RFM Analysis

Learn more about the most advanced segmentation technique for eCommerce!

Wioleta Jednaka avatar
Written by Wioleta Jednaka
Updated over a week ago

Every customer is unique. So why should you engage with every customer in the same way by sending all of them the same, standard messages? Using a more segmented, personalized approach is always a better idea – and will give you much better results.

In other words, a smart approach to segmentation is the key! And RFM is hands-down the most advanced way to segment an eCommerce audience.

Let's see what RFM Analysis is all about and how you can use it on edrone!

What is RFM Analysis?

RFM stands for Recency, Frequency and Monetary [value]. RFM Analysis is a marketing technique used to quantitatively determine which customers are the best, which need more attention, and which ones the company is losing, by examining:

  • How recently they have purchased (Recency);

  • How often they buy from that store (Frequency); and

  • How much they spend (Monetary value).

It is based on the marketing axiom that "80% of your sales come from 20% of your customers" — also known as the Pareto Principle.

RFM analysis is of paramount importance for eCommerce businesses that understand that intelligence – knowing the different types of customers and how they behave – is the biggest competitive advantage that an online store can have.

How does RFM Analysis work?

There are three basic principles behind RFM Analysis:

  1. Customers who bought from you recently are more likely to respond to your next promotion than those whose last purchase was a long time ago. This is a universal principle that can be observed in almost all segments: insurance, banking, retail, travel, etc.

  2. It is also true that frequent buyers, i.e. customers who buy often, are more likely to respond than less frequent buyers.

  3. Those who spend more generally respond better than those who spend less.

Using a mathematical model, these principles are then used as a basis to group customers in the so-called "RFM Grid", formed by 10 segments:

Let’s take a look at each of these segments:

  1. Champions: Your best customers, they buy and spend a lot and made their last purchase recently.

  2. Loyal Customers: Very good customers — they spend a lot.

  3. Potential Loyalist: Recent customers, but who have already spent a lot.

  4. New Customer: Recent customers, who made only a few purchases.

  5. Promising: Customers who buy frequently and spend a lot, but made their last purchase some time ago.

  6. Need Attention: Recent customers with above average spending, but low frequency.

  7. At Risk: Customers who bought frequently, but haven't made any purchases in a long time.

  8. Can't lose them: Customers who have spent a lot, but have been inactive for a long time.

  9. Hibernating: Low-frequency, low-spender customers who haven't bought in a long time.

  10. Lost: Your worst customers. They haven't bought in a long time, they only bought once (or very few times) and they spent very little.

Each of these segments can be engaged in a specific way to achieve the best possible results – we'll get to that in a minute. However, to make them easier to understand on a macro level and get started with RFM segmentation, we can bundle them into three strategic groups:

  • HIGH RFM (Champions + Loyal Customers) — this group includes the very best customers. They represent a store’s IDEAL CUSTOMER. This group usually represents around 5% of a customer base.

  • MEDIUM RFM (Potential Customers + New Customers + Promising + Need attention + At risk + Can't miss them) — this group includes the most recent customers, however, with low to medium frequency and/or low to medium spending, and your customers with medium to high frequency and/or medium to high spending. They represent a store’s STANDARD CUSTOMER. This group usually represents around 20% of a customer base.

  • LOW RFM (Hibernating + Lost) — this group includes customers who don't buy often,don’t spend much when they do buy, and haven't bought in a long time. They represent a store’s WORST CUSTOMER – if your store only had these customers, it would not exist. This group usually represents around 75% of a customer base.

Now let's see exactly how edrone can help you harness the power of such advanced, behavior-based segmentation.

How to use RFM Analysis

In edrone, RFM Analysis is available for the Dynamic Newsletter and SMS Newsletter engagements. Here are a few suggestions of the different types of messages you can send to each of the main strategic groups:

  • How to engage HIGH RFM customers
    These customers love your brand and will help promote it if they feel appreciated. Engage them by providing early access to new products, give them exclusive VIP rewards, and ask for reviews. You can also engage High RFM customers with Up-selling product recommendations.

  • How to engage MEDIUM RFM customers
    These customers are not the very best, but they're not indifferent to your brand either, and as such they have the potential to become High RFM customers in the future if properly engaged with the right messages. Invite them to join your Loyalty and/or Referral Programs to increase Purchase Frequency, show them Up-selling and Cross-selling product recommendations to increase Order Value, and give them discount coupons for limited-time offers to increase recency.

  • How to engage LOW RFM customers
    These customers don't care that much about your brand, so you need to give them a reasons to buy again from your store and keep them from going to your competitors. You need to give them the most attractive conditions possible, so send them discount coupons and show them your newest releases as well as your bestselling products to maximize your chances for conversion.

You can use this as a basis to get started with using RFM segmentation, and later refine your strategy to engage each of the 10 segments with specific messages to maximize your results.

Keep up the good work!

Need more help?

If you have any further questions about RFM Analysis, please do not hesitate to contact us at hello@edrone.me

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