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Re: RFM

From: Jim Novo <jimnovo_at_sprintmail.com>
Date: Thu 07 Mar 2002 20:07:57 -0600

Marco Janeczek typed:

> Recently I subscribed to ClickZ, and found a very
> interesting article about RFM.

It was an interesting, but a very confusing explanation.
If you would like to try a more lucid one (at least I
think so), try this one:

http://www.jimnovo.com/RFM-tour.htm

> RFM stands for Recency, Frequency and Monetary. It
> basically describes the value a customer places in
> relation to the revenue you can generate from that
> customer.

This is not quite accurate, RFM ranks the current and
**potential** value of a customer relative to other
customers. None of this was very well explained in the
article, for sure.

> Then you give this customer a score for each R, F and M,
> from 1 to 3.
> So if your customer rates 111 therefore the customer is a
> very low profit customer. If a customer rates 333 then a
> customer is a higher profit customer.

Well, a 111 is not only a low profit customer, but they have
low future potential as well. The 333 customer is a high
value customer, with high future potential. It's not just
about value "now", it's also about value "in the future",
which is what makes RFM so powerful. RFM allows you to
look forward, rather than always looking back in time at
what was. It forces you to concentrate on customers who
are the rocket fuel of your **future** business.

> Now, the question is should we concentrate on 333s or
> should we concentrate on 111s to convert them to become
> 333s. ?

You can't convert 111's to 333's, and you will waste a ton
of money if you try to do it. These are low value customers
who have low future value.

> The question also is if a customer rates 1, does this mean
> that the customer is not interested in the product/service
> anymore, or did they move somewhere else to get that product/
> service ?

That is generally the implication - these are "defected
customers". 113's are defected *best* customers, (high
current value, low potential value) and you never want to
see them get there.

You want to "do something" before it happens, usually a
marketing program. The tremendous value in the RFM model
is to be able to allocate spending where it generates the
highest ROI, not waste money on lost cause customers, and
detect when best customers are leaving you before it's too
late.

> any opinions ?

Meaning does it work? I've been using it for 20 years,
and I can tell you it works even better online than offline.
RFM is the Swiss Army knife of customer models. It
literally tells you how to make more money on the web.

But this ClickZ article did a terrible job of making the
case, I think. RFM can be used in many ways, and you don't
even have to use the "numbering method" described in the
article to make it work.

That's the most complicated version. These are easier:

http://www.jimnovo.com/measure-loyalty.htm

http://www.jimnovo.com/Recency-Discount.htm

http://www.jimnovo.com/Recency-Model.htm

http://www.jimnovo.com/Behavioral-Marketing.htm

Jim

Jim Novo | Author: Turning Customer Data into Profits
Learn the techniques and models used in High ROI
Customer Marketing at: http://www.jimnovo.com





Received on Thu Mar 07 2002 - 20:07:57 CST


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