RFM Analysis And Why It Matters In Business

The RFM analysis is a marketing framework that seeks to understand and analyze customer behavior based on three factors: recency, frequency, and monetary. The RFM analysis allows businesses to segment their customer base into homogenous groups, understand the traits of each, and then engage each group with targeted marketing campaigns.

Understanding the RFM analysis

The RFM analysis differs from other methods such as demographic segmentation, where a customer base is targeted according to age, employment, gender, or other demographic data. 

In the RFM analysis, the ultimate goal is to predict which consumers are most likely to make a repeat purchase. 

To this end, individual consumers are segmented based on buyer behavior that includes:

  • Recency – the time elapsed since a customer bought or last engaged with a product.
  • Frequency – expressed as the total number of transactions and engaged visits or the average time between transactions and engaged visits.
  • Monetary – describing the intention of a customer to spend or their purchasing power. In other words, the total or average value of their transactions.

Implementing an RFM analysis for customer segmentation

When individual customers are scored according to RFM metrics, marketers gain valuable insight into buyer behavior. The analysis will clearly identify the customer who spends the most money on a business, but it also provides information on:

  • Customers who contribute most to churn rate, or the rate at which a customer stops doing business with an organization.
  • Customers who have the potential to become valuable, repeat buyers.
  • Customers who are most likely to respond to push notification marketing.

Ultimately, the RFM analysis tells a business where each consumer is in their buying journey. The journey will be specific to each individual and indeed each business, and it guides whether future offers should be made and when.

For example, a consumer who buys a pair of shoes with a high recency score and low frequency and monetary scores is likely a new customer. As a result, the shoe company might send them follow up emails with shoe care tips and maybe the cross-promotion of laces or inserts. 

Conversely, a consumer who buys another pair of shoes with low recency, high frequency, and high monetary score is a high-spending though disengaged consumer. The shoe company might look at his purchase history to offer them a new pair of shoes at a price point they find attractive.

Industry-specific RFM analyses

Depending on the industry, a business should increase or decrease the relative importance of RFM values.

For example, a car dealership should place little importance on frequency – since new cars are not products that are bought monthly. Recency is a better metric, as the company can target previous buyers who are more likely to upgrade models.

In the consumer staples industry, frequency and recency are more important than monetary – because most discretionary items are low value and need to be replenished periodically.

Lastly, a not-for-profit charity organization should value the monetary and frequency component above all. This is because charities are reliant on periodic donations to survive.

Key takeaways:

  • The RFM analysis argues that recency, frequency, and monetary traits are the best predictors of consumer buying behavior.
  • The RFM analysis can provide valuable insight into where consumers are in their journeys, which in turn dictates the most effective marketing strategies.
  • Depending on the industry and the nature of purchasing decisions, certain metrics in the RFM analysis should be given more weight than others. 

Connected Business Frameworks

Porter’s Five Forces

Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces

Ansoff Matrix

You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived by whether the market is new or existing, and the product is new or existing.

Blitzscaling Canvas

The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

Business Analysis Framework

Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Gap Analysis

A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.

Business Model Canvas

The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.

Lean Startup Canvas

The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.

Digital Marketing Circle

digital channel is a marketing channel, part of a distribution strategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.

Blue Ocean Strategy

A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Other strategy frameworks:

Additional resources:

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