How to use recency, frequency, and monetary value to rank customers and drive better results.
By now, many online retailers should be familiar with the abbreviation "RFM," which stands for recency, frequency, and monetary value. For a refresher, here's my explanation from 2002.
Over the past several columns, I've examined conversion rate basics. This week, we continue our study of the basics with an updated look at RFM.
Recency represents the number of days since the customer last completed the action you're profiling. Frequency represents the number of times the customer has completed this action since the first time she completed it. Monetary value represents the total value (usually total sales) the customer created by completing these actions.
The classic RFM model produces scores that rank customers relative to each other for the likelihood that they will repeat the action being profiled. Any action can be profiled: visits, purchases, logins, and so on. High likelihood to repeat an action, providing this action has economic value to the company, means high future value. Low likelihood to repeat means low future value. RFM is that simple.
RFM is a commonsense way of sorting marketing and optimization decisions based on what your visitors actually do and what they spend.
What Can RFM Do for You?
Let me defer that answer to a friend, optimization junkie, and fan of RFM. According to Frank Malsbenden, VP/GM of Vision Retailing, parent company of Shoeline.com:
Getting Started With RFM
Once you grasp RFM fundamentals, you'll be inspired. Once you sort by these criteria, you'll quickly find new and exciting ways to use them, such as:
My one tip when using RFM: don't waste too many resources turning low RFMs into higher ones. It's much more efficient to keep higher RFMs engaged.
If you need a quick immersion in RFM, again I highly suggest "Drilling Down: Turning Customer Data into Profits with a Spreadsheet" by good friend Jim Novo.
Have you learned anything interesting from employing RFM techniques? Let's us know in the comments section what you've found.
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Bryan Eisenberg is co-founder and chief marketing officer (CMO) of IdealSpot. He is co-author of the Wall Street Journal, Amazon, BusinessWeek, and New York Times best-selling books Call to Action, Waiting For Your Cat to Bark?, and Always Be Testing, and Buyer Legends. Bryan is a keynote speaker and has keynoted conferences globally such as Gultaggen, Shop.org, Direct Marketing Association, MarketingSherpa, Econsultancy, Webcom, the Canadian Marketing Association, and others for the past 10 years. Bryan was named a winner of the Marketing Edge's Rising Stars Awards, recognized by eConsultancy members as one of the top 10 User Experience Gurus, selected as one of the inaugural iMedia Top 25 Marketers, and has been recognized as most influential in PPC, Social Selling, OmniChannel Retail. Bryan serves as an advisory board member of several venture capital backed companies such as Sightly, UserTesting, Monetate, ChatID, Nomi, and BazaarVoice. He works with his co-author and brother Jeffrey Eisenberg. You can find them at BryanEisenberg.com.
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