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 coauthor of the Wall Street Journal, Amazon, BusinessWeek, and New York Times bestselling books "Call to Action," "Waiting For Your Cat to Bark?," and "Always Be Testing." Bryan is a professional marketing speaker and has keynoted conferences globally such as SES, Shop.org, Direct Marketing Association, MarketingSherpa, Econsultancy, Webcom, SEM Konferansen Norway, the Canadian Marketing Association, and others. In 2010, Bryan was named a winner of the Direct Marketing Educational Foundation's Rising Stars Awards, which recognizes the most talented professionals 40 years of age or younger in the field of direct/interactive marketing. He is also cofounder and chairman emeritus of the Web Analytics Association. Bryan serves as an advisory board member of SES Conference & Expo, the eMetrics Marketing Optimization Summit, and several venture capital backed companies. He works with his coauthor and brother Jeffrey Eisenberg. You can find them at BryanEisenberg.com.
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