How to use the RFM Segmentation to segment your customer base?
Acquiring a new customer cost up to 5 times more than retaining an existing one (and sometimes even more)?
With numbers like that, the value of customer retention can't be overstated.
Especially when 38% of consumers are ready to join the loyalty program of a brand to which they feel loyal (Industry report, Loyoly).
But how do you keep your existing customers engaged, especially in an increasingly crowded e-commerce landscape?
Let me introduce you RFM Segmentation : a nuanced approach that leverages the metrics of Recency, Frequency, and Monetary Value to segment your customer base.
This not only adds precision to your marketing strategies but also maximizes customer lifetime value.
If you're an e-commerce brand or marketing professional looking to build customer loyalty and significantly boost revenue, then this comprehensive guide is for you.
We'll delve deep into what RFM Segmentation is, why it's crucial for your business, and how to implement it effectively, step-by-step.
What is RFM segmentation ?
RFM Segmentation is a customer segmentation methodology that classifies customers based on three quantitative factors: Recency, Frequency, and Monetary Value.
These elements provide a comprehensive understanding of consumer behavior, facilitating targeted and effective marketing strategies.
Recency
When did this customer last make a purchase or interact with the brand?
This criterion examines the time elapsed since a customer last engaged with the brand, whether it's making a purchase, clicking on an email, or interacting on social media.
The more recent the interaction, the more likely the customer is to engage again.
If you're new to RFM segmentation, focus on purchases only.
Frequency
This metric quantifies the number of transactions or engagements a customer has had over a defined time period.
Frequent interactions often indicate a higher degree of customer loyalty and satisfaction, which is invaluable for predicting future engagements.
Here too, if you're just starting out with RFM segmentation, focus on purchases only.
Monetary
Monetary value examines the total financial contribution of the customer over their lifecycle.
It could mean assessing the average order value, or the cumulative amount spent by the customer during their relationship with the brand.
Here, if you focus on interactions instead of purchases, you can use Earned Media Value to define their monetary value.
When synthesized, these 3 metrics offer a multidimensional view of the customer's relationship with a brand.
Why use RFM segmentation in e-commerce?
Ah, the million-dollar question ! Or should I say, the question that could lead to millions.
By giving you the lowdown on who your customers are, how they behave, and what they're worth, RFM turns your marketing strategy from guesswork into a science.
And let's be real, in today's hyper-competitive e-commerce landscape, who wouldn't want that edge?
Pinpoint marketing
Gone are the days when you'd cast a wide net and hope for the best.
With RFM segmentation, you can tailor your marketing strategies to specific segments.
Planning a flash sale? Target frequent buyers.
Want to win back lapsed customers? Zoom in on those with high Monetary Value but low Recency scores.
You'll become a marketing sniper.
Resource allocation
Let's face it, marketing budgets aren't infinite.
RFM segmentation provides data-driven insights that assist in prioritizing marketing initiatives.
This ensures that investment is directed toward customer segments that are most likely to yield high returns.
Customer retention
As any e-commerce pro knows, it's cheaper to retain an existing customer than to acquire a new one.
RFM segmentation helps you identify the customers most likely to stick around, so you can give them the attention they deserve.
Upselling and cross-selling
Knowing your customer's monetary value and purchase frequency can unlock new avenues for upselling and cross-selling.
Got a segment of high-frequency but low-monetary customers? Maybe they're ready for a more premium offering.
Risk mitigation
RFM can also serve as an early warning system.
A sudden drop in frequency or monetary value on a segment can be a warning sign, pointing to deeper problems that require immediate attention.
Strategic planning
Over the long haul, understanding your RFM segments can guide broader strategic decisions.
Whether it's inventory management, pricing strategies, or even new product development, the insights gleaned from RFM segmentation can be gold.
How to create RFM segmentation?
Let's shift gears from the theoretical to the hands-on.
Here's a step-by-step breakdown to help you implement RFM segmentation for your e-commerce brand.
Step 1: Gather your data
Before you can even think about segmentation, you need a solid foundation of transactional data.
Access your customer database and extract relevant information such as customer IDs, the dates of their purchases, and the amounts they've spent.
Make sure to select a specific timeframe that aligns with your marketing objectives. It could be a quarter, six months, or even a year, depending on your business.
Step 2: Calculate recency
To get your Recency metrics, choose a reference date. Usually the current date is the most practical.
Then, compute the number of days since the last transaction for each customer. Store this information in a new column in your database.
Remember, the fewer the days since the last purchase, the higher the Recency value will be.
Step 3: Measure frequency
Frequency is the total number of purchases made by each customer during your chosen timeframe.
Simple as pie, tally them up.
Again, add this information as a new column in your database.
Step 4: Assess monetary value
Monetary Value is the total amount spent by each customer over that same period.
Don't confuse this with the average order value; we're talking about the sum total here.
Create another new column in your database for this metric.
Step 5: Rank customers
Now comes the fun part.
After you've compiled the Recency, Frequency, and Monetary metrics, it's time to rank your customers.
There are several methods for this, such as percentile ranking or simply dividing your customers into quartiles (four equal parts) based on each metric.
Step 6: Assign scores
Assign scores for Recency, Frequency, and Monetary Value based on the ranking.
For instance, if using quartiles, scores can range from 1 to 4, with 4 being the best.
Now, each customer will have a three-digit RFM score, like 4-3-2.
Step 7: Create segments
You've got your RFM scores; now it's time to create meaningful customer segments.
These could range from "High-Value Customers" with high scores across all metrics (e.g., 4-4-4) to "At-Risk Customers" with low scores like 1-1-1.
Name these segments in a manner that clearly describes their characteristics for easy reference.
We’ll give more examples below.
Step 8: Develop strategies
With your customer segments in place, tailor your marketing strategies to each group's specific traits and behaviors.
For high-value customers, this could mean exclusive promotions or early access to new products.
For at-risk customers, consider re-engagement campaigns or special discounts to spark interest.
Read below for more inspiration.
11 examples of RFM segments and marketing action ideas
Let's delve deeper into this by examining some typical segments and associated marketing strategies.
High-Value Customers (4-4-4 or 3-4-4)
Characteristics: These are your crown jewels, the customers who have recently purchased, who buy often, and spend a lot too.
Marketing actions: Reward loyalty by offering exclusive previews to new collections, first dibs on sales, or special members-only offers.
Consider creating a loyalty program that offers points or cash-back for purchases to encourage repeat business.
Check out this article to learn all about creating a loyalty and rewards program.
New Enthusiasts (4-4-1)
Characteristics: These folks have made frequent purchases but haven't spent much in terms of monetary value, yet.
Marketing actions: Use targeted email campaigns or app notifications to introduce them to higher-value items that align with their recent purchases.
You could also offer a bundled package of goods at a discounted rate.
And they're also the perfect profiles to invite to join your loyalty program.
At-Risk High Spenders (1-2-4)
Characteristics: Customers who haven't bought anything for a while but have historically spent a lot.
Marketing actions: Rekindle the relationship through win-back campaigns.
Offer them exclusive deals or access to VIP services.
Personalized messages asking for their feedback on why they've disengaged can also provide invaluable insights.
Price-Sensitive Shoppers (3-1-1)
Characteristics: These customers are active but make infrequent, low-value purchases.
Marketing actions: Flash sales or limited-time discount offers can trigger buying behavior.
They're interested in your products but need an extra push to spend.
Make sure the offers are time-sensitive to encourage immediate action.
Window Shoppers (4-1-1)
Characteristics: These customers are recent but have low frequency and monetary scores. They're mostly browsers but have recently made at least one purchase.
Marketing actions: Since these customers are still engaging with your brand, try offering educational content about the value your products offer.
Product guides or how-to content might be just what they need to make a second purchase.
Lapsed Customers (1-1-1)
Characteristics: Haven't bought anything in a while, never bought much to begin with, and don't buy often.
Marketing actions: These are the hardest to win back and might require aggressive discounts or even 'we miss you' campaigns.
Another angle is to survey them to find out why they left.
You might find you can win them back with improvements to your service or product lineup.
Seasonal Shoppers (2-1-4)
Characteristics: These customers may not shop often or recently, but when they do, they go big, perhaps during holiday seasons or annual sales.
Marketing actions: Mark your calendar for these seasonal periods and plan to target this group with early-bird specials, exclusive previews, and package deals tailored to what they typically purchase.
Bargain Hunters (4-1-2)
Characteristics: Recent shoppers who don’t buy frequently and always aim for discounted items or low-cost options.
Marketing actions: Use limited-time discount coupons or flash sales to encourage them to make more frequent purchases.
This group is price-sensitive but engaged, so timely promotions can work wonders.
You could also think about inviting them into your loyalty program to encourage them to interact more with your brand, and ultimately spend more frequently.
Slow but Steady (1-3-3)
Characteristics: They may not have shopped recently, but in the past, they've shopped consistently and spent a reasonable amount.
Marketing actions: Consider luring them back with "We've missed you" messages coupled with incentives like exclusive discounts or free shipping on their next purchase.
Experimental Shoppers (4-2-1)
Characteristics: These customers have recently made a purchase and do so from time to time but haven't spent much yet.
Marketing actions: Suggest related products to what they’ve already bought, perhaps with a small discount to encourage a bigger spend next time.
You could also try "bundle" promotions that offer a package deal on related products.
Silent Observers (1-1-2)
Characteristics: These customers have been dormant for some time but have previously spent a moderate amount of money.
Marketing actions: Re-engage them by showcasing new features or products since their last visit.
A "What's New" campaign could be the nudge they need to re-engage with your brand.
