Using Recency-Frequency-Monetary (RFM) framework to segment and market to Customers
In the last blog, we discussed the methodology for calculating RFM score for customers. In this blog, we will discuss how to make the RFM framework actionable by segmenting and creating marketing plans.
The following discussion is inspired by methodologies put forth by Putler, a marketing analytics company. You can see their full discussion of the topic at the following link:
The first step for segmenting is to make the RFM framework simpler by combining Frequency and Monetary scores to a single score. For this, add the Frequency and Monetary scores for each customer and then rank them, quintile them, and give score from 5 to 1 as discussed previously.
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An example of the resulting data table is shown below:
|Customer||Recency||Frequency & Monetary|
Then the two scores can be represented in a 2-dimensional plane. Following is the segmentation plan:
Each segment has its unique characteristics, and therefore requires different marketing strategies. Below is a table that identifies each segment and provides topline marketing strategies:
|RFM Segment||Recency Score||Frequency/ Monetary Score||Marketing Strategies|
|A. Champions||5||5||White glove treatment. Loyalty rewards|
|B. Loyal||3-5||4-5||Loyalty rewards. Upsell|
|C. Potential loyal||4-5||2-3||Incentivize w/ upgrade in loyalty rewards|
|D. New||4-5||1||Onboarding support|
|E. About to lose||3||1-3||Coupon incentives|
|F. High roller at risk||1-2||5||Higher cost incentives to come back|
|G. At risk||1-2||3-4||Email drip campaign, occasional coupons|
|H. Lost||1-2||1-2||Purge if no activity on emails (open/click)|
You can modify the above segmentation plan and marketing strategies as appropriate for your business. That said, this methodology shows the way to make RFM efforts actionable for marketing purposes.