A number of years ago my wife Heidi ordered a down comforter from a catalog. She loved the style and quality of the comforter when it arrived. Of course, as a marketer I was very interested to see what would happen next.
Sure enough, they started sending us a regular stream of catalogs and offers. At first they came very frequently, but we didn’t buy again, and gradually the mailings tapered off until they came very rarely.
Then, about two years ago, we received one of their now infrequent catalogs, and Heidi decided to order some down pillows. And guess what?
That’s right! We started receiving catalogs again on a regular basis.
Of course, I knew exactly what was going on. Their marketing department is using something similar to the RFM system. The RFM system is used by businesses to target their most likely buyers.
The RFM Score
R = Recency – a measure of how recently customers bought from you. The more recently customers have purchased from you, the more likely they are to buy again.
F = Frequency – a measure of how many times customers purchased from you. The more frequently they buy, the more likely they are to buy again.
M = Monetary/Money – a measure of how much money customers have spent with you. Customers who spend the most money with you are more likely to buy again.
The way I like to determine RFM scores is to rank each customer with an R score, an F score, and an M score. Then I combine them into one comprehensive score for each customer. The higher the RFM score, the more valuable the customer is likely to be to your business.
How to Do It
Here’s one example of how I assigned scores for one of my clients:
• All customers who purchased in the last month received a score of 5.
• All customers who purchased in the last 2 to 3 months received a score of 4.
• All customers who purchased in the last 4 to 6 months received a score of 3.
• All customers who purchased in the last 7 to 16 months received a score of 2.
• All customers who purchased in the last 17 to 24 months received a score of 1.
• All customers who did not purchase for the past 25 months received a score of 0.
• All customers who purchased 5 or more products received a score of 5.
• All customers who purchased 4 products received a score of 4.
• All customers who purchased 2 or 3 products received a score of 3.
• All customers who purchased 1 product received a score of 1.
• Trial subscriptions/free offers received a score of 0.
• Customers who spent more than $1,250 received a score of 5.
• Customers who spent between $900 and $1,249 received a score of 4.
• Customers who spent between $500 and $899 received a score of 3.
• Customers who spent between $200 and $499 received a score of 2.
• Customers who spent between $51 and $199 received a score of 1.
• Customers who spent less than $50 received a score of 0.
Once all the individual R, F, and M scores were assigned to each customer, I added together the three scores to get each customer’s RFM score. Then I broke the customer file into ranks based on the overall scores.
Rank 1 = 15 Score (Best Customers)
Rank 2 = 14 Score
Rank 3 = 13 Score
Rank 4 = 12 Score
Rank 5 = 11 Score
Rank 6 = 10 Score
Rank 7 = 8 to 9 Score
Rank 8 = 6 to 7 Score
Rank 9 = 4 to 5 Score
Rank 10 = 0 to 3 Score (Customers Least Likely to Respond)
Using this approach, the higher the rank (8, 9, 10) the lower the score and the weaker the customer.
Again, this is just one example of how you can segment your list. You can decide how to use this approach to get the most valuable information about your customers.
Once you have your list segmented, you can use your findings to cross-sell and upsell your best prospects. Use this information to identify where to spend your advertising dollar most effectively.
Thanks to the RFM Score, you can know who your customers are and what they want.
But Don’t Be Too Quick to Say Goodbye
Never give up on a customer completely. You always want to keep them in your customer file. When you plan a Direct Mail campaign to your house file, you have to decide how far you want to “drill down” into your existing customer base.
Also, you may have special campaigns for customers you haven’t heard from for a while. These are the “we want you back” letters or the “reactivation” letters we all receive, along with special discounts for buying again. This can be a great way to revive interest in customers you haven’t heard from in years.