Shortly, RFM analysis is an easy but effective marketing technique used by top marketers and entrepreneurs to identify which customers are the best for the business.
It requires a deep analysis of your own customers in order to see how recently they purchased (R), how often (F) and how much money they spent (M).
RFM segmentation is based on the principle that “80% of your revenue comes from 20% of your customers”.
Even if RFM analysis is something new for a lot of people, marketers or entrepreneurs, it is not something new.
It was been used for more than 30 years by direct mailing marketers from NGOs to identify exactly the customers who are more likely to make a donation.
The idea behind this was simple: a person who made a donation before is more likely to donate again than a person who never did this and probably is not interested.
So they started to take a look at their own customers and based on that they crafted targeted email marketing campaigns exactly to the right people.
Even if RFM segmentation is focused on identifying your top customers, it’s not only about them. Because you will get more than just your top customers.
To give you an example, maybe you have a group of customers who like your products but they just don’t buy from you so often.
Should you drop them? No way!
You should think about how to make them engage more with your brand and make sure that they will become top customers also.
So basically, RFM analysis lets you target specific clusters of customers with the right message based on their purchase behavior.
The result? Higher response rate, increased loyalty and increased lifetime value.
RFM have also a few variations based on the type of business you own:
RFD – Recency, Frequency, Duration: it is used to analyze the behavior based on viewership or readership (ex: news websites);
RFE – Recency, Frequency, Engagement: it is similar to RFD but Duration is replaced by Engagement and engagement can be defined according to your business needs (ex: pages per visit + time spent);
There are few other similar variations but RFD and RFE are the most popular used after RFM segmentation.
Still, RFM remains one of the best ways to increase revenue and customer retention rate for ecommerce businesses.
Do you still question yourself “What is RFM analysis?”
Let us know what is your opinion on this segmentation technique.