Which 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?
The 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 organization. Essentially, RFM is a predictor that anyone can enable to determine who are the most likely customers to buy and buy bigger. FM stands for
The 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.
Customers 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.
The 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.
Determining who will spend more
Rank 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.
The 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.
A 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.
The 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 heavily.
RFM as a Customer Valuation Tool
The 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 customers.
RFM as a marketing toolConsider 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 resources around.