The most powerful acronym in all of marketing – RFM – will bring in more lifetime value to your business than any other strategy move with the exception of viral campaigns or capital intensive efforts. RFM stands for Recency, Frequency, Monetization and are the building blocks for a data matrix that will organize your data for future growth.
Recency
Recency refers to how much time has passed since “zero hour” of conversion. This can be a purchase, an email signup, or any other action of intent. The closer the person is to that zero hour, the more likely they are to become a repeat converter. Granted, there is a bit of behavioral economics in this model that should be accounted for, because there is such a thing as tact – besides a trigger email (opt in confirmation, transactional email), you will probably want to wait at least a day to start hitting them with marketing materials. GoDaddy.com does a good job at this – you may notice that you get promotions right after you sign up for a domain. Recency is the most powerful of all these metrics, which can be a little counter intuitive, and should be the leading driver in priority. Recency will show probability of converting the customer again.
Frequency
Frequency is how many times the customer has performed a given action in a given time period. Traditionally this is done on a year window for purchases, but that is variable. Frequency is a lesser metric because it takes into account many more factors than recency does – customer service, shipping, cost comparisons, brand impression, etc. If frequency is above a given threshold that your company determines to be a magic number (loyalty), then frequency can give you a segment of die hard customers, moreso than the other factors can. But, RFM is built on marketing campaigns for your entire buyer list, and when applied to everyone, Frequency is harder to forecast unless it is very high. The tricky thing about frequency is how it interacts with Monetization – promotions are used to drive Frequency but may hurt Monitization. An interesting take on the dynamics of this matrix, but research shows that promotions increase these metrics but crush lifetime value. Frequency will show loyalty of the customer.
Monetization
The third piece of the pie is monetization, how much money the customer spends on an average order (Average Order Value). The amount people spend is a reflection of what kind of budget they are working with and what kind of products they buy, and an indirect indication of what they like your company for. Monetization on it’s own is not a very strong metric to forecast future behavior or marketing efforts because it could just indicate emotional spending or gifts or any other factor. What it can tell you, though, is the quality of customer relative to the other factors – if someone consistently spends 50% higher than your company AOV, you can make insights on their lifetime value that are accurate. Monetization will show the quality and depth of the customer.
Putting these three in a matrix gives you 9 segments of data and thus a marketing strategy that can be geared 9 (or more or less) different ways in terms of creative and content. If you want to target high spenders, give them marketing materials about your absolute best products and services, because they are the most likely to spend the most. Then you can slice that down by purchase history, etc. You would be amazed at how much of your business comes from the top 1/9 of that matrix, almost all businesses drive up to 80% of their business off of 20% of their customers. Using RFM is a great place to start to organize your data and an even better way to strategize your marketing efforts.
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