Did you know that an average person gets about 100 emails a day and spends approximately 8 to 11 seconds reading the mail they choose to open? 

Customers are looking for personalized content sent to them at the right time. 

Consider another fact – 70% of customers are likely to open emails on their mobile. The right message and personalized preferences are likely to lead to an action within an hour of your website opening.

(Source: Salesforce Trailhead). 

Ecommerce firms need to ensure they have the right tools to help them understand their customers and their online behavior. A deeper understanding will allow businesses to personalize content for their customers. 

Predict Customer behavior with RFM…

RFM is an incredible analytical tool that helps identify and create customer segments by analyzing their spending habits.

Key Takeaways

• RFM is a marketing measuring and analysis tool

• RFM evaluates customers on their most recent purchase, how often they buy and the value of their purchase.

Why RFM?

Most businesses broadly classify their customers as new and repeat customers. However, challenges like low loyalty base, high customer churn, and low ticket value do not provide the complete picture. Hence, businesses cannot make an informed choice.

How do you create customer segments?

RFM analysis ranks customers in 3 categories – Recency, Frequency and Monetary. Generally, the scale is 1 to 5 (the higher number, better the result), customers would score in each category and then segmented together based on the collective score.

RFM analysis can be used to predict (to a reasonable degree) if the customer is likely to return and buy again. 

Recency

The more recent a customer transaction, the more likely they will continue to be patrons to the business and recall the brand for their subsequent purchases. Compared with customers who have been dormant or have not visited the brand for long periods, the likelihood of engaging with recent customers is higher.

Frequency

Frequency of a customer’s transaction depends on factors such as price, quality, variety and the need for replenishment and/or replacement.

Monetary Value

How much does the customer spend? More emphasis is given to how much the customer spends on their purchase, at a risk of alienating customers who are consistent but spend less on each transaction.

Consider the graph above. Customer segments include – Loyal customers, Potential loyalists, Champions, Need attention, Can’t afford to lose them, drifters etc. For an Ecommerce business, understanding each segment is critical. Personalizing content, promotions and offers will allow them to win more loyalty while improving the overall customer experience. Personalizing content will also allow businesses to win back lost customers to a certain extent.

Significance of RFM

RFM analysis allows businesses to understand the % of revenue that comes from repeat customers while providing insights in consumer behavior. These insights are helpful and allow businesses to make customers happy and make them repeat customers.

Caution ahead!

While RFM is an incredible analytical tool, there are some pitfalls that should be avoided. Pitfalls include:

• Over Solicitation – Businesses must exercise caution as customers do not wish to be over-solicited thereby leading to negative experiences which can dissuade customers from returning. 
• Focus on current customers – RFM focuses on current customers and tends to focus on the best customers which can lead to the next pitfall which is ignorance.
• Ignorance – RFM tends to give a low score to new customers who made a small purchase. Since RFM focuses on current customers, it is not an effective tool for prospecting new customers. 
• RFM is not a precise quantitative model. The significance of each RFM measure is different for distinct industries. 

Having understood the pitfalls, RFM analysis does allow businesses to identify customer segments that can be targeted effectively, nurturing the various segments, improving retention and customer spends. 

What are your goals? Do you want to drive customer engagement? Do you want to improve customer retention and increase customer spends? Then do get in touch with us. Simply, schedule a call with us today.