Recency, Frequency, Monetary Analysis, also known as the RFM method, is a marketing technique used to group customers by segments. It assesses customers based on how recently they made a purchase (recency), how frequently they purchase (frequency), and how much money they spend (monetary analysis). Using a strategic formula that combines the three RFM dimensions, the analysis numerically ranks customers and segments them into tiers of values. The results provide a comprehensive picture of a consumer base and distinguish those with the most purchasing potential. At the root of this method lies the notion that 80% of business comes from 20% of customers.
Who uses a Recency, Frequency, Monetary Analysis?
Businesses that market products or services to a consumer base will benefit from a Recency, Frequency, Monetary Analysis. Within the Marketing and Advertising Industry, RFM helps create efficient marketing strategies by identifying which segment of customers should be targeted and prioritized. This minimizes marketing costs and improves return on investment. Computer Software Developers have this analysis technique embedded in their core with the advent of customer relationship software and online marketing campaigns. RFM and customer segmentation is also seen in the Retail Field. Loyalty programs are established for active purchasers with high RFM rankings to encourage customer retention, and promotions are geared towards those with low RFM rankings to stimulate purchases among new customers.
