Why You Need RFM Analysis for User Segmentation

You improve your sales knowledge by customer segmentation and customer profiling. User segmentation improves your marketing campaigns, your sales, and your even your future investments.

But what is the best way to utilize user segmentation? Each industry has their own processes, but RFM (Recency-Frequency-Monetary Value) has been a successful model.

This analysis measures the recent and frequent sales as well as analyzing the costs. Customers are valuable to your business is they spend more, spend often, and recently purchased something.

But there’s more depth in an RFM analysis — you’ll be surprised by the results.

If you’re looking for an effective strategy when segmenting customers, here’s why you should choose RFM.

RFM Can Improve Your Marketing Techniques

The purpose of RFM is to categorize user segmentation, depending on how much they spend, how often they shop, and if they shop frequently. Therefore, you’ll learn how to market to your customers.

A business typically has a following. This following is either comprised of one of the following aspects of RFM.

Let’s say you run a luxury brand.

Your customers don’t shop frequently, but maybe you had a few recent purchases where they spent a lot. Therefore, you can market to this customer base by promoting some designer products you recently received.

Most of Your Customers are Reoccurring

One of the reasons why RFM marketing works is because most of your customers keep supporting your business. This makes marketing and user segmentation easier.

Using RFM, you’ll understand why your customers keep returning.

If you notice your click-through rates are successful with email campaigns, you understand what attracted the customer based on your marketing. You can see if your customers are attracted to sales or if they’re attracted to new products.

Using RFM is Easy

One of the many benefits of RFM is how easy it is to use.

You can first segment customers by the frequency of sales.

Assign each customer a number between 1 through 5, 1 being the most frequent customer and 5 being the most frequent. Use this for the recent customers and the ones who spend the most.

Your result should look like 543 (meaning very recent sale, high frequency, and average spending) or 343 (meaning relatively recent, high frequency, and average spending).

This model is called the ‘RFM cell.’ You’re aiming for each customer to have a ‘555’ score.

Let’s look at the customer who has the 343 score. What can you do to persuade that customer to become a 555 customer?

Well, they haven’t shopped as much recently. And when they do shop, they spend an okay amount of money. But they do shop pretty frequently.

First, try and improve their frequency. See what they buy and market those products to them. Then, encourage them to spend more and continue spending.

Identify Customer Changes

When you constantly use RFM analysis, you can identify any changes from your customers. These changes can be recent or can expand over several years.

Take the RFM cell model as an example. Say you had a perfect 555 customer. But all of a sudden, that customer turned into a 254 customer. They spend a lot and have shopped frequently, but they’re shopping less.

Why is that?

You can look at any company changes. Maybe you discontinued a brand or a product. So you bring that product back, and the customer becomes a 555 customer again.

RFM Can be Used for Any Industry

RFM analysis can be used for any industry; as long as your business relies on supply and demand, you can utilize RFM to conduct customer segmentation.

RFM has mainly been used in the retail industry. But economics surely increase outside of retail — food, platform hosting, SEO, and even non-profits can utilize RFM.

The digital world is constantly increasing. It has spurred new industries and will continue to create more.

When you have a strong customer base who constantly supports your business, you can utilize the RFM platform.

RFM Improves Customer Service

Your customers are the most important aspect of your business. You want to appeal to them, but want to go further than the average customer service rep.

How do you provide excellent service while being personal with the customer? Start with knowing what they want. The easiest way to determine this is with RFM.

You’re striving to achieve 555, but you notice most of your customers are 515. When they shop, they spend a lot. But they don’t shop frequently.

When interacting with your customers, appeal to them personally. Thank them for their service and state you want them to return. Refer to them by name and ask about the products they’re buying.

Maybe you have a customer complaint, but the customer is a 555. You know this is a devoted customer who spends a lot.

Your marketing and customer satisfaction is set, so you need to continue this trend. When that customer complains, bend over backward for them. Keep that 555 rating to ensure you’re receiving customer satisfaction and sales.

RFM Software

It’s easier to measure RFM. This analysis has existed for 40 years; now that we have CRM (customer relationship management) measuring RFM cells is convenient.

You have several options when using RFM software:

Manual – This is the old-fashioned way. But you can still use programs such as Excel to measure any trends and customer insight.

Semi-Automated – This is a combination of your team and an automation tool. You can input the numbers into the program and your team can calculate the RFM cells manually.

Automated – Certain CRM scores have RFM software included. You can measure customers’ sales habits and immediately calculate an RFM cell.

Third-Party – This is when a separate company analyzes your RFM cell. They will calculate your score and handle marketing and customer service strategies.

Drive Your User Segmentation Scores

Every business wants to increase their sales. The best way to monitor your marketing and sales is learning customers’ responses.

Analyzing and measuring their frequency, recency, and the amount they spend will give you a devoted customer following.

If you need assistance with your sales, we can help you.