.st0{fill:#FFFFFF;}

RFM Customer Segments: How to Boost Profitability with Your Top Customers  

By  Jack

If you’re a business owner, you know how important it is to focus on your top customers, but have you ever taken the time to analyze your RFM customer segments?

If not, you could be missing out on valuable insights that could lead to significant growth.

RFM can be the most profitable activity you can ever do in your business, and is low-hanging fruit if you want to increase lifetime customer value.

In this article I’m going to make the case for why you should focus on RFM regardless of your industry or business size.

We’ll cover the basics of RFM, how it can help you better understand and target your top customers, and a walk through a 5 step implementation strategy.

RFM Customer Segments: What is RFM?

RFM (Recency, Frequency, Monetary) analysis is a customer segmentation technique that looks at three factors based on transaction history:

  • Recency: how recently a customer made a purchase
  • Frequency: how often a customer make purchases
  • Monetary value: how much a customer spends per purchase

Based on these factors, businesses can then segment their customers into different groups.

This information can be used to create targeted marketing campaigns that are far more likely to convert. As you can imagine, different customers react to different messaging.

The overall strategy involves analyzing customer data and creating a customized offer specifically tailored for that audience.

While it was originally developed by mail order companies back in the 1990s, these days RFM can be used effectively by any business. The whole concept of RFM is based on the proven science of the 80/20 Principle: 20% customers make up 80% of your total revenue.

The punchline: RFM is the best strategy to find your most responsive, top customers, and has the potential to transform your business.

Why Use RFM Analysis?

Customers are not created equal: they are in very different stages of their relationship with you, and as a result, their level of value to you varies significantly.

You might have some customers that jump on everything you offer and purchase all the time. Others might begin really interested and then fade away.

Still others might have not purchased in a while and are worth trying to win back.

Your customers all have very different behavior, so your communication and strategy can’t be one size fits all.

Why Use RFM Analysis

The key is you really want to treat these different customer groups differently if you want to maximize results.

RFM analysis can help you answer a ton of valuable questions:

  • Who are my best, most loyal customers?
  • Which customers am I at risk of losing?
  • Which customers have the potential of becoming more profitable?
  • Who are lost customers that I don’t need to give as much attention to?
  • Which customers do I really need to retain?
  • How should I allocate my marketing resources?
  • Which group of customers is most likely to respond a specific marketing campaign?
  • Where should I spend my time and energy to maximize value?

Beyond answering these questions, here are just a handful of the benefits RFM can enable:

1. Improve Customer Retention

RFM segmentation can help you improve customer retention by identifying which customers are at risk of churning. By analyzing the behavior of customers who have recently churned, you can identify patterns that may indicate a high risk of churn. Armed with this information, you can take steps to prevent future churn by reaching out to at-risk customers or offering them incentives to stay.

2. Boost Sales

RFM segmentation can also be used to boost sales by identifying your best customers and targeting them with personalized offers. By understanding which customers are most likely to make a purchase, you can create targeted campaigns that are more likely to result in a quick surge of cash flow to your business. Additionally, this info can help you upsell and cross-sell to your existing customer base by identifying which products or services they’re most likely to be interested in.

3. Enhance Service and Customer Loyalty

RFM segmentation can be used to enhance customer service by identifying which customers are most likely to need assistance. By analyzing the behavior of customers who have recently contacted customer service, you can identify patterns that may indicate a need for help. This allows you to take steps to improve your customer service or proactively reach out to at-risk customers.

4. Improve Marketing ROI

RFM segmentation can also be used to improve the return on investment (ROI) of your marketing efforts. By targeting your marketing campaigns to specific segments of your customer base, you can ensure that your campaigns are more targeted and effective.

5. Increase Customer Lifetime Value

Finally, and maybe most importantly: RFM segmentation can be used to increase the lifetime value of your customers. By understanding which customers are most valuable to your business, you can focus your efforts on custom high-ticket offers and retaining these customers.

In terms of results, here are just a handful of RFM outcomes highlighted by predictive marketing firm Windsor Circle:

RFM Customer Segments

You can create any variety of customer segments to fit your specific situation, but my favorite is the version below from Putler.

You’ll see 11 different segments with an actionable tip for each.

Instead of reaching out to 100% of your audience, try targeting only specific customer segments and tailoring your actions. You’ll get far better results.

Which of your existing customers would be in each category?

RFM Analysis Step by Step

Let’s walk through how to implement an RFM analysis within your business.

Keep in mind you can either do this yourself or use an analytics service. Putler and Kissmetrics are two excellent options if you’d like to simplify the tech and use a service.

If you’d like to do it yourself you can follow along below – I’ve also included an Excel tutorial later in this article.

The single prerequisite for RFM is that you currently collect data on your customer purchases. If you don’t do this currently, start there and come back to RFM later on.

There are three steps in conducting an RFM analysis:

  1. Calculate the recency, frequency, and monetary value for each customer.
  2. Segment your customers based on their RFM scores.
  3. Target your marketing efforts at the segments that will be most responsive to them.

Let’s go through each of these steps in more detail.

Step 1: Calculate recency, frequency, and monetary value for each customer

In order to calculate the RFM scores, you need three pieces of data for each customer:

  1. The date of their most recent purchase
  2. The number of purchases they have made in the past 12 months
  3. The total amount they have spent in the past 12 months

Once you have this data, you can calculate the RFM scores using the following formulas:

Recency = The number of days since the customer’s most recent purchase

Frequency = The number of purchases made in the past 12 months

Monetary Value = The total amount spent in the past 12 months

For example, let’s say you have a customer who made a purchase on January 1st, 2022 and another purchase on March 15th, 2022.

Their recency score would be 73 (the number of days between March 15th and January 1st).

If they made 10 purchases in the past 12 months, their frequency score would be 10. And if they spent $500 in the past 12 months, their monetary value would be $500.

Step 2: Segment your customers based on their RFM scores

Once you have calculated the RFM scores for all of your customers, you can segment them into groups based on those scores.

As we covered above, you can use all sorts of different segmentations, but for the sake of this example, let’s break them into quartiles.

This means that you will have four groups of customers, each containing 25% of your total customer base:

  1. The bottom 25% (the least valuable customers)
  2. The next 25%
  3. The next 25%
  4. The top 25% (the most valuable customers)

Step 3: Target your marketing efforts at the segments that will be most responsive to them

Once you have segmented your customers into groups, you can create targeted marketing campaigns for each segment. 

A few examples of how you can use this:

  • If you are running a sale on your website, you might want to target the top 25% of your customer base (the ones who are most valuable to your business) with an email campaign or a special offer.
  • If you are introducing a new product, you might want to target the bottom 25% of your customer base (the ones who are least valuable to your business) with a discount or a free trial.
  • Send win-back emails to at risk customers in order to prevent them from churning.

I’d recommend looking at the actionable tips mentioned in the above graphic to spark some ideas. Make sure to track the results of each campaign so you can fine-tune your approach over time.

RFM Analysis in Excel

If you’re interested in doing RFM analysis yourself, here’s a simple Excel tutorial that can help:

RFM Segmentation Example: Actionable Implementation

If you’re still with me, I want to share some actionable implementation advice that you’ll find wildly successful if you follow through with it.

I want you to create an offer specifically targeted for your “champions.”  This is your top customer segmentation group: they’ve bought recently, buy often, and spend the most.

These folks are not only the easiest to work with (they are not penny pinchers and complainers), they are also most receptive to buying your highest priced offers.

Here’s the strategy in a nutshell:

1. Come up with a compelling high ticket offer for this group of top customers

I’ve created a detailed post on crafting high ticket offers to get you started.

2. Hold a promotion for a five day period

It’s critical to not have this promotion available indefinitely.

It can only be open for a limited time so you can create scarcity and urgency for your customers. We need to give them an incentive to act now.

3. Create a series of emails to promote your offer over the five days

Lay out the offer, ensure they understand the incredible value of what you’re offering and include proof/testimonials with a great guarantee.

As you get closer to the deadline, increase the frequency of these emails (consider having 3 emails go out on the final day).

If you’re looking for an email structure to use, check out the below video from Frank Kern:

4. Send direct mail pieces to arrive during the five day promotional period

The mail pieces and emails support each other and with mail you can feel much more confident in your ability to stay out of the spam folder.

One of the best pieces of advice I can give you is to use multiple modes of media. Offline media is incredibly underrated and has a higher likelihood of getting attention.

The customers you connect with through other modes of media will have the highest customer lifetime value (CLV): they’ll stick with you longer and spend a lot more money with you.

5. Call Your Customers

As an added bonus, I’d recommend you (or someone on your team) follow up towards the end of the promotion with a phone call.

This will often close the deal and get people off the fence. Here’s a sample script you can use:

Hi CUSTOMER NAME, this is YOUR NAME. I’ve been sending you the email and mail this week.

I wanted to make sure you knew about our exclusive VIP customer offer that’s expiring this Sunday. I’ve put together this special offer just for our best customers to to express how much I appreciate your business.

Do you have any questions? Is there anything else you need to know before getting started?

Results

At the end of this promotion, I’m confident this strategy will result in a significant cash flow surge for you and your business.

The best part? you can repeat this strategy multiple times a year with various offers to your top customers.

Conclusion

Hopefully by now, it’s clear that RFM segmentation is a powerful marketing tool that can be used to improve a number of different aspects of your business. By understanding the behavior of your best and worst customers, you can take steps to improve customer retention, improve marketing ROI, boost profits, and maximize customer lifetime value.

At this point you should have what you need to know how to conduct an RFM analysis. If you’re not already using RFM segmentation in your business, now is a great time to start. If you found this interesting, I have a similar post on customer profitability analysis I’d recommend you check out.

I hope this was helpful – I’d love to hear about your results in the comments below. Good luck!

Jack


Investor & Mentor

related posts:

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Get in touch

>