What it means
Recency is the number of days since a customer last bought, frequency is the number of purchases in a period, and monetary value is the total amount spent. Together they describe a customer's behaviour using data that nearly every business already holds.
No special survey or expensive software is needed to get started. The approach rests on a long-standing observation in marketing: customers who bought recently, buy often and spend a lot are the most likely to buy again.
A customer who has not bought for a long time is less likely to return, whatever they spent in the past. To use RFM, a business ranks its customers on each measure and splits them into five equal groups, with 5 as the best.
Each customer then has a three-digit code such as 5-4-4. The codes can be added up or kept separate to define segments such as champions, loyal customers and at-risk customers.
The segments guide action. Champions might receive early access to new products, at-risk customers a win-back discount, and lapsed customers a final reminder before they are removed from the list.
The goal is to spend marketing money where it will have the most effect. RFM is also useful to finance teams.
It supports estimates of customer lifetime value, helps to forecast repeat revenue and can show whether a rise in sales is coming from loyal customers or a one-off burst of new ones. The method has limits.
It looks only at past behaviour, it ignores why customers buy, and the cut-off points need to be adjusted for each business, so a monthly grocery buyer and a once-a-year furniture buyer should not be scored on the same scale.
In practice
Real-world examples.
Example
An online clothing retailer finds that its 5-5-5 customers, who are 8% of the list, produce 35% of revenue. It invites them to preview a new range before it goes on sale. The campaign produces a higher response than an offer sent to the whole list. The retailer repeats the approach before each season.
Example
A hotel group scores guests by recency of stay, number of stays and total spend. Guests with a high frequency but poor recency are sent a personal offer, as they may have switched to a competitor. The group measures the offer by comparing bookings with those from a similar group that received no message.
Example
A charity uses RFM on its donors. It asks recent, frequent donors for a larger gift and asks lapsed donors for a small one. The mix lifts total donations without more mailings. The charity also saves printing and postage costs.
Formula
Calculation
RFM score = Recency score + Frequency score + Monetary score (each scored 1 to 5, with 5 best)
Suppose a customer last bought 10 days ago, which puts them in the best recency group and earns a score of 5. They made 8 orders in the past year, which scores 4, and they spent $1,200, which also scores 4. Their code is 5-4-4 and their combined score is 5 + 4 + 4 = 13 out of a possible 15. A customer who last bought 300 days ago, ordered once and spent $50 might score 1 + 1 + 1 = 3, and would be treated as a lapsed customer.Case study
Seen in the real world.
Cobalt Coffee is an illustrative, fictional online coffee subscription firm with 40,000 customers. It sent the same 15% discount to everyone, which cost $60,000 in a quarter and gave little extra revenue.
The marketing manager scored the customers by RFM and found that 6,000 customers were at risk, with strong past spending but no order for four months. She sent them a personal message and a 15% discount, and held back the offer from loyal customers who were buying anyway.
The discount cost fell to $18,000, and the win-back group produced $95,000 of new orders. In this illustrative story, the lesson was that targeting the offer was worth more than giving it to everyone. The marketing manager now reviews the segments every quarter.
Watch out
Common mistakes.
- Treating all three scores as equally important for every business, when recency may matter most for some and spend for others.
- Using the same cut-off points for businesses with different buying cycles.
- Relying on RFM alone, when it ignores the reasons customers buy and the cost of serving them.
Questions
People also ask.
What does RFM stand for?
It stands for recency, frequency and monetary value, which are the three measures used to score each customer.
How often should RFM scores be updated?
Commonly every month or quarter, depending on how often customers buy.
Can RFM be used by a business with few customers?
It works best with hundreds or thousands of customers, but a small business can use a simplified version to spot its best and most at-risk accounts.
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