What is the RFM Model?

The RFM Model is a Tool that helps Classify Customers to Develop Successful Marketing Campaigns.

  • And Target the Right Customer with the Right Approach.

 

To do this, it Analyzes the Purchasing Habits using 3 Metrics.

 

It’s name, is an acronym for the four 3 Metrics proposed:

  • Recency.
  • Frequency.
  • Monetary Value.

Three Metrics of the RFM Model

1. Recency: How Long has it been since the Client’s Last Purchase.

  • Or the Last time the Client Interacted with the Company.

 

2. Frequency: How Often the Client Purchases from the Company.

  • How Engaged is the Client with the Company.

 

3. Monetary Value: How much money the Client Spends or can Spend.

  • The Purchasing Power of the Client and the Willingness to Spend.

RFM Model

 

Let’s see the first example:

RFM Model example: Casinos

 

If you find it difficult to Understand these Metrics and Why would any Company to bother about them…

  • … Think about a Casino.

 

In case you don’t know, Casinos Monitor their best Players and Treat them much better than Average Customers.

  • Sometimes they even offer Free Rooms.

 

Why?

Well, if a Client spends hundreds of thousands of dollars per year, They are a Gold Mine.

 

But… How do Casinos use the RFM Model?

 

Recency

The longer a Player has been without going to the Casino, the more money he (or she) can gamble.

  • In case a Player has lost money gambling (which is the most common thing).

People need time to get their Money back … And forget what they Lost.

 

Frequency

Players can be:

  • Sporadic Players that come and go.
  • Frequent Players who bet little money, but many times.
  • Players who gamble a lot of money in a few days of the year.
    • These are the most profitable ones .
      • They spend a lot, and hardly use the Facilities.

 

Monetary Value

As you can guess…

  • The Richer the Client, the more money he (or she) can Spend.

Although, many times, more than wealth it is the Will to Spend what is most valued.

  • What is sad, and doesn’t end well (for the “player”).

 

As you can see, these 3 Metrics could define perfectly the “Potential Profitability” of the Clients of any Casino.

As you might be thinking right now… Every company has lots of things in common with Casinos.

  • All of them want their Clients to Spend as much as possible in their Businesses.

 

But, How can an Average company use the RFM Model?

How to use the RFM Model

First of all, you should establish Measurable and Defined Metrics.

  • Use Monthly Purchases, days since last Purchase, Money Spent per year…

 

Avoid using Subjective Metrics such asFrequent Buyer, Sporadic…“.

  • Define your Metrics with Numbers anyone understands.

 

Use a Scale to Rank your Customers.

  • Assign each Variable 5 Points. Your Best Clients would have 15 Points.

 

Be Open to Modify your Metrics and their Target Values.

  • Each Business is Different and should be Realistic about its Targets.

The best way to understand the RFM Model and how you can use it is by sharing some examples with you:

RFM Model examples

We have chosen 3 different examples in which the RFM Model is used.

  • Even if Companies don’t call it by this name (RFM).

 

Let’s begin:

Facebook - RFM Model example

 

In the age of the Internet, Data is the new Gold.

Social media Networks Analyze what we like the Most, in order to sell us certain Products.

  • Well, technically, to allocate the proper Ads to the right Users.

 

Let’s Analyze what Facebook could be doing.

  • We can’t be sure, as these algorithms are Top Secret.

 

Recency

Maybe, if we have recently bought a certain Product through some Facebook Ad, Facebook suggests us to buy Complementary Products.

  • For example, if you have just bought a Play Station 5, Facebook could Suggest you some games.

 

Frequency

You surely have experienced this at Facebook:

  • The more you watch a certain type of Suggested video, the more similar Videos Facebook suggests to you.

 

Surely, Facebook Measures with what type of Products, Ads or Formats we interact the most.

  • For example, Facebook always suggests me 3.00 minutes videos about Food.

 

Monetary Value

This is the Variable that we are least sure of.

 

But, we imagine that, if you buy, or show interest in “expensive” Products, Facebook would suggest you more “Premium Products”.

  • For example: If you buy an expensive Bag, or a Computer… Through a Facebook Ad.

 

* Again, we are not experts in How Network Ads work (in fact, we have no idea about How Google decides what Ads are shown in our Site).

  • We have created this example for you to understand How the RFM Model can be used.

Insurance Companies - RFM Model example

 

Car Insurance Companies use these Metrics but, with a little difference:

  • Instead of using Shopping Habits, they use your Car Incidents as Reference.

 

Let’s see what they do:

 

Recency

Car Insurance Companies analyze when has been the last Time you had an Accident.

  • The longer it has been since your last accident, the less amount they’ll Charge you.

 

Frequency

Of course, the more Accidents or Incidents you have had, the higher your Insurance rate will be.

  • This is well known by everybody.

 

Monetary Value

How Car Insurance Companies use this Metric?

  • The more expensive your Car, the higher the insurance rate.

 

Of course, this is because, fixing an expensive car is more expensive.

  • But, if you don’t have any Accident (pretty common) you pay more for nothing.

Credit Companies - RFM Model example

 

Credit Companies (or/ and Banks) are famous for “auditing” their clients.

  • They are some of the companies that Analyze their Clients the most.

 

In fact, the name “Credit” shows what they look for:

  • People they can Trust.

Trust… To give their money back, with interest.

 

Let’s briefly analyze How Credit Companies use the RFM Model:

 

Recency

Credit Card Companies analyze if you have recently Borrowed large amounts of Money.

  • Or if you have recently repaid a Loan.

Depending on this Analysis, they canCalculateyour Financial Health.

 

Frequency

For Credit Companies, it is important How Often:

  • You ask for Credits.
  • You stay “in the Red” (when you have no money in your credit account).
  • You Generate Income.

 

Depending on this Factors, they’ll be able to decide When, or How often, they can offer you a Loan.

 

Monetary Value

The amount of Money you Generate, Spend, and ask for a Loan, are Vital.

  • These Metrics help Banks decide How much Money they can Lend you.

Summarizing

The RFM Model is a Tool that helps Classify Customers to Develop Successful Marketing Campaigns.

 

To do this, it Analyzes the Purchasing Habits using 3 Metrics:

  1. Recency: How Long has it been since the Client’s Last Purchase.
  2. Frequency: How Often the Client Purchases from the Company.
  3. Monetary Value: How much money the Client Spends or can Spend.

 

How to Use the RFM Model:

  • First of all, you should establish Measurable and Defined Metrics.
  • Avoid using Subjective Metrics such as “Frequent Buyer, Sporadic…”.
  • Use a Scale to Rank your Customers.
  • Be Open to Modify your Metrics and their Target Values.

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