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March 28, 2016

Use RFM Segmentation to Create Winning Offers and Content

customer_segmentation_lrg.pngHow do you market to your customers if you aren’t aware of their needs? Better yet, how do you get through to your customer if you don’t know how to reach them?

To sell to your customer is to know your customer. Without understanding how to properly engage your customer, your marketing tactics are bound to fall flat.

Small or niche businesses have the advantage of knowing who their customers are. Think about your local mom and pop stores and the ‘regulars’ they know so well they’re on a first-name basis.

In reality, most businesses don’t have the privilege of knowing their customers on a personal level, even after the customer has left behind a transactional paper trail. What some businesses do have, however, is a handle on their customer’s needs and what it is that incites them to act.

This information is gained through the practice of customer segmentation

To segment your customers is to take subsets from your target audience and group them together based on common interests, needs, and preferences.

Customer segmentation  enables you to treat different groups of people, well, differently. Just as no two customers are alike, customer segmentation recognizes that no market is entirely homogeneous. Every industry is made up of a blend of unique needs and demands, something that customer segmentation addresses head on.

Getting to know these subsets--or segments--will help you gain a better understanding of who your customers are, giving you the ability to communicate in a more personalized, relevant way.

But that’s only half of it. Before you can start to understand and peg some of your customers as the “best” ones, you must first identify them.

Enter: RFM, a marketing analysis technique that stands for “Recency, Frequency, Monetary.”

The FYI on RFM
RFM uses data to segment a group of customers according to their buying histories. These segments are then ranked in descending order from the most valuable to least valuable, making it easier to nail down who the “best” customers are.  

The RFM approach is structured around a few simple yet intuitive ideas: 

  • Recency: Customers who have bought from you within the last 30 days are more likely to buy from you again
  • Frequency: Repeat customers are more likely to buy from you again
  • Monetary: Customers who spend more are likely to buy from you again

The attributes represented by RFM are ordered by importance when ranking customers, as recency is the most important metric of these three variables.

The time lapsed between customer visits is a very telling factor: the longer is takes for a customer to come back, the higher the likelihood they won’t be coming back - ever.

Next, frequency measures how often a client does business with you. Though less powerful than recency, frequency is still important, especially when you consider hit-and-run buyers. The best kind of customers are the ones who buy from you, and buy from you often. Your business becomes regimented into their routine.

Think about it: Customers who have only bought from you once are not your target market and thus, will not impact your long-term goals.

When a customer’s monetary value is combined with recency and frequency, it sharpens the picture in terms of who your best customers are. The amount of money a customer spends is the final measure of his or her value, drawing the distinction between heavy spenders and those who spent next to nothing.

Adding It Up

When you calculate the RFM of your customers, you first need to identify the values of the three measures: The customer’s most recent transaction; the number of transactions over a year; and the total or average dollars spent. From there, you must determine how many categories you will assign for the RFM variables--most opt for three or five. The idea is that the higher the computed RFM score, the more profitable the customer is likely to be to your business.

For example, you can assign your customers to a frequency score of 3 if they have made 10-15 transactions over the past year; a score of 2 if they have made 3-9 transactions; and a score of 1 if they have made 1-2 transactions. It’s important to be mindful that you rank your customers in descending order, sorting them from recency to frequency and finally, monetary.

Drilling it Down

Once you’ve done your calculations and have visibility into who these “best” customers are, you can start to pick away at their behaviors, thread their similarities together, and see what sets them apart from other customers.

When you ask questions like “What do their lifestyles have in common?” and “Do they live within a certain radius?” you will begin to better understand your target market, helping you create effective, relevant communications and compelling offers. Segmenting your list will also give you a leg up on who your best prospects are for cross-selling and upselling opportunities.

Customers that are true to your business are most likely to respond to your direct mail campaigns versus one-time buyers. RFM is a valuable technique for identifying who these true customers are, empowering you to focus your mailings on only the most responsive segments of your target market and ultimately reaping the greatest ROI.

Want to learn more about your best customers and how to find prospects that look like them?  Request a Stream Profile of your database.

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