RFM analysis

What it means

RFM analysis segments customers by how recently they bought, how often they buy and how much they spend: recency, frequency and monetary value. Each customer gets a score on the three dimensions and is placed in a segment according to the combination.

It identifies the most valuable customers, who buy often, recently and a lot, as well as those at risk of leaving because they used to buy regularly but have not for a long time. It thus helps prevent churn and target marketing where it will achieve the most.

RFM is a simple form of segmentation based on actual behaviour rather than demographics. Order data from an online shop, till or CRM are all it needs, so even a small company can do it without sophisticated tools.

How it works in practice

The method is simple: for each customer, find the date of the last purchase, the number of purchases and total spend over the chosen period. The values are split, for example, into five groups, and each customer gets a score from 1 to 5 on each dimension.

The segments are then used in email marketing and the loyalty programme: exclusive offers and attention for the best customers, encouragement of a second purchase for new ones, and a reminder or win-back offer for those at risk.

In services, such as an accounting firm, the principle can be adapted: instead of purchases, track length of relationship, number of additional services and annual billing. The result shows which clients deserve the most attention and which are about to leave.

What to watch out for

RFM looks backwards and ignores margin. A customer who spends a lot but at low margin or with high service costs is not necessarily the most valuable. Decisions benefit from adding profitability to RFM.

Segment-based targeting must respect data protection rules. Profiling customers for marketing requires a lawful basis and transparency, and customers must be able to object to direct marketing.