By Jessica Heald on Wed 11 March 2020 in Wholesale & Distribution
Let us explain what RFM is, why you should care about it, how to calculate and use it, and most importantly – how it impacts all 6 key strategies for growth and profitability in Wholesale, Distributor & Manufacturing businesses…
So…what is RFM?
RFM is a well-known and well-loved technique for segmenting customers by their spend pattern. Essentially, it segments customers by Recency, Frequency and Monetary Value:
Recency is a score for how long ago a customer bought from you. It's usually expressed as a ranking score of 1-3 or 1-5.
Frequency is a score for how often a customer buys from you. Typically, this is usually over the last year or two years, and, again expressed as a rank or score of 1-3 or 1-5.
Monetary Value is a score for how much a customer spends with you in total over that period. Again, this is scored or ranked from 1-3 or from 1-5.
Calculating these scores can actually become very complex, and to make matters even trickier, scores ideally need to be recalculated daily. But, don't worry, if you’re already using Prospect CRM, then our Dev team have already figured out all the calculations for you, meaning you don't have to! If you aren't yet using Prospect CRM, then we'd love to have you as a customer, so why not take a no obligation Free Trial, integrated to your back-office accounting or inventory system? But, either way, here's the info you need to be able to either understand the calculations we've done for you, or to do those calculations yourself, on a spreadsheet.
For each of the 3 metrics (Recency, Frequency and Monetary Value), your customer data is assigned into buckets to give them a ranking score. These buckets would look something like this:
Based on the customer's total score from all 3 metrics, they're then put into a 3-dimensional cube with the highest scoring customers in one corner and the lowest in the opposite corner. But, 3D cubes are hard to imagine and even harder to work with. So, RFM grids are usually flattened out into a 2D representation, like the one below (much easier!):
The 1-5 score along the bottom (x-axis) is the Recency score, and the 1-5 up the left-hand side (y-axis) is a combination of the Frequency and Value (averaged in this case, but in other diagrams expressed as the sum of the two).
So, a new customer will enter in the bottom right-hand corner (high Recency, but low Frequency and low Monetary value), then move up the chain to 'Potential Loyalist', 'Loyal Customer' and eventually a 'Champion' customer – assuming they keep ordering with you! The aim is to ensure customers take this path, moving upwards, and don't move towards the left-hand side of the grid. You achieve this by recognising that customers in each segment need treating differently and approaching with different methods and styles of communication, or even different special offers and incentives.
Focused Targeting of the different RFM Segments
RFM allows your team to be more proactive, as it enables them to more confidently tailor their approach with each customer, depending on which segment they fall into.
High RFM scores identify your most promising customers, enabling your team to build on experiences that keep them engaged.
- Onboard with personal contact
- Get the customer to place repeat orders
- Turn them into regular, loyal customers
- Promote new products to these customers
- Get feedback for future considerations
- Obtain referrals & case studies
Identifying customers with low RFM scores is just as important as identifying your Champions and Loyal Customers. Armed with this information, your teams can identify:
- New customers that need to be onboarded & nurtured
- Previously loyal customers that have found a replacement product(s) & should be entered into a re-activation campaign
- Customers who buy low-value items regularly and are prime candidates to be moved up the chain, with an upsell campaign
Here’s a handy chart of all the RFM Segments, and some actionable tips for each which can implement straight away!
Want to learn more about how RFM segmentation can drive growth in your Wholesale, Distributor or Manufacturing business? We ran a free Webinar all about it which you can watch back here!