Segmentation and

RFM Basics

Bill Ruppert, ResponseB2Bwruppert@responseb2b.com

817-442-0698

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Introduction

• Who to mail?

• How often to mail them?

• Fundamental questions

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Basic Tools

• The Segment

• RFM to define segments

• Some simple reports

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Segments

• The mail / no mail decision is made at a group level

• That group is called a segment

– Every name is mailed or not mailed

– Pros: simplicity, control, transparency

– Cons: defining, multiplication

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Desirable Attributes

Similarity - within a segment

Distinctiveness - between segments

Comparability - over time

Size - large enough to have meaning

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Similarity

The names within a segment have a similar behavior

Justifies mailing all or none

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Distinctiveness

The segment behaves differently than other segments

Is there really a difference between a 6 time and 7 time buyer?

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Comparability

Able to compare the results from a segment over time

Requires stability in the RFM definition process

In prospecting, requires thought in ordering lists

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Size

The segment should be large enough that the results are statistically valid

Cell grouping, described later, helps with this

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Prospecting Segments

• A Prospecting segment is a particular select from a list

– 12 month buyers

– SIC 35xx with 1-4 employees

• Prospecting lists are often small

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House File Segments

• RFM = Recency, Frequency, Monetary

• Easy to implement

• Easy to understand

• More then adequate for most B2B direct marketers

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RFM Values vs. Cells

• The RFM values are the actual unique value for each customer– 138 days; 17 orders; $1,465.27

• The RFM cells are groupings of values

• First, define how values are calculated

• Second, define how the cell are defined

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Recency Value

• The date of last order

• The most powerful predictor of who is likely to order

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Frequency Value

• Frequency is the next most powerful predictor of response

• Do not use the total count of lifetime orders as the definition of frequency

• Pick a time limit back from the most recent order

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Monetary Value

• Monetary is the least powerful

• Especially useful to avoid mailing very low value customers

• Total sales directly correlated to order frequency

• Use the average order size of the orders counted for frequency

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Defining RFM Cells

• Compute the values as defined above

• Define a cell structure - ranges of values for R, F and M

• Assign each customer to a cell

• Use cells for reporting, analysis, mailing decisions, etc.

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Number of Cells

• The number of cells you create is important

• Too few cells reduces the discriminatory power of your segmentation

• Too many cells is hard (or even impossible!) to work with

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A Starting RFM Cell Structure

• A place to start from, but everyone has different needs

• 108 cells for the first three years of buyers and nine cells for every year after that

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Recency

• Quarters for 3 years

– 0-3 mo, 4-6 mo, 9-12 mo, …., 34-36 mo

– Some may need more in the first year

– Others may need less after the first year

• Year groups after that

– 37-48 mo, 49-60 mo, ...

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Frequency

• A simple 1, 2, 3+ for frequency

• Recent, 1x buyers are new customers - special treatment

• If really aggressive, you may want higher frequency cells for mailing more often

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Monetary

• Start with 3 groups based on ranges of average order size

• Low - less then one half AOS

• Normal - one half to twice AOS

• High - over twice AOS

• May need a special “Very Low” for reduced mailings

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RFM Cell Groups

• Sometimes you need many RFM cells

– if short R periods are needed

– if both higher F and higher M values have strong predictive power

• The number of cells can multiply quickly

• Solution - RFM Cell Groups

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Group Similar Mailing Patterns

• Define groups of cells sharing a default mailing pattern

• The default decisions can be changed at the cell level as needed

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The A's, B’s and C’s

• “A” - the best cells, mailed every time

• “B”, “C”, “D” - good to not so good

• “N” - current new buyers– “over-mail” in an attempt to convert into

multi-buyers

• “X” - so bad, you’ll never mail– slug and test as though a prospecting list

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Segmentation Enhancements

• Product History– RFM report by Product Groups

• SIC and Employee Size– RFM report by SIC / Employee Size

Groups

• Create special RFM Cells– fewer cells

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Example Reports

• Forecasting and Sales Reporting

• Using RFM Cell Groups

• RFM Dynamics

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Total

Key Mail Avg. Sales/ Cost/ Total at Per PerRec Freq Mon Code Qty. Orders Sales %Pull Order Piece 1,000 38.0% Piece Order

0-3 3+ 201+ PG0101 3,058 474 $130,350 15.5% $275.00 $42.63 $645 $47,513 $15.54 $100.240-3 3+ 50-200 PG0102 2,706 276 $34,500 10.2% $125.00 $12.75 $645 $11,352 $4.20 $41.130-3 3+ 0-50 PG0103 1,717 122 $3,904 7.1% $32.00 $2.27 $645 $375 $0.22 $3.07

0-3 3+ Sub 7,481 872 $168,754 11.7% $193.53 $22.56 $645 $59,239 $7.92 $67.94

0-3 2 201+ PG0104 2,752 341 $93,775 12.4% $275.00 $34.07 $645 $33,825 $12.29 $99.190-3 2 50-200 PG0105 2,435 199 $24,875 8.2% $125.00 $10.21 $645 $7,873 $3.23 $39.560-3 2 0-50 PG0106 1,545 82 $2,624 5.3% $32.00 $1.70 $645 ($1) ($0.00) ($0.01)

0-3 2 Sub 6,733 622 $121,274 9.2% $194.97 $18.01 $645 $41,697 $6.19 $67.04

0-3 1 201+ PG0107 1,651 106 $29,150 6.4% $275.00 $17.65 $645 $10,001 $6.06 $94.350-3 1 50-200 PG0108 1,461 60 $7,500 4.1% $125.00 $5.13 $645 $1,905 $1.30 $31.750-3 1 0-50 PG0109 927 22 $704 2.4% $32.00 $0.76 $645 ($331) ($0.36) ($15.03)

0-3 1 Sub 4,040 188 $37,354 4.7% $198.69 $9.25 $645 $11,575 $2.87 $61.57

0-3 Sub 6,428 270 $45,558 4.2% $168.73 $7.09 $645 $13,149 $2.05 $48.70

Contribution

Forecasting and Sales Reporting

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Using RFM Cell Groups

Mail DateCust 01/06/03 02/10/03 03/17/03 04/21/03 05/19/03 06/23/03 Pieces Total Cost/

RFM Group Count 100% 100% 100% 100% 100% 100% Mailed Cost Cust

A Top Tier 14,328 Mini Reo BB Mini 2 BB Reo 85,968 95,998$ 6.70$

B Second Tier 15,953 Mini Reo BB Mini 2 BB 79,765 100,185$ 6.28$

C Other Good 20,913 Mini React BB Mini 2 React 104,565 90,972$ 4.35$

D React Potential 4,768 Mini React BB 14,304 16,116$ 3.38$

N1 12mo New 8,706 Mini BB Reo 26,118 28,904$ 3.32$

N2 24mo New 6,879 Reo BB 13,758 19,468$ 2.83$

X 0-60mo Low Value 46,414 BB 46,414 109,073$ 2.35$

Z 61+mo 31,843 0 -$ -$

Totals 149,804 64,668 62,841 117,961 51,194 30,281 43,947 370,892 460,714$ 3.08$

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RFM Dynamics2003

Monetary % Sales % Sales % Sales

Recency Freq (Avg Ord) Custs Retn (000) Custs Retn (000) Custs Retn (000) Custs

New Customers 17,692 4,041 15,176 3,677 11,318 2,751

1. 0-12 mo 1. 2+x 1. $201+ 6,880 57% 4,062 7,337 60% 4,884 7,936 58% 4,915 7,604 2. $51-200 16,831 55% 4,357 16,295 55% 4,198 15,959 54% 3,992 14,875 3. $0-50 3,299 37% 209 3,376 37% 235 3,191 34% 224 2,901

1. 2+x Total 27,010 53% 8,628 27,008 54% 9,317 27,086 53% 9,132 25,380

2. 1x 1. $201+ 3,259 20% 356 2,899 25% 343 2,686 22% 250 2,354 2. $51-200 7,701 16% 331 6,054 19% 332 5,800 17% 219 4,726 3. $0-50 6,718 12% 165 5,683 14% 166 5,033 13% 133 3,757

2. 1x Total 17,678 15% 853 14,636 19% 841 13,519 17% 602 10,837

1. 0-12 mo Total 44,688 38% 9,481 41,644 41% 10,158 40,605 41% 9,734 36,217

2. 13-24 mo 1. 2+x 1. $201+ 2,401 28% 382 2,978 29% 455 2,960 25% 363 3,356 2. $51-200 6,078 28% 473 7,609 28% 598 7,387 26% 542 7,286 3. $0-50 1,931 20% 78 2,062 18% 76 2,109 20% 73 2,117

1. 2+x Total 10,410 27% 933 12,649 27% 1,128 12,456 25% 979 12,759

2. 1x 1. $201+ 2,844 14% 166 2,596 12% 129 2,174 13% 106 2,087 2. $51-200 7,543 11% 203 6,439 10% 162 4,882 11% 136 4,820 3. $0-50 6,562 10% 105 5,905 8% 91 4,866 9% 66 4,370

2. 1x Total 16,949 11% 474 14,940 10% 383 11,922 10% 308 11,277

2. 13-24 mo Total 27,359 17% 1,407 27,589 18% 1,511 24,378 18% 1,287 24,036

2000 2001 2002

Thank You!

Thank you for your kind attention!

And thanks to MeritDirect for inviting me!