D1A 11 E1A 10 F1A 10 1 gift $500+ 44 0.1% A 2013 15,842 22.1%
1
A1B 23 B1B 29 C1B 24 D1B 38 E1B 29 F1B 38 1 gift $250 - $499 181 0.3% B 2012 21,383 29.9%
L
T
A1C 249 B1C 425 C1C 345 D1C 257 E1C 213 F1C 307 1 gift $100 - $249 1,796 2.5% C 2011 10,332 14.4%
g
A1D 1,442 B1D 2,480 C1D 1,741 D1D 1,367 E1D 1,131 F1D 1,732 1 gift $ 50 - $ 99 9,893 13.8% D 2010 7,138 10.0%
i
f
A1E 5,153 B1E 7,774 C1E 2,258 D1E 1,476 E1E 4,963 F1E 3,354 1 gift $ 25 - $49 24,978 34.9% E 2009 8,863 12.4%
t
A1F 2,766 B1F 4,512 C1F 2,141 D1F 1,785 E1F 798 F1F 631 1 gift $ 1 - $ 24 12,633 17.6% F 2008 prior 8,027 11.2%
15,222
9,637 6,516 4,934 7,144 6,072 TOTAL 71,585 100.0%
2 A2A 22 B2A 5 C2A 4 D2A 9 E2A 7 F2A 10 2 gifts $500+ 57 0.1%
L A2B 30 B2B 44 C2B 31 D2B 18 E2B 14 F2B 20 2 gifts $250 - $499 157 0.2%
T
A2C 549 B2C 757 C2C 458 D2C 269 E2C 212 F2C 255 2 gifts $100 - $249 2,500 3.5% FREQUENCY - Number of Transactions
g
i A2D 1,146 B2D 1,720 C2D 1,342 D2D 790 E2D 715 F2D 1,068 2 gifts $ 50 - $ 99 6,781 9.5% 1 1 gift 49,525 69.2%
f
t A2E 167 B2E 372 C2E 330 D2E 230 E2E 191 F2E 110 2 gifts $ 25 - $49 1,400 2.0% 2 2 gifts 10,984 15.3%
s
A2F 3 B2F 33 C2F 33 D2F 13 E2F 1 F2F 6 2 gifts $ 1 - $ 24 89 0.1% 3 3 gifts 4,032 5.6%
1,917 2,931 2,198 1,329 1,140 1,469 4 4 gifts 2,011 2.8%
3 A3A 10 B3A 9 C3A 14 D3A 13 E3A 4 F3A 5 3 gifts $500+ 55 0.1% 5+ 5+ gifts 5,033 7.0%
L A3B 144 B3B 101 C3B 31 D3B 20 E3B 13 F3B 12 3 gifts $250 - $499 321 0.4% TOTAL 71,585 100.0%
T
A3C 635 B3C 687 C3C 385 D3C 199 E3C 139 F3C 153 3 gifts $100 - $249 2,198 3.1%
g
i A3D 322 B3D 402 C3D 283 D3D 158 E3D 131 F3D 128 3 gifts $ 50 - $ 99 1,424 2.0%
f
t A3E 2 B3E 4 C3E 15 D3E 1 E3E 6 F3E 4 3 gifts $ 25 - $49 32 0.0% MONETARY - Accumulated
s
A3F - B3F 1 C3F 1 D3F - E3F - F3F - 3 gifts $ 1 - $ 24 2 0.0% A $500+ 2,183 3.0%
1,113 1,204 729 391 293 302 B $250 - $499 2,263 3.2%
4 A4A 22 B4A 15 C4A 8 D4A 3 E4A 2 F4A 2 4 gifts $500+ 52 0.1% C $100 - $249 9,162 12.8%
L A4B 172 B4B 98 C4B 28 D4B 13 E4B 11 F4B 7 4 gifts $250 - $499 329 0.5% D $ 50 - $ 99 18,819 26.3%
T
A4C 507 B4C 460 C4C 229 D4C 146 E4C 71 F4C 83 4 gifts $100 - $249 1,496 2.1% E $ 25 - $49 26,434 36.9%
g
i A4D 30 B4D 46 C4D 30 D4D 8 E4D 12 F4D 3 4 gifts $ 50 - $ 99 129 0.2% F $ 1 - $ 24 12,724 17.8%
f
t A4E 2 B4E 2 C4E 1 D4E - E4E - F4E - 4 gifts $ 25 - $49 5 0.0% TOTAL 71,585 100.0%
s
A4F - B4F - C4F - D4F - E4F - F4F - 4 gifts $ 1 - $ 24 - 0.0%
733 621 296 170 96 95
5 A5A 1,005 B5A 548 C5A 229 D5A 108 E5A 75 F5A 10 5+ gifts $500+ 1,975 2.8%
+
A5B 691 B5B 348 C5B 128 D5B 55 E5B 28 F5B 25 5+ gifts $250 - $499 1,275 1.8%
L
T A5C 532 B5C 318 C5C 126 D5C 92 E5C 64 F5C 40 5+ gifts $100 - $249 1,172 1.6%
g A5D 214 B5D 185 C5D 102 D5D 55 E5D 22 F5D 14 5+ gifts $ 50 - $ 99 592 0.8%
i
f A5E - B5E 6 C5E 8 D5E 4 E5E 1 F5E - 5+ gifts $ 25 - $49 19 0.0%
t
A5F - B5F - C5F - D5F - E5F - F5F - 5+ gifts $ 1 - $ 24 - 0.0%
2,442 1,405 593 314 190 89 TOTAL 71,585 100.0%

1
L
T
g
i
f
t
9,637
15,222
6,516 4,934 7,144 6,072 Rows are 1-time buyers TOTAL 71,585 100.0%
2 A2A
L A2B
22
30
B2A
B2B
5
44
C2A
C2B
4
31
D2A
D2B
9
18
E2A
E2B
7
14
F2A
F2B
(Frequency) by Monetary
10
20
2 gifts $500+
2 gifts $250 - $499

57
157
0.1%
0.2%
T
g
f
s
1,917 2,931 2,198 1,329 1,140 1,469 4 4 gifts 2,011 2.8%
T
g
Rows are 2-time buyers

f
s
(Frequency) by Monetary
1,113 1,204 729 391 293 302 B $250 - $499 2,263 3.2%
T
g
f
s
733 621 296 170 96 95
+
L
g A5D
i
214
Columns are by Recency
B5D 185 C5D 102 D5D 55 E5D 22 F5D 14 5+ gifts $ 50 - $ 99 592 0.8%

t
2,442 1,405 593 314 190 89 TOTAL 71,585 100.0%

1
L
T
g
i
f
t
9,637 Row summary of 1-time

15,222
6,516 4,934 7,144 6,072 TOTAL 71,585 100.0%
2 A2A
L A2B
22
30
buyers by Monetary
B2A
B2B
5
44
C2A
C2B
4
31
D2A
D2B
9
18
E2A
E2B
7
14
F2A
F2B
10
20
2 gifts $500+
2 gifts $250 - $499

57
157
0.1%
0.2%
T
g
A2C 549 value
B2C 757 C2C 458 D2C 269 E2C 212 F2C 255 2 gifts $100 - $249 2,500 3.5% FREQUENCY - Number of Transactions
f
s
1,917 2,931 2,198 1,329 1,140 1,469 4 4 gifts 2,011 2.8%
T
g
f
Row summary of 2-time

s
buyers by Monetary
1,113 1,204 729 391 293 302 B $250 - $499 2,263 3.2%
L A4B
T
A4C
172
507
value
B4B
B4C
98
460
C4B
C4C
28
229
D4B
D4C
13
146
E4B
E4C
11
71
F4B
F4C
7
83
4 gifts $250 - $499
4 gifts $100 - $249

329
1,496
0.5%
2.1%
D
E
$ 50 - $ 99
$ 25 - $49
18,819
26,434
26.3%
36.9%
g
f
s
733 621 296 170 96 95
+
L
i
t
2,442 1,405 593 314 190 89 TOTAL 71,585 100.0%

1
L
T
g
i
Summary of Recency
f
t
15,222
9,637 6,516 4,934 7,144 6,072 TOTAL 71,585 100.0%
2 A2A 22 B2A 5 C2A 4 D2A 9 E2A 7 F2A 10 2 gifts $500+ 57 0.1%
L A2B 30 B2B 44 C2B 31 D2B 18 E2B 14 F2B 20 2 gifts $250 - $499 157 0.2%
T
g
f
s
1,917 2,931 2,198 1,329 1,140 1,469 4 4 gifts 2,011 2.8%
L A3B
T
144 B3B 101 C3B 31 D3B
Summary of Frequency
20 E3B 13 F3B 12 3 gifts $250 - $499 321 0.4% TOTAL 71,585 100.0%
g
f
s
1,113 1,204 729 391 293 302 B $250 - $499 2,263 3.2%
T
g
f
s
733 621 296 Summary of Monetary

170 96 95
+
L
i
t
2,442 1,405 593 314 190 89 TOTAL 71,585 100.0%

Recency
Recency Customers Response Revenue Resp Rate Avg Sales

0-3 months 38,457 1,597 $42,571 4.2% $26.66
4-6 months 29,472 961 $19,274 3.3% $20.06
7-9 months 21,947 422 $6,231 1.9% $14.77
10-12 months 16,473 247 $2,547 1.5% $10.31
13-18 months 11,648 114 $954 1.0% $8.37
19-24 months 15,982 88 $341 0.6% $3.88
25+ 26,482 91 $188 0.3% $2.07
TOTAL 160,461 3,520 $72,106 2.2% $20.48
Frequency + Recency
Recency Freq Customers Response Revenue Resp Rate Avg Sales

0-3 months 3x+ 12,978 582 $15,201 4.5% $26.12
0-3 months 2x 5,325 201 $5,074 3.8% $25.24
0-3 months 1x 20,154 488 $10,025 2.4% $20.54
0-3 months 38,457 1,271 $42,571 3.3% $33.49
4-6 months 3x+ 10,873 452 $11,054 4.2% $24.46

4-6 months 2x 4,287 143 $2,984 3.3% $20.87
4-6 months 1x 14,312 250 $4,874 1.7% $19.50
4-6 months 29,472 845 $18,912 2.9% $22.38
TOTAL CATALOG MAILED SALES
MAILED RESP PCT SALES AVG SL
Total Records 172,295 1,468 0.85% $1,632,790 $ 1,112
Recency
A - 0-3 months 18,562 492 2.65% $ 482,559 $ 981
B - 4-6 months 11,934 190 1.59% $ 225,985 $ 1,189
Mailing C - 7-9 months

D - 10-12 months
12,047
11,411
139
129
1.15%
1.13%
$
$
147,661
133,310
$ 1,062
$ 1,033
Results E - 13-18 months

F - 19-24 months
G - 25-36 months
19,529
15,396
29,614
124
86
132
0.63%
0.56%
0.45%
$
$
$
168,552
116,023
155,026
$ 1,359
$ 1,349
$ 1,174
H – 37-48 months 24,852 82 0.33% $ 90,146 $ 1,099
J – 49+ 0
Unmakred 28,950 94 0.32% $ 113,528 $ 1,208
TOTAL (R's) 172,295 1,468 0.85% $ 1,632,790 $ 1,112
Frequency
1 Time 63,744 400 0.63% $ 500,552 $ 1,251
2 Times 26,191 224 0.86% $ 238,746 $ 1,066
3 Times 53,168 749 1.41% $ 779,685 $ 1,041
Unmarked 29,092 95 0.32% $ 113,807 $ 1,208
TOTAL (F's) 172,295 1,468 0.85% $ 1,632,790 $ 1,112
Monetary
A - $10,000 plus 5,432 139 2.56% $ 169,229 $ 1,217
B - $5,000 – 9,999 14,421 229 1.59% $ 317,783 $ 1,388
C - $1,000 – 4,999 52,762 562 1.07% $ 605,726 $ 1,078
D - $500 - 999. 17,036 132 0.77% $ 113,268 $ 858
E - $1 - 499 42,847 271 0.63% $ 269,746 $ 995
Z - $0 10,847 41 0.38% $ 43,510 $ 1,061
Unmarked 28,950 94 0.32% $ 113,528 $ 1,208
TOTAL (M's) 172,295 1,468 0.85% $ 1,632,790 $ 1,112
RFM score
Can be a 3-character quintile = 543

– Sort file on R descending – breaking into 20% increments
– Sort file on F descending – breaking into 20% increments
– Sort file on M descending – breaking into 20% increments
– Assign top 20% score of 5, next 20% score of 4, and so on
The segments, therefore do not reflect any specific timeframe,

frequency or amounts. Higher values (i.e. 555) are better than
lower values (313). There are 125 total segments created.
RFM Variations
RFMP (Products)
 Best predictor is by product
 Address challenge of Seasonality
Why RFM?
Use it to:
– Identify groups of customers ~
segments behave differently
– Target offers by various segments
– An offer to first time “triers” (don’t over do it)
– Promote repeat purchases/donors
– Eliminate non-responsive
Why RFM?
Use it:
– Modeling isn’t practical or too expensive
– Small databases
– Gain a high level of understanding
RFM versus Predictive Models
Advantage RFM Model

Understandable Easy Black Box
Creation Relatively simple Statistician with PhD
Timing Week Up to 6 weeks

Update As needed Annual
Cost Inexpensive Budget approval
Seasonality Somewhat effective Separate models
Depth All buyers Recent buyers
Breadth 3 variables 100s of variables
Predictive No Yes
RFM
 Stage 1 Customers are one-time

buyers with positive Expectancy.
 Stage 2 Customers are multi-
buyers with positive Expectancy.
 Stage 3 Customers are multi-
buyers with negative Expectancy.
 Stage 4 Customers are buyers
with negative Expectancy
Expectancy = Recency or Monetary

RFM
 Stage 1 Customers – “Triers”
 Stage 1 Customers are an

appreciating asset. They are new
customers that need to be resold.
They will respond well to early
marketing that features best selling
products with instructions on how to
use them. They trust the use of
testimonials from satisfied
customers. The goal is to move
them to Stage Two.
RFM
 Stage 2 Customers – “Buyers”
 Stage 2 Customers are your most

valuable asset. They are loyal
customers that need to be retained.
They will respond well to frequent
marketing that features your newest
products and bundles. They like to
be rewarded for their loyalty, and
asked for suggestions and
testimonials. The goal is to keep
them in Stage Two
RFM
 Stage 3 Customers
"High Value, but Falling Potential"
 Stage 3 Customers are a
depreciating asset. They are
customers that need to be
reactivated. They aren't responding
to your marketing. Have they moved
or died? Are they shopping
elsewhere? Have they experienced
problems with your company? The
goal is to find out what's wrong, and
fix it if possible.
RFM
 Stage 4 Customers
"Low Value, and Falling Potential"
 Stage 4 Customers are a liability,
not an asset. They are lost
customers that need to be replaced.
They have not responded to your
marketing in a long time. The goal is
to direct resources away from them
toward the retention and acquisition
of more valuable customers. Cut
them loose.
RFM Best practices
 Build RFM cells with significant quantities

 Seasonality impacts R
– Holidays
– Campaigns
– Special offers
 Profile top RFM segments
RFM Summary
 Utilize simple RFM to segment and

understand customers
 Develop a Direct Mail marketing plan based
on RFM segmentation
– Target
– Establish a contact frequency plan
– Don’t be afraid to “let go”
 Track results
Questions, Answers & some GREEN!!!
Gary A Seitz
Executive Vice President
C.TRAC
(440) 572-1000 x140
GSeitz@ctrac.com

RFM: A powerful tool for customer segmentation and targeted marketing

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Gary A.

Past behavior is best predictor of future

 Most powerful predictor of who is likely to buy

 Second most powerful predictor of response

Recency Freq Customers Response Revenue Resp Rate Avg Sales

4-6 months 3x+ 10,873 452 $11,054 4.2% $24.46

 Least powerful predictor

Direct Mail offers:

A = 0-3 months E = 13-24 months

A = $10,000+ E = $500 - $999

2 A2A 22 B2A 5 C2A 4 D2A 9 E2A 7 F2A 10 2 gifts $500+ 57 0.1%

1,917 2,931 2,198 1,329 1,140 1,469 4 4 gifts 2,011 2.8%

733 621 296 170 96 95

2,442 1,405 593 314 190 89 TOTAL 71,585 100.0%

2 gifts $250 - $499

1,917 2,931 2,198 1,329 1,140 1,469 4 4 gifts 2,011 2.8%

Rows are 2-time buyers

733 621 296 170 96 95

f A5E - B5E 6 C5E 8 D5E 4 E5E 1 F5E - 5+ gifts $ 25 - $49 19 0.0%

2,442 1,405 593 314 190 89 TOTAL 71,585 100.0%

9,637 Row summary of 1-time

2 gifts $250 - $499

1,917 2,931 2,198 1,329 1,140 1,469 4 4 gifts 2,011 2.8%

Row summary of 2-time

4 gifts $100 - $249

733 621 296 170 96 95

2,442 1,405 593 314 190 89 TOTAL 71,585 100.0%

2 A2A 22 B2A 5 C2A 4 D2A 9 E2A 7 F2A 10 2 gifts $500+ 57 0.1%

1,917 2,931 2,198 1,329 1,140 1,469 4 4 gifts 2,011 2.8%

733 621 296 Summary of Monetary

2,442 1,405 593 314 190 89 TOTAL 71,585 100.0%

Recency Customers Response Revenue Resp Rate Avg Sales

Recency Freq Customers Response Revenue Resp Rate Avg Sales

4-6 months 3x+ 10,873 452 $11,054 4.2% $24.46

MAILED RESP PCT SALES AVG SL

Total Records 172,295 1,468 0.85% $1,632,790 $ 1,112

Mailing C - 7-9 months

Results E - 13-18 months

Can be a 3-character quintile = 543

The segments, therefore do not reflect any specific timeframe,

Advantage RFM Model

Timing Week Up to 6 weeks

 Stage 1 Customers are one-time

Expectancy = Recency or Monetary

 Stage 1 Customers – “Triers”

 Stage 1 Customers are an

 Stage 2 Customers – “Buyers”

 Stage 2 Customers are your most

 Build RFM cells with significant quantities

 Utilize simple RFM to segment and

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