RFM majorly analyses the customer-centric pulse with which various business parameters can be improved from time to time. The sales of a business directly relates to the way customers respond to the campaigns.

Marketers as they go through a long-lasting experience with the customer base, they better understand the value of each customer. Whether it is a new or a reputed customer, all the factors such as age-group, geography, behavior in analytics play a major part for business digitally. Let’s get into basics of RFM and a detailed note of how it impacts the areas of business with respect to customer segmentation.

What is RFM Analysis?

The abbreviation RFM can be said as Recency (R), Frequency(F), and Monetary value(M) with which customer segmentation can be distinguished. Further, RFM can be explained as:

RECENCY (R): Time since last purchase
FREQUENCY (F): Total number of purchases
MONETARY VALUE (M): Total amount spent

The analysis clearly portrays a picture of key customers to moderate visitors to the recent patrons in your business. A product-based business with RFM implicates Frequency and Monetary value to be major elements while Recency associates with retention.

RFM analysis is so easy, popular and effective strategy in knowing the customer segmentation of a business. It also indirectly correlates to the CTRs (Click-Through Rates) to retention, loyalty, and building customer relationships.

RFM Analysis for Customer Segmentation

Diving deep into the statistics of RFM analysis and dividing the key factors of segmentation, let’s rate the customers with Grade 1 as Low and Grade 5 as High respectively. Below are the details with examples:

Recency(5), Frequency(5), and Monetary value(5)

For instance, a customer has very recently visited your business website to purchase product, has done purchases many times in the past, and spent lump some money. So in this case, it’s agreeable that the customer has got loyalty with your business and likes spending enough amounts for the quality of products. Hence he/she can be named as the best customer.

Recency(3), Frequency(3), and Monetary value(3)

This is a case where people might or might not opt your product and tend to purchase from your competitor. The like case would be retention of such customer showing interest in your business, provided an Offer or Discount Price is on the cards. Also, customers with average expenditures might not show great figures in Recency(R) and Frequency(F) compared to the Key or Best Customers on your website.

Quoting few scenario’s with RFM analysis:

Segment	RFM	Description	Strategy
Best Customer	555	Most recent and most often purchases, and spend the most	No price incentives, new products, and loyalty programs
Loyal Customer	X5X	Buy most frequently	Use R and M to further segment
Big Spenders	XX5	Spend the most	Market your most expensive products
Almost Lost	355	Haven’t purchased for some time, but purchased frequently and spend the most	Aggressive price incentives
Lost Customers	511	Haven’t purchased for some time, but purchased frequently and spend the most	Aggressive price incentives
Lost Cheap Customers	442	Last purchased long ago, purchased few, and spent little	Don’t spend too much trying to re-acquire

Recency(1), Frequency(1), and Monetary value(1)

A new customer has shown interest and is of an opinion to try spending less money for any of the products displayed on your portal. With a first purchase, he/she does neither believe nor hesitate to grab something interesting at a low cost. But as the time progresses and repetition of visits increase from that particular customer, definitely turns to be a prospective customer.

Other possibilities in RFM analysis

It’s not always a generic criteria of customers that your business involves as explained above, but variations do happen. For example: Consumer electronics such as High-range mobiles, Refrigerators, Ovens, etc can just be purchased once in a decade or 2. In such case, R-1, F-1, and M-5 are a possibility. But the interpretation cannot be a Best or Least valued customer. Either an average value cannot be assigned, just because you don’t know if the same customer has visited recently and been many times on your website for other products that range in the low-mid range price segment.

Considering RFM in many other variations such as 551, 515, 315, and so-on just judging a customer with these figures cannot always be intact. But implementation in improvements with respect to less figured areas yields great responses and customer-centric progress.

Customer Behavior

Apart from the analysis segmentation, Customer Behavior plays vital role. Although a best customer has a great opinion towards your business, the loyalty of the owner has to be maintained. It’s a great struggle to change the moderate customer into a best customer for your business as it involves price, loyalty, offers or discounts to keep him/her revisiting. But at the same time, a new customer can be your loyal customer soon once the good reviews pour on your brand or product.     

Conclusion

RFM as a business analytics technique keeps an up-to-date customer engagement and behavior. This also guides the business owners and partners to advance improvements with the customer segmentation levels.