RFM (Recency, Frequency
Model, and Monetary) Value
customers are most likely to buy from you next and how much?
If you knew the answer to that question, you’d make sure
that you took care of these top customers and you’d make sure
they understood everything you had to offer you wouldn’t you?
fact is that the RFM model can do just that and it’s a lot
easier than the name sounds.
RFM stands for Response, Retention, and Monetary and all
are meant to determine how valuable a customer is to your
RFM is a predictor that anyone can enable to determine who are the
most likely customers to buy and buy bigger.
FM stands for
more recent a customer has bought from you, the more likely they
are to buy from you again. This
of course makes sense because their experience is fresh, they are
less likely to have contacted one of your competitors, and their
need is still near, which means that they have a very good
probability that the need exists. In home care, if someone needed help last week, they are more
likely to need it next week than if the prior use of your services
was 3 months ago.
who buy often are most likely to buy again.
They came back the second time so they were probably
satisfied vs. someone who only used your services once.
standard rule of thumb is that the more money someone has spent,
the more they will spend next time.
They’ve already broken more ice with you, and they have
shown a willingness to spend that money.
who will spend more
each of your clients by who has spent recently. Rank them again by how often they have used your services in
the past 3 months. And
rank them again according to how much money they’ve spent with
you in that amount of time. Now
add the scores. You
may find that you should weight the different factors, but keep
them equal for now.
RFM model says that those customers who have the lowest score
(closest to 3) are going to potentially be your next biggest
clients. You may find
some exceptions in this, but generally, these are because of
factors that cannot be calculated.
customer who recovered may not need services again, even if
they’ve needed round the clock care.
They aren’t unhappy, they are just done requiring your
services. For the sake of argument however, do NOT completely ignore
these clients, simply because they are done right now. They are happy with you and they may very well need you in
the near future.
RFM Model says that the people who are closest to the top of your
list are the ones who you should spend extra money marketing to. If they are at the bottom of the list, one shouldn’t
necessarily forget about them, just don’t focus on them as
as a Customer Valuation Tool
RFM model also tells you how you can determine the financial value
of a client. If you
aren’t familiar with Lifetime Value of a Client, read the
article. You should
know what your average lifetime value of your clients are in
determining where and how much money you spend on advertising.
It goes directly to ROI (Return On Investment).
RFM can be
used to compare the potential value of two customers (or customer
segments). Customers that are better on their RFM score, are the
ones with higher potential value to the business. Segmentation of
customers on the basis of RFM score can lead to targeted
promotions and offers depending on the potential value of the
RFM as a marketing tool
that if you were to score all your clients and note that a much
larger percent of the most profitable ones were from a given
geographic area, wouldn’t it make sense to do some intensive
promotion in that area? If
70% of your “best” clients come from 30% of your target area,
it would only make sense that if you concentrated your efforts
here, you would be money ahead than if your spread your marketing