rfm: a cool tool for simple analytics

Gary A. Seitz

RFM: A cool tool

What is RFM?

R = Recency

Last purchase or meaningful transaction (donation)

F = Frequency

How often there is a dollar-earning transaction

M= Monetary

The sum of all revenue generated

Why RFM?

Past behavior is best predictor of future

– Segmentation is quantifiable way to distinguish

between best & worst customers

– RFM is quick, descriptive way to segment a

marketing database based on purchase

behavior

– It is not a statistical or predictive model

Recency

Most powerful predictor of who is likely to buy

Time-frame since last transaction

“High-end” date on the database, not “today’s date”

Recency Customers Response Revenue Resp Rate Avg Sales

0-3 months 38,457 1,597 $42,571 4.2% $26.66

4-6 months 29,472 961 $19,274 3.3% $20.06

7-9 months 21,947 422 $6,231 1.9% $14.77

10-12 months 16,473 247 $2,547 1.5% $10.31

13-18 months 11,648 114 $954 1.0% $8.37

19-24 months 15,982 88 $341 0.6% $3.88

25+ 26,482 91 $188 0.3% $2.07

TOTAL 160,461 3,520 $72,106 2.2% $20.48

Frequency

Second most powerful predictor of response

How often a buyer has a dollar earning transaction

– Purchase or donation

– Exclude credits

Timeframe or Lifetime transactions

Is not number of units (i.e. 3 shipments)

Frequency + Recency

Recency Freq Customers Response Revenue Resp Rate Avg Sales

0-3 months 3x+ 12,978 582 $15,201 4.5% $26.12

0-3 months 2x 5,325 201 $5,074 3.8% $25.24

0-3 months 1x 20,154 488 $10,025 2.4% $20.54

0-3 months 38,457 1,271 $42,571 3.3% $33.49

4-6 months 3x+ 10,873 452 $11,054 4.2% $24.46

4-6 months 2x 4,287 143 $2,984 3.3% $20.87

4-6 months 1x 14,312 250 $4,874 1.7% $19.50

4-6 months 29,472 845 $18,912 2.9% $22.38

Monetary

Least powerful predictor

Useful to avoid mailing low value customers

Sum of all revenue earned

Exclusive of tax and shipping

May be actual dollars, or an average

Frequency + Monetary

Impact of adding Monetary

– Who to market

– How to market

Direct Mail offers:

Loyalty programs

“Comps”

Personalized offers

Eliminating frequent “bargain shoppers”

1x

2x

3x

4x

5x+

A$ B$ C$ D$ E$

Getting Started with RFM

Recency

Assign 6 to 8 letter codes for time segments

appropriate for your business

Use quarters for first year: 0-3 mo, 4-6 mo

Group years (months) 13-24 mo, 25-36 mo

A = 0-3 months E = 13-24 months

B = 4-6 months F = 25-36 months

C = 7-9 months G = 37-48 months

D = 10-12 months H = 49+ months


Frequency

A simple 1, 2, 3 (3x+)

Triers ~ buyers ~ highers

1x buyers are new customers!

Give them special treatment

Convert them to 2x ~ but not too long


Monetary

Use 3 to 8 letter codes in reverse value

Accumulated or Average value

A = $10,000+ E = $500 - $999

B = $5,000 - $9,999 F = $100 - $499

C = $2,500 - $4,999 G = $1 = $99

D = $1,000 - $2,499 Z = $0 (returned)

RFM score

Kevin O’Leary

RFM = B2D

B = 4–6 months since last transaction

2 = 2 transactions

= $1,000 - $2,499

2013 COUNT 2012 COUNT 2011 COUNT 2010 COUNT 2009 COUNT 2008 - COUNT FREQ + MONETARY RECENCY - Last Transaction

1

L

T

g

i

f

t

A1A 4 B1A 2 C1A 7 D1A 11 E1A 10 F1A 10 1 gift $500+ 44 0.1% A 2013 15,842 22.1%

A1B 23 B1B 29 C1B 24 D1B 38 E1B 29 F1B 38 1 gift $250 - $499 181 0.3% B 2012 21,383 29.9%

A1C 249 B1C 425 C1C 345 D1C 257 E1C 213 F1C 307 1 gift $100 - $249 1,796 2.5% C 2011 10,332 14.4%

A1D 1,442 B1D 2,480 C1D 1,741 D1D 1,367 E1D 1,131 F1D 1,732 1 gift $ 50 - $ 99 9,893 13.8% D 2010 7,138 10.0%

A1E 5,153 B1E 7,774 C1E 2,258 D1E 1,476 E1E 4,963 F1E 3,354 1 gift $ 25 - $49 24,978 34.9% E 2009 8,863 12.4%

A1F 2,766 B1F 4,512 C1F 2,141 D1F 1,785 E1F 798 F1F 631 1 gift $ 1 - $ 24 12,633 17.6% F 2008 prior 8,027 11.2%

9,637

15,222 6,516

4,934

7,144

6,072 TOTAL 71,585 100.0%

2

L

T

g

i

f

t

s

A2A 22 B2A 5 C2A 4 D2A 9 E2A 7 F2A 10 2 gifts $500+ 57 0.1%

A2B 30 B2B 44 C2B 31 D2B 18 E2B 14 F2B 20 2 gifts $250 - $499 157 0.2%

A2C 549 B2C 757 C2C 458 D2C 269 E2C 212 F2C 255 2 gifts $100 - $249 2,500 3.5% FREQUENCY - Number of Transactions

A2D 1,146 B2D 1,720 C2D 1,342 D2D 790 E2D 715 F2D 1,068 2 gifts $ 50 - $ 99 6,781 9.5% 1 1 gift 49,525 69.2%

A2E 167 B2E 372 C2E 330 D2E 230 E2E 191 F2E 110 2 gifts $ 25 - $49 1,400 2.0% 2 2 gifts 10,984 15.3%

A2F 3 B2F 33 C2F 33 D2F 13 E2F 1 F2F 6 2 gifts $ 1 - $ 24 89 0.1% 3 3 gifts 4,032 5.6%

1,917

2,931

2,198

1,329

1,140

1,469 4 4 gifts 2,011 2.8%

3

L

T

g

i

f

t

s

A3A 10 B3A 9 C3A 14 D3A 13 E3A 4 F3A 5 3 gifts $500+ 55 0.1% 5+ 5+ gifts 5,033 7.0%

A3B 144 B3B 101 C3B 31 D3B 20 E3B 13 F3B 12 3 gifts $250 - $499 321 0.4% TOTAL 71,585 100.0%

A3C 635 B3C 687 C3C 385 D3C 199 E3C 139 F3C 153 3 gifts $100 - $249 2,198 3.1%

A3D 322 B3D 402 C3D 283 D3D 158 E3D 131 F3D 128 3 gifts $ 50 - $ 99 1,424 2.0%

A3E 2 B3E 4 C3E 15 D3E 1 E3E 6 F3E 4 3 gifts $ 25 - $49 32 0.0% MONETARY - Accumulated

A3F - B3F 1 C3F 1 D3F - E3F - F3F - 3 gifts $ 1 - $ 24 2 0.0% A $500+ 2,183 3.0%

1,113

1,204

729

391

293

302 B $250 - $499 2,263 3.2%

4

L

T

g

i

f

t

s

A4A 22 B4A 15 C4A 8 D4A 3 E4A 2 F4A 2 4 gifts $500+ 52 0.1% C $100 - $249 9,162 12.8%

A4B 172 B4B 98 C4B 28 D4B 13 E4B 11 F4B 7 4 gifts $250 - $499 329 0.5% D $ 50 - $ 99 18,819 26.3%

A4C 507 B4C 460 C4C 229 D4C 146 E4C 71 F4C 83 4 gifts $100 - $249 1,496 2.1% E $ 25 - $49 26,434 36.9%

A4D 30 B4D 46 C4D 30 D4D 8 E4D 12 F4D 3 4 gifts $ 50 - $ 99 129 0.2% F $ 1 - $ 24 12,724 17.8%

A4E 2 B4E 2 C4E 1 D4E - E4E - F4E - 4 gifts $ 25 - $49 5 0.0% TOTAL 71,585 100.0%

A4F - B4F - C4F - D4F - E4F - F4F - 4 gifts $ 1 - $ 24 - 0.0%

733

621

296

170

96

95

5

+

L

T

g

i

f

t

A5A 1,005 B5A 548 C5A 229 D5A 108 E5A 75 F5A 10 5+ gifts $500+ 1,975 2.8%

A5B 691 B5B 348 C5B 128 D5B 55 E5B 28 F5B 25 5+ gifts $250 - $499 1,275 1.8%

A5C 532 B5C 318 C5C 126 D5C 92 E5C 64 F5C 40 5+ gifts $100 - $249 1,172 1.6%

A5D 214 B5D 185 C5D 102 D5D 55 E5D 22 F5D 14 5+ gifts $ 50 - $ 99 592 0.8%

A5E - B5E 6 C5E 8 D5E 4 E5E 1 F5E - 5+ gifts $ 25 - $49 19 0.0%

A5F - B5F - C5F - D5F - E5F - F5F - 5+ gifts $ 1 - $ 24 - 0.0%

2,442

1,405

593

314

190

89 TOTAL 71,585 100.0%


1

L

T

g

i

f

t







9,637

15,222 6,516

4,934

7,144

6,072 TOTAL 71,585 100.0%

2

L

T

g

i

f

t

s







1,917

2,931

2,198

1,329

1,140

1,469 4 4 gifts 2,011 2.8%

3

L

T

g

i

f

t

s







1,113

1,204

729

391

293

302 B $250 - $499 2,263 3.2%

4

L

T

g

i

f

t

s







733

621

296

170

96

95

5

+

L

T

g

i

f

t







2,442

1,405

593

314

190

89 TOTAL 71,585 100.0%

Rows are 1-time buyers (Frequency) by Monetary

Rows are 2-time buyers (Frequency) by Monetary

Columns are by Recency


1

L

T

g

i

f

t







9,637

15,222 6,516

4,934

7,144

6,072 TOTAL 71,585 100.0%

2

L

T

g

i

f

t

s







1,917

2,931

2,198

1,329

1,140

1,469 4 4 gifts 2,011 2.8%

3

L

T

g

i

f

t

s







1,113

1,204

729

391

293

302 B $250 - $499 2,263 3.2%

4

L

T

g

i

f

t

s







733

621

296

170

96

95

5

+

L

T

g

i

f

t







2,442

1,405

593

314

190

89 TOTAL 71,585 100.0%

Row summary of 1-time buyers by Monetary value

Row summary of 2-time buyers by Monetary value


1

L

T

g

i

f

t







9,637

15,222 6,516

4,934

7,144

6,072 TOTAL 71,585 100.0%

2

L

T

g

i

f

t

s







1,917

2,931

2,198

1,329

1,140

1,469 4 4 gifts 2,011 2.8%

3

L

T

g

i

f

t

s







1,113

1,204

729

391

293

302 B $250 - $499 2,263 3.2%

4

L

T

g

i

f

t

s







733

621

296

170

96

95

5

+

L

T

g

i

f

t







2,442

1,405

593

314

190

89 TOTAL 71,585 100.0%

Summary of Recency

Summary of Frequency

Summary of Monetary

Recency

Recency Customers Response Revenue Resp Rate Avg Sales

0-3 months 38,457 1,597 $42,571 4.2% $26.66

4-6 months 29,472 961 $19,274 3.3% $20.06

7-9 months 21,947 422 $6,231 1.9% $14.77

10-12 months 16,473 247 $2,547 1.5% $10.31

13-18 months 11,648 114 $954 1.0% $8.37

19-24 months 15,982 88 $341 0.6% $3.88

25+ 26,482 91 $188 0.3% $2.07

TOTAL 160,461 3,520 $72,106 2.2% $20.48

Frequency + Recency

Recency Freq Customers Response Revenue Resp Rate Avg Sales

0-3 months 3x+ 12,978 582 $15,201 4.5% $26.12

0-3 months 2x 5,325 201 $5,074 3.8% $25.24

0-3 months 1x 20,154 488 $10,025 2.4% $20.54

0-3 months 38,457 1,271 $42,571 3.3% $33.49

4-6 months 3x+ 10,873 452 $11,054 4.2% $24.46

4-6 months 2x 4,287 143 $2,984 3.3% $20.87

4-6 months 1x 14,312 250 $4,874 1.7% $19.50

4-6 months 29,472 845 $18,912 2.9% $22.38

Mailing Results

TOTAL CATALOG MAILED SALES

MAILED RESP PCT SALES AVG SL

Total Records 172,295 1,468 0.85% $1,632,790 $ 1,112

Recency

A - 0-3 months 18,562 492 2.65% $ 482,559 $ 981

B - 4-6 months 11,934 190 1.59% $ 225,985 $ 1,189

C - 7-9 months 12,047 139 1.15% $ 147,661 $ 1,062

D - 10-12 months 11,411 129 1.13% $ 133,310 $ 1,033

E - 13-18 months 19,529 124 0.63% $ 168,552 $ 1,359

F - 19-24 months 15,396 86 0.56% $ 116,023 $ 1,349

G - 25-36 months 29,614 132 0.45% $ 155,026 $ 1,174

H – 37-48 months 24,852 82 0.33% $ 90,146 $ 1,099

J – 49+ 0

Unmakred 28,950 94 0.32% $ 113,528 $ 1,208

TOTAL (R's) 172,295 1,468 0.85% $ 1,632,790 $ 1,112

Frequency

1 Time 63,744 400 0.63% $ 500,552 $ 1,251

2 Times 26,191 224 0.86% $ 238,746 $ 1,066

3 Times 53,168 749 1.41% $ 779,685 $ 1,041

Unmarked 29,092 95 0.32% $ 113,807 $ 1,208

TOTAL (F's) 172,295 1,468 0.85% $ 1,632,790 $ 1,112

Monetary

A - $10,000 plus 5,432 139 2.56% $ 169,229 $ 1,217

B - $5,000 – 9,999 14,421 229 1.59% $ 317,783 $ 1,388

C - $1,000 – 4,999 52,762 562 1.07% $ 605,726 $ 1,078

D - $500 - 999. 17,036 132 0.77% $ 113,268 $ 858

E - $1 - 499 42,847 271 0.63% $ 269,746 $ 995

Z - $0 10,847 41 0.38% $ 43,510 $ 1,061

Unmarked 28,950 94 0.32% $ 113,528 $ 1,208

TOTAL (M's) 172,295 1,468 0.85% $ 1,632,790 $ 1,112

RFM score

Can be a 3-character quintile = 543

– Sort file on R descending – breaking into 20% increments

– Sort file on F descending – breaking into 20% increments

– Sort file on M descending – breaking into 20% increments

– Assign top 20% score of 5, next 20% score of 4, and so on

The segments, therefore do not reflect any specific timeframe,

frequency or amounts. Higher values (i.e. 555) are better than

lower values (313). There are 125 total segments created.

RFM Variations

RFMP (Products) Best predictor is by product

Address challenge of Seasonality

Why RFM?

Use it to:

– Identify groups of customers ~

segments behave differently

– Target offers by various segments

– An offer to first time “triers” (don’t over do it)

– Promote repeat purchases/donors

– Eliminate non-responsive

Why RFM?

Use it:

– Modeling isn’t practical or too expensive

– Small databases

– Gain a high level of understanding

RFM versus Predictive Models

Advantage RFM Model

Understandable Easy Black Box

Creation Relatively simple Statistician with PhD

Timing Week Up to 6 weeks

Update As needed Annual

Cost Inexpensive Budget approval

Seasonality Somewhat effective Separate models

Depth All buyers Recent buyers

Breadth 3 variables 100s of variables

Predictive No Yes

RFM

Stage 1 Customers are one-time

buyers with positive Expectancy.

Stage 2 Customers are multi-

buyers with positive Expectancy.

Stage 3 Customers are multi-

buyers with negative Expectancy.

Stage 4 Customers are buyers

with negative Expectancy

Expectancy = Recency or Monetary

RFM

Stage 1 Customers – “Triers”

Stage 1 Customers are an

appreciating asset. They are new

customers that need to be resold.

They will respond well to early

marketing that features best selling

products with instructions on how to

use them. They trust the use of

testimonials from satisfied

customers. The goal is to move

them to Stage Two.

RFM

Stage 2 Customers – “Buyers”

Stage 2 Customers are your most

valuable asset. They are loyal

customers that need to be retained.

They will respond well to frequent

marketing that features your newest

products and bundles. They like to

be rewarded for their loyalty, and

asked for suggestions and

testimonials. The goal is to keep

them in Stage Two

RFM

Stage 3 Customers

"High Value, but Falling Potential"

Stage 3 Customers are a

depreciating asset. They are

customers that need to be

reactivated. They aren't responding

to your marketing. Have they moved

or died? Are they shopping

elsewhere? Have they experienced

problems with your company? The

goal is to find out what's wrong, and

fix it if possible.

RFM

Stage 4 Customers

"Low Value, and Falling Potential"

Stage 4 Customers are a liability,

not an asset. They are lost

customers that need to be replaced.

They have not responded to your

marketing in a long time. The goal is

to direct resources away from them

toward the retention and acquisition

of more valuable customers. Cut

them loose.

RFM Best practices

Build RFM cells with significant quantities

Seasonality impacts R – Holidays

– Campaigns

– Special offers

Profile top RFM segments

RFM Summary

Utilize simple RFM to segment and

understand customers

Develop a Direct Mail marketing plan based

on RFM segmentation

– Target

– Establish a contact frequency plan

– Don’t be afraid to “let go”

Track results

Questions, Answers & some GREEN!!!

Gary A Seitz Executive Vice President C.TRAC (440) 572-1000 x140 [email protected]

rfm: a cool tool for simple analytics

Marketing