RFM (Recency, Frequency, and Monetary) is a highly powerful model for driving data-driven growth. Have you ever wondered:

• Who are your best customers?
• Which customers who were recently your best are about to churn?
• Who are your loyal customers?
• Which customers have you already "lost" and no longer need to spend time and attention on?
• Which customers should you retain?
• Which products generate the most value from your best customers?
• Which products are toxic and causing customers to churn?
• How do you know which ads or conversion paths yield the best customers and which do not?

These are all questions that can provide valuable insights through effective RFM segmentation and analysis.

To get started with CVO (Customer Value Optimization) and attract more qualitative customers, you first need to analyze your existing customers.

Generally, customers fall into three categories:

• Low value: These are customers who return used products, endlessly complain to customer service, and only buy low-margin products at extremely low prices.
• Average value: These are your general, one-time, or irregular buyers, who make up the majority of your customer base.
• High value: These customers generate the most profit by making repeat purchases or buying high-margin items.

In this article, we will delve deeper into the RFM model.

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What is RFM?

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The RFM Model was originally introduced by Bult and Wansbeek (University of Groningen) in 1995. It was effectively used by catalog sellers to minimize their printing and shipping costs while maximizing returns.

It is based on the Pareto principle: 80% of the results come from 20% of the causes. Twenty percent of your customers generate 80% of the total revenue. Customers who have made one purchase are more likely to buy again. People who make large purchases are likely to repeat this behavior.

The Pareto principle forms the core of the RFM model. Concentrating all efforts on the most important customer segments is likely to yield a much higher return.

RFM stands for Recency, Frequency, and Monetary value and is a data-driven model used to group customers based on their transactional behavior.

• Recency: When was the last time a customer made a purchase?
• Frequency: How often has a customer made a purchase?
• Monetary Value: How much (money) has a customer spent with you?

By assigning a score of 1 to 4 or 1 to 5 to each of these three components, you can establish various groups that people belong to.

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If you look closely, you will see that the Monetary Value is a similar way to calculate Customer Lifetime Value (CLV). However, CLV provides a very one-sided view of reality that can be misleading.

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Why is RFM Better than Traditional Segmentation Methods?
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The RFM model is based on the transactions between a user and a company, which allows for a more effective segmentation approach.
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By combining the three elements—new or returning visitors, first, second, or third orders, and high order value—the RFM model leverages concrete transactional data and segments users based on various groups.
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This results in a much better and more effective model that groups individuals based on their behavior and provides more accurate predictions of future interactions based on past behavior.
This is especially true when RFM is used for further qualitative and quantitative analyses.

Many currently used segmentation methods provide a limited view or depth of customer segments due to the absence of one or more of the three elements (Recency, Frequency, and Monetary value), resulting in a less comprehensive prediction of future (customer) interactions.

RFM enables you to communicate more relevantly with specific customer groups, ultimately achieving better and higher customer value.
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RFM has the potential to create very specific interactions, leading to increased customer satisfaction and making customers feel understood and valued by the company.

Each RFM segment deserves its own set of communication and marketing activities.

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Difference Between RFM and CLV
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The primary difference is that time and frequency are also taken into account in the calculations. This becomes important when you have, for example, a customer with a high one-time purchase versus a loyal returning customer who makes a purchase every two months. The loyal customer may not immediately have the highest monetary (CLV) value, but because they are very recent and make multiple purchases, they are likely a better customer in the long run.

We also did not consider possible returns for both groups, which may disadvantage one-time customers more than returning loyal customers.
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Example
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Customer 1 makes a purchase of €150 every two months in your webshop. That totals €900 per year and €1,800 over two years.
Customer 2 makes a one-time purchase of €3,000, equivalent to 20 orders from Customer 1.

This means that Customer 1 regularly purchases from you, but their lifetime value is €1,200 lower than that of Customer 2.

If you only look at customer lifetime value, Customer 2 would rank high on the list regardless of whether they made any purchases in two years.

If you then use this information for marketing, you will likely spend time and money on the wrong customers while excluding loyal customers, with all the consequences that entails. This is where RFM shines, as it adds extra dimensions to revenue, making you more effective.

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Customer Lifetime Value

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Here, you see that Customer 2 has a better CLV and should be considered the most important customer.

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RFM analyse

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This provides a clearer picture of who is actually the better customer for your business. Customer 1 has a score of 544, while Customer 2 has a score of 115.

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RFM Segments
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At Polaris, we primarily use Reveal for RFM segmentation, where we have defined the following RFM groups:

Soulmates: These are the most valuable customers. They have made the most purchases, spent the most in your webshop, and their last order was placed recently.

Lovers: These are active customers who have placed several orders, with the most recent one being recent.

New Passion: These customers have made 1-2 purchases with an average order value.

Flirting: These customers are sporadically active. They have made a number of high-value purchases but are inconsistent.

Potential Lovers: These are active customers who have made several high-value purchases. They have the potential to become Lovers.

Platonic Friend: These customers are active but place few orders and order items of small or medium value.

About to Dump You: These are inactive customers who placed their last order more than 6 months ago.

Don Juan: These customers have placed only one order, but it was of high value.

Ex-lovers: These customers are your former Lovers or Soulmates who have left your webshop and are now inactive. You likely don't know why they stopped purchasing.

Apprentice: These customers are new customers who have just placed their first order.

Break-up: These customers are inactive, primarily looking for promotions, which erodes your margins. They place orders of low value.

Below, we have answered the following questions for all segments:

• How do you keep the segment active?
• How can you learn and be more relevant to the segment?
• How do you acquire more customers from the segment?

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Soulmates
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How do you keep the Soulmates active?

• Email Campaigns:
  • Send personalized campaigns with very exclusive offers available only to them.
  • If you have a loyalty program, ensure you consider this group when sending out a campaign.
• Direct Mail / Postcards:
  • Everyone appreciates personal attention. A handwritten card (or a card with a personalized printed message) is a good alternative.
• Phone Contact:
  • If this group is not extremely large, you could call these customers to express your appreciation and possibly gather some feedback.
  • If successful, you could even collect additional feedback about your business and services.
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How can you learn and be more relevant to the Soulmates?

• NPS:
  • By capturing the NPS score at multiple moments, shortly after purchase and after customers have experienced the initial results of your product, you gain insight into their expectations and how well the product meets those expectations.
• User Experience Surveys:
  • A standard practice we follow in Conversion Optimization is to ask customers about their experience immediately after a purchase.
  • It's even better to segment this feedback so you can either ask different questions or see the differences between the various RFM groups.
• Customer Experience Surveys:
  • The goal of this survey is to ascertain the overall experience with the product, delivery, packaging, etc.
• Personal Thank You Cards:
  • Enhance customer loyalty by sending handwritten thank-you cards to Soulmates, expressing appreciation for their loyalty. This personal gesture strengthens the relationship and shows true recognition for their support.
• Jobs to Be Done Research:
  • Conduct in-depth research into the real reasons why Soulmates choose your products. Identify their core needs and motivations to better tailor your products and services and increase customer satisfaction.
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How do you acquire more Soulmates?

• Motivate Existing Customers from the Lovers Group:
  • The Lovers group is closest to the Soulmate group; they are already familiar with your brand, have purchased recently, and all that is needed to engage them as Soulmates is to increase their Monetary Value.
  • This can be done by offering targeted cross-sells and upsells during their next purchase.
• Create "Lookalike" Groups in Your Online Marketing Platforms:
  • The algorithms will seek similar individuals to whom you can either spend a bit more to attract them or lower your CPC and CPA.

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Lovers

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How do you keep Lovers active?

• Regular Updates:
  • Send monthly newsletters with information about new products, services, and exclusive offers to keep their interest alive.
• Loyalty Program:
  • Develop a loyalty program that offers points, discounts, or other rewards for each purchase, encouraging them to buy more frequently.
• Exclusive Events:
  • Invite Lovers to VIP events, previews, or product launches, which increases their engagement and loyalty.
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How can you learn and be more relevant to the Lovers?

• In-Depth Surveys:
  • Conduct regular surveys to gather their needs, desires, and feedback, which helps improve your offerings.
• Personalization:
  • Use purchase history and preferences to provide personalized product recommendations and content.
• Customer Service Excellence:
  • Offer a premium customer service experience, including personal shoppers or advice, to strengthen their trust and satisfaction.
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How do you acquire more Lovers?

• Referral Programs:
  • Encourage current Lovers to refer friends with rewards for both parties for every successful referral.
• Optimize the Customer Journey:
  • Analyze the customer journey of existing Lovers to identify successful paths and replicate those experiences for new customers.
• Targeted Marketing:
  • Use data analysis to identify potential Lovers and focus your marketing efforts on these groups with tailored messaging.

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New Passion

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How do you keep New Passion active?

• Educational Content:
  • Provide guides, tutorials, and blogs that help them get the most out of their purchase and introduce related products.
• Introductory Offers:
  • Provide discounts or special offers on their next purchase to encourage repeat buying.
• Community Building:
  • Invite them to join your brand community through social media, forums, or events, which enhances their engagement and loyalty.
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How can you learn and be more relevant to New Passion?

• Analyzing First Impressions:
  • Gather feedback specifically about their first purchase experience to gain insights on how to improve this experience for future customers.
• Segmentation and Analysis:
  • Segment New Passion customers based on their purchase behavior and preferences for more targeted communication.
• Product Development Input:
  • Use their feedback as input for product improvements or new product developments.
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How do you acquire more New Passion?

• Targeted Advertising:
  • Use targeted ads to reach potential customers who resemble your current New Passion segment.
• Introductory Programs:
  • Create special introductory programs that offer new customers an irresistible deal for their first purchase.
• Social Proof:
  • Highlight reviews, testimonials, and case studies from New Passion customers to build trust with potential new customers.

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Flirting

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How do you keep Flirting active?

• Targeted Reminders:
  • Send reminders about products they have viewed or added to their cart but haven’t purchased, possibly with a small discount to stimulate the purchase.
• Limited Offers:
  • Create urgency with time-sensitive offers or exclusive access to products to motivate them to take action.
• Interactive Content:
  • Engage them with interactive content such as quizzes or polls that align with their interests and encourage deeper involvement.
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How can you learn and be more relevant to Flirting?

• Behavior Analysis:
  • Analyze their browsing and purchasing behavior to understand which products or services pique their interest.
• Feedback Loops:
  • Request feedback immediately after interactions to see what improves or diminishes their experience.
• Customized Communication:
  • Use the collected data to send personalized messages and offers that resonate with their specific preferences.
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How do you acquire more Flirting?

• Attractive Entry Products:
  • Offer entry-level products or services that are easy to access, increasing the likelihood that new customers will make their first purchase.
• Cross-Promotion:
  • Collaborate with complementary brands or platforms to expand your reach and attract new customers.
• Visual Marketing:
  • Implement visually appealing marketing and social media campaigns designed to capture attention and generate interest.

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Potential Lovers

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How do you keep Potential Lovers active?

• Development Opportunities:
  • Identify opportunities for upselling or cross-selling based on their previous purchases and show them products that can enrich their experience.
• Personal Attention:
  • Make them feel special with personal attention, such as a dedicated account manager or customer service representative.
• Exclusive Benefits:
  • Offer benefits such as early access to new releases or members-only content to increase their engagement.

How can you learn and be more relevant to Potential Lovers?

• In-Depth Interviews:
  • Conduct in-depth interviews or focus groups with Potential Lovers to gain deep insights into their needs and desires.
• User Research:
  • Utilize user research to see how they interact with your products and what improvements can be made.
• Customized Experiences:
  • Develop tailored experiences or products that are specifically aligned with the feedback and preferences of this group.

How do you acquire more Potential Lovers?

• Data-Driven Targeting:
  • Use data analysis to identify similar prospects and direct your marketing efforts toward these groups.
• Value-Driven Content:
  • Create and share value-driven content that highlights the unique benefits of your products, aimed at attracting customers looking for deep and meaningful interactions.
• Community Engagement:
  • Build a community around your brand to create a sense of belonging and naturally attract Potential Lovers through word-of-mouth and community activities.

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Platonic Friend
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How do you keep Platonic Friends active?

• Value Education:
  • Emphasize the value and quality of your products by sharing educational content, encouraging them to consider spending more in the future.
• Customer Service Excellence:
  • Provide exceptional customer service to create positive experiences that can improve their perception and loyalty.
• Special Offers:
  • Give access to special offers or discounts to increase their interest and purchase intention.
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How can you learn and be more relevant to Platonic Friends?

• Needs Analysis:
  • Investigate their specific needs and preferences to offer more relevant products or services.
• Segment-Specific Content:
  • Create content that is tailored to their interests and needs to increase their engagement.
• Direct Communication:
  • Use direct communication channels such as email or social media to gather their feedback and suggestions.
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How do you acquire more Platonic Friends?

• Broad Reach Campaigns:
  • Implement marketing campaigns with a broad reach to increase awareness and attract new customers who are not yet ready for large purchases.
• Introductory Products:
  • Offer introductory products or services at lower prices to reduce the entry barrier.
• Testimonials and Reviews:
  • Share testimonials and positive reviews to build trust with potential new customers.

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About to Dump You
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How do you keep About to Dump You active?

• Re-Engagement Campaigns:
  • Launch specific re-engagement campaigns with attractive offers to renew their interest.
• Feedback Requests:
  • Actively ask for feedback to understand why their engagement is decreasing and how you can improve this.
• Customized Reminders:
  • Send personalized reminders about what they are missing by not being active, possibly with an exclusive offer.
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How can you learn and be more relevant to About to Dump You?

• Behavior Analysis:
  • Analyze their purchasing behavior and interactions to identify patterns that may indicate decreasing interest.
• Win-Back Offers:
  • Develop specific win-back offers based on their previous purchase history and preferences.
• Personal Dialogue:
  • Initiate a personal dialogue to understand their concerns and needs, allowing you to respond to their situation more effectively.
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How do you win back About to Dump You customers?

• Segmentation and Targeting:
  • Identify and segment inactive customers to create targeted communication and offers.
• Analysis of Drop-Out Reasons:
  • Understand the main reasons why customers drop out and address these in your marketing and product strategy.
• Reintroduction Campaigns:
  • Develop reintroduction campaigns aimed at attracting inactive customers by highlighting improvements or new features.

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Don Juan
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How do you keep Don Juan active?

• Exclusive Offers:
  • Offer exclusive deals or products specifically targeted at their one-time, high-value purchasing behavior to motivate them for a repeat purchase.
• Premium Experience:
  • Ensure a premium customer service experience that matches their high spending, making them feel valued and more likely to return.
• Follow-Up Communication:
  • Implement a follow-up communication strategy focused on showing appreciation and offering additional products or services that align with their initial purchase.
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How can you learn and be more relevant to Don Juan?

• Purchase Behavior Analysis:
  • Study their purchasing behavior and preferences to understand what attracts them and how future offers can be tailored accordingly.
• Personalized Recommendations:
  • Use data from their previous purchases to make personalized product recommendations that may pique their interest.
• Direct Feedback:
  • Ask for feedback shortly after their purchase to gain insight into their experience and how you can improve it for future interactions.
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How do you acquire more Don Juan customers?

• High-Value Targeting:
  • Focus your marketing efforts on attracting customers with high spending patterns by utilizing luxury marketing tactics and channels.
• Bundle Offers:
  • Create bundle offers or packages with high value that appeal to customers who are likely to make large one-time purchases.
• VIP Treatment:
  • Develop a VIP customer program that offers exclusive benefits and experiences to attract new Don Juan customers.

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Ex-lovers

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How do you keep Ex-Lovers active?

• Re-Engagement Campaigns:
  • Set up targeted campaigns to remind Ex-Lovers of the value your brand offers and what they are missing.
• Departure Reason Research:
  • Conduct research to understand why they stopped purchasing and use these insights to improve your offerings or service.
• Special Comeback Offers:
  • Offer special comeback deals or incentives to convince them to make another purchase.
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How can you learn and be more relevant to Ex-Lovers?

• Departure Analysis:
  • Analyze data to identify patterns in why Ex-Lovers drop off, such as price points, product quality, or customer service experiences.
• Personal Outreach:
  • Consider personal outreach to show that you value their business and are open to feedback and improvement.
• Adjusting Offer:
  • Tailor your offerings based on feedback from Ex-Lovers to demonstrate that you take their input seriously and are willing to change.
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How do you win back Ex-Lovers?

• Win-Back Strategies:
  • Develop specific win-back strategies aimed at re-attracting Ex-Lovers by highlighting improvements and new value propositions.
• Feedback Loops:
  • Use feedback loops to continuously learn from Ex-Lovers and continually improve your products, services, and customer service.
• Reintroduction of Improvements:
  • Clearly communicate any improvements or changes in your offerings to convince Ex-Lovers to give your brand a second chance.

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Apprentice

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How do you keep Apprentices active?

• Welcome Communication:
  • Send a welcome message or package with useful information on how to get the most out of their purchase and introduce them to your brand community.
• Education and Support:
  • Provide educational content and support to enhance their experience with the product, increasing the likelihood of repeat purchases.
• Encouragement for the Second Purchase:
  • Offer a special discount or incentive for their second purchase to encourage them to stay active and increase their engagement with the brand.
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How can you learn and be more relevant to Apprentices?

• Feedback after First Purchase:
  • Ask for feedback after their first purchase to gather insights about their experience and how you can improve it.
• Segmentation for Personalization:
  • Use the information from their first purchase for segmentation and personalization in future communications and offers.
• Analyze Their Behavior:
  • Monitor their behavior and interactions after the first purchase to better understand what motivates and interests them.
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How do you acquire more Apprentices?

• Referral Programs:
  • Encourage existing customers to refer friends with a reward for each successful referral that results in a new customer.
• Targeted Marketing for Newcomers:
  • Develop marketing campaigns specifically aimed at potential customers who are likely to be interested in a first purchase.
• Make Entry Easy:
  • Minimize the barriers for a first purchase by providing clear information, support, and possibly a first-purchase discount.

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Break-up

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How do you keep Break-Up customers active?

• Targeted Promotions:
  • Offer targeted promotions specifically designed to win this group back, such as exclusive discounts or access to limited-edition products.
• Re-Engagement Campaigns:
  • Develop specific re-engagement campaigns that address their previous areas of interest with attractive offers.
• Value Reminder:
  • Communicate the unique value of your products or services to remind them of what they are missing by not being active.
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How can you learn and be more relevant to Break-Up customers?

• Research Reasons for Inactivity:
  • Conduct surveys or interviews to understand the reasons behind their inactivity and adjust your strategies accordingly.
• Analyze Their Purchasing Patterns:
  • Look at their previous purchasing patterns to better understand what types of promotions or products might reactivate them.
• Personalize Communication:
  • Use the collected data to send highly personalized communication that aligns with their specific interests and previous interactions with your brand.
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How do you win back Break-Up customers?

• Reconsider Loyalty Programs:
  • Offer a revised loyalty program that provides more value for their engagement, such as rewards for reactivating their account.
• Exclusive Return Offers:
  • Create exclusive offers that are only valid if they reactivate their account or begin purchasing again.
• Improve Product Offering:
  • Ensure that your product offering and pricing strategy remain attractive, especially for customers who are sensitive to promotions and discounts.

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If you have any questions about email marketing in 2024 after reading this article, please contact Polaris Growth for further advice.

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