Notes on Rfm Analysis
Kenan-Flagler Business School The University of North Carolina
Recency, Frequency and Monetary (RFM) Analysis
RFM is widely used by direct marketers of all types for selecting which customers to target offers to. The fundamental premise underlying RFM analysis is that customers who have purchased recently, have made more purchases and have made larger purchases are more likely to respond to your offering than other customers who have purchased less recently, less often and in smaller amounts. RFM analysis can also be used to target special offers to ‘welcome’ new customers, encourage small purchasers to spend more, to reactivate lapsed customers, or encourage other marketing initiatives. RFM analysis uses information about customers’ past behavior that is easily tracked and readily available. Recency is how long ago the customer last made a purchase. Frequency is how many purchases the customer has made (sometimes within a specified time period, such as average number of purchases per year). Monetary is total dollars spent by the customer (again, sometimes within a specified time period). RFM by Example: The BookBinders Book Club The BookBinders Book Club sells specialty books and selected other merchandise through direct marketing. New members are acquired by advertising in specialty magazines, newspapers and TV. After joining, members receive regular mailings offering new titles and, occasionally, related merchandise. Right from its start, BookBinders made a strategic decision to build and maintain a detailed database about its club members containing all the relevant information about their customers. Initially, BookBinders mailed each offer to all its members. However, as BookBinders has grown, the cost of mailing offers to the full customer list has grown as well. In an effort to improve profitability and the return on his marketing dollars, Stan Lawton, BookBinders marketing director, was eager to assess the effectiveness of database marketing techniques.
Recency, Frequency and Monetary (RFM) Analysis
RFM is widely used by direct marketers of all types for selecting which customers to target offers to. The fundamental premise underlying RFM analysis is that customers who have purchased recently, have made more purchases and have made larger purchases are more likely to respond to your offering than other customers who have purchased less recently, less often and in smaller amounts. RFM analysis can also be used to target special offers to ‘welcome’ new customers, encourage small purchasers to spend more, to reactivate lapsed customers, or encourage other marketing initiatives. RFM analysis uses information about customers’ past behavior that is easily tracked and readily available. Recency is how long ago the customer last made a purchase. Frequency is how many purchases the customer has made (sometimes within a specified time period, such as average number of purchases per year). Monetary is total dollars spent by the customer (again, sometimes within a specified time period). RFM by Example: The BookBinders Book Club The BookBinders Book Club sells specialty books and selected other merchandise through direct marketing. New members are acquired by advertising in specialty magazines, newspapers and TV. After joining, members receive regular mailings offering new titles and, occasionally, related merchandise. Right from its start, BookBinders made a strategic decision to build and maintain a detailed database about its club members containing all the relevant information about their customers. Initially, BookBinders mailed each offer to all its members. However, as BookBinders has grown, the cost of mailing offers to the full customer list has grown as well. In an effort to improve profitability and the return on his marketing dollars, Stan Lawton, BookBinders marketing director, was eager to assess the effectiveness of database marketing techniques.