RFM Segmentation is Still a Workhorse

In a world buzzing with AI and complex algorithms, a decades-old method still packs a punch. RFM segmentation remains one of the most effective, and overlooked, ways to understand your customers and drive ROI.

While over 40-years old as a marketing analysis technique, RFM is just as important (and popular) for organizations with customer data.  The digital age has only accentuated the beauty of RFM as a key tool in a marketer’s kit.

RFM stands for Recency, Frequency, and Monetary value, which are three key metrics used to evaluate customer engagement and profitability.  A breakdown of each component, is as follows:

1. Recency (R): This metric measures the time that has passed since a customer's last purchase. It helps identify the level of customer activity and engagement. Generally, customers who have made recent purchases are considered more valuable and likely to make future purchases.

2. Frequency (F): Frequency refers to the number of purchases made by a customer within a specific period. It helps determine the loyalty and engagement level of customers. Customers who make frequent purchases are often more loyal and have a higher lifetime value.

3. Monetary Value (M): Monetary value represents the total amount of money spent by a customer over a given period. It assesses the customer's spending patterns and identifies high-value customers who contribute significantly to revenue.

Some keys in selecting and maintaining the right RFM thresholds are understanding strategic objectives, purchase cycles, adjustments for inflation and accounting for a mix of different channels (e.g., eCommerce, bricks and mortar).  Once the RFM thresholds are established, customers can be segmented into different groups, such as:

• High-Value Customers: These are customers who have made recent purchases, frequently engage with the business, and spend a significant amount of money. They are often the most valuable customers and should be prioritized for personalized marketing strategies and retention efforts.

• Potential Loyal Customers: This segment consists of customers who have made recent purchases but haven't reached the same frequency or monetary value as high-value customers. They show potential for becoming more loyal and may require targeted marketing campaigns to encourage repeat purchases.

• Low-Value Customers: This segment includes customers who have made a few purchases, spend less, and show infrequent engagement. While they may not contribute significantly to revenue, they should not be neglected, as there may still be opportunities to increase their value.

• Dormant Customers: These customers have made purchases in the past but have not engaged or made any recent purchases. They require reactivation strategies to bring them back and regain their interest.

We also recommend validating the segments created, through some primary research.  Key to making RFM a core language of the business is to track, update and report on RFM segments on a regular basis (ideally weekly, but on a rolling basis covering enough purchase cycles).  Track RFM segments over time and make them part of your organization's shared language, even tying leadership KPIs or bonuses to loyalty goals.

RFM segmentation is truly a workhorse.  It provides insights into customer behavior and helps businesses tailor marketing strategies and campaigns based on the unique characteristics of each segment. By understanding their customers better, businesses can optimize their marketing efforts, improve customer retention, and drive revenue growth.

RFM is one of many consumer segmentation techniques TAP Analytics has helped our clients with in designing and applying to grow their business.  We believe our deep experience in leveraging RFM across multiple industries can be a benefit to you.  If you’d like to learn how we may be able to help your organization, get in touch with us as hello@thetapconsultancy.com.