RFM-Analysis

RFM (Recency, Frequency, Monetary) Analysis is a marketing technique used to determine quantitatively which customers are the best ones by examining how recently a customer has purchased (Recency), how often they purchase (Frequency), and how much the customer spends (Monetary).

Recency(R): Customers who purchased more recently are more likely to purchase again than are customers who purchased further in the past.
Frequency(F): Customers who have made more purchases in the past are more likely to respond than who have made fewer purchases.
Monetary: Customers who have spent more (in total for all purchases) in the past are more likely to respond than those who have spent less.

Benefits of RFM Analysis

• Increased customer Retention
• Increased response rate
• Increased Conversion Rate
• Increased Revenue

Table with key RFM Segments

Segment	RFM	Description	Marketing
Best Customers	111	Customers who brought most recently, most often and spend the most	No price incentives, New products and loyalty programs
Loyal Customers	X1X	Customers who bought most recently	Use R and M to further segment
Big Spenders	XX1	Customers who spend the most	Market your most expensive products
Almost Lost	311	Haven't purchased for some time, but purchased frequently and spend the most	Agressive price incentives
Lost Customers	411	Haven't purchased for some time, but purchased frequently and spend the most	Agressive price incentives
Lost Cheap Customers	444	Last purchase long ago, purchased few and spend little	Don't spend too much trying to re-acquire

Interpreting the RFM Analysis

Let us suppose we receive the below result

Customer	Recency(R)	Frequency(F)	Monetary Value(M)	RFM Class
Etha K.	4 days	58 orders	$2869	1-1-1
Jerold Sporer	50 days	1 order	$44	3-4-4
Anie Hettinger	47 days	2 orders	$156	3-2-1

Result:

1. Etha K. belongs to the "Best Customer" segment --
   She purchased recently (R=1), frequently buys (F=1), and spent the most (M=1).
2. Jerold Sporer is about to enter the "Lost Cheap Customer" segment --
   He has not purchased in a while (R=3), bought few (F=4), and spent little (M=4).
3. Anie Hettinger is a type of "Almost Lost Customer" segment --
   She has not made a purchase for some time (R=3), she bought somewhat frequently (F=2), but she is in the group who spent the most (M=1).