What Is RFM (Recency, Frequency, Monetary) Analysis?
RFM analysis, or RFM segmentation, is one of the most powerful ways to segment customers and increase direct mail performance. You can use it to evaluate your house file based on three criteria—Recency, Frequency and Monetary value—and create customized outreach plans. These messages provide a more personalized experience for each of your prospects, which makes them more inclined to respond, and helps boost your campaign ROI (Return on Investment).
Below you’ll learn what businesses can benefit from RFM analysis, how it works, and a few ideas about how to use it to for your next direct mail campaign.
What Businesses Can Benefit From RFM Analysis?
A first requirement for RFM analysis is that you must have a database—or house list—of customers with a history of supporting your organization. This method of segmentation is used across many industries, including direct-to-consumer, ecommerce stores, and nonprofits to name a few, so line of work isn’t a limiting factor.
You should know that this method can be overkill for small, and even some medium-sized businesses though, as your list won’t be big enough to provide any meaningful insight from segmentation. Each situation is different, but as a rule of thumb, only use RFM analysis if your database includes at least several thousand names.
How Does RFM Analysis Work?
The first step to using RFM segmentation is to create groups of customers based on their behavior. Then you can use that information to understand and predict what kinds of messages will appeal to each group.
There are many behaviors you can use to categorize customers—location, recent life events, or gender, to name a few—but RFM analysis focuses specifically on the purchasing behaviors of your database.
These are best defined by three factors any business inherently has access to whenever someone purchases from or donates to your organization. We’re talking about the recency, frequency, and monetary value of each action. Let’s take a closer look at each:
Recency: A measure of how recently the customer purchased or donated. The more recent the action, the higher the rating.
Frequency: A measure of how often the customer purchases or donates. The more frequent the purchases or donations, the higher the rating.
Monetary Value: A measure of the value of a customer’s purchases. Higher value equals a higher ranking.
How to Perform an RFM Analysis
To perform the analysis, you should assign each name in your database with a numerical value for each category: recency, frequency and monetary. You can use any numerical scale you’d like to rate each behavior, but from one to four is common because it attaches a meaningful amount of detail without overwhelming complexity.
Remember that the scale you create is relative to your customer base, so your scores should be customized to your company. For example, a household goods company might consider a $150 purchase a high four on the monetary value scale, while an auto dealership would mark that as bottom of the barrel.
Also, don’t be afraid to ignore outliers in your calculations. For example, one customer might make an $8,000 purchase, while the rest of your database has a maximum purchase value of $2,500. If that’s the case, use the latter as the upper limit of your rating system.
Categorize Your Customers
After rating each person in your list on all three categories, you’ll have as many as 64 categories of customers, assuming you used a four-point rating system. If you have the resources, you can use each of these groups to create customized campaigns, though how you actually use them depends on your bandwidth and goals.
You may not be able to create 64 separate campaigns, but you can still extract meaningful patterns, or sort each group of customers into three or four campaigns to start. If you’re not sure how to use the results of your analysis for your direct mail outreach, talk to a qualified printing partner. They’ll typically have recommendations on how to leverage your data to improve performance.
Customize Your Campaigns
One of the most common and simple uses of an RFM analysis is to find your highest and lowest value customers so you can shift spend from the latter to the former. When you spend less on low-value buyers, and more on the most valuable customers, ROI can skyrocket. Simply see who ranks toward the top and bottom in all four categories, and reallocate your resources accordingly.
This doesn’t mean you should bombard your highest value customers exclusively. Even your best and most interested buyers can get over-saturated with marketing materials, which will drive them away.
Just keep your finger on the pulse of your audience by making incremental changes and measuring the results. For example, if you start mailing high value customers 25 percent more frequently and response plummets, you know to dial back.
Besides frequency, you can change your offer, creative, or almost any other aspect of your campaign. For example, if a customer typically makes large purchases, and does so often (high frequency and monetary value), but hasn’t been active in a while (low recency), you could offer a special, limited time offer to re-engage them. Likewise, for high value clients you could upgrade the creative and use a letter package instead of a self-mailer or postcard.
This stage in the process is another great time to talk to your printing partner, as they’re sure to have suggestions for what types of mail and offers have seen success for specific segments.
No matter what you do, remember to always test, measure, analyze, and adjust accordingly. What works for another company or for you in the past may not work again, and trying new things is the best way to stay fresh and keep your marketing campaigns performing at a high level.
Use RFM Analysis to Improve Performance
Overall, RFM analysis is a great tool to segment your customers. It can be used to identify your best customers, weak links, and everyone who falls somewhere in between, so you can plan and execute accordingly. The more you personalize, the more you perform, and with RFM analysis, you can add a layer of personalization that would otherwise be impossible.
If you’re looking for a cutting-edge direct mail printer who can make expert recommendations and take advantage of your segmented database, contact us. We have deep experience working with full variable data printing and can help you personalize your direct mail campaigns to get industry-leading results.