Recency, Frequency, Monetary Analysis 101
If you’re looking for a more strategic way to segment your list and understand your customers better, you should always start with RFM Analysis. RFM stands for Recency, Frequency, Monetary — and the order of the letters is definitely significant to the process. Here’s a quick introduction and overview to RFM and how it can help you improve your marketing and grow your business.
Why Should You Use RFM Analysis?
The future of marketing has already arrived, and it’s called “Behavioral Response Marketing.” In a nutshell, this type of marketing involves triggers based on what your prospects and customers do (or don’t do) while subscribed to your list. RFM analysis is the best place to begin if you want to upgrade your email marketing (and your offline marketing) because it’s the most logical way to segment your list based on clear, proven metrics.
Why Should You Segment Your List?
In the beginning, your marketing can be as simple as capturing leads and then following up with those leads. But as your business matures, you need to become much more sophisticated. That starts with list segmentation.
In order to segment your list, you’ll need marketing software to make the process easier. For small businesses, I recommend (and I use) Infusionsoft. They offer the best CRM + Email Marketing system out there for small businesses.
With a tool like Infusionsoft, you can easily segment your list by using Tags to segment your contacts based on behavior. RFM is really just a top-level way of measuring behavior. Here’s how to segment your list using RFM…
The first item on the RFM list is Recency. Make no mistake, Recency is the single best way to predict which of your contacts will become your next customer. In other words, if you want to know who your best customers are TODAY, simply look at who has performed a positive action RECENTLY (yesterday, the last 7 days, the last 30 days, etc).
Recent actions could be: opened an email, clicked an email link, purchased a product, watched a video, responded on social media, etc. Obviously not all “recent” behaviors are equal, but most of them are worth measuring. The key for you is to determine which RECENT behaviors tend to generate the most subsequent purchases.
When looking at recency, you’re basically asking the question “What have you done for me lately?” Think about it — if you’re in a romantic relationship with someone, this question is most important of all. Maybe you did something nice 6 months ago, but it’s doing something nice today, yesterday, or within this week that really counts.
Next on our RFM list is Frequency. After measuring recency, we want to know how Frequently your prospects and customers have taken action. This will be the second-best metric for determining who your best customers will be. Maybe it’s been 30 days since you clicked an email, but if you’ve clicked over 50 emails in the last year, that’s a worthwhile thing to know.
Again, it’s important to separate frequency from recency. I hope the reason is obvious — the customer/prospect who has clicked 50 emails within the last year is not as likely to make another purchase as the customer or prospect who clicked 5 emails in the last week.
When looking at Frequency, you’re asking “How often have you done something for me?” This one is still very important and takes a strong second place on our list.
Finally, we come to Monetary. Believe it or not, “total money spent” is third place in RFM analysis. Although a customer may have spent thousands of dollars with you, if those purchases are not recent AND not frequent, you’re not as likely to make another upcoming sale with that individual.
Here you are asking the question, “How much money have you spent on me?”
It can be hard for us business owners and entrepreneurs to accept that “total dollars spent” is not necessarily going to give us a list of our best customers UNLESS that metric also comes with Recency and Frequency of purchase or action.
RFM Analysis In A Nutshell
So there you have it. RFM analysis is really a lot easier to implement in your business than you might realize. If you’re using a tool like Infusionsoft, you can start by exporting your list and then segmenting by Recency, then by Frequency, and then by Monetary values. Give each contact a score in those 3 categories and then total the 3 scores to segment your list across the board.
Even if you just start by applying “Recency” by itself, you can learn a lot about your list and at least get some segmentation benefits.
If you’re not already using Infusionsoft, I highly recommend you check them out here.
What questions do you have about RFM analysis? Leave your comment below.