Marketing to Customer Segments Using RFM
Because RFM bases customer value on three parameters rather than only one, these segments are more meaningful to you and your marketing strategies.
Many people think of valuable customers as customers who have spent a lot of money. But if spend is the only customer behavior you're evaluating, you may miss out on other key things.
Let's look at hypothetical high value customer Henry Hogsworth. Henry Hogsworth has spent over $50,000 at your business. But he hasn't made a purchase in over 30 months. Because Henry is worth $50K, you may have him listed as a valuable customer to target on your next marketing campaign. But Henry is likely a lapsed customer who is unlikely to respond to your marketing efforts.
Similarly, you may think that Tom Jones is a low value customer because he has only spent $480. But what if Tom Jones had made 5 purchases within 4 weeks?
Common sense dictates that Tom Jones is going to be more responsive to your next sales promotion than a customer who hasn't spent money at your business in nearly 3 years.
Including recency and frequency in the mix means you can identify these customers and target specific conversations to them to encourage behavior change.
On the other hand, it could be Henry purchased 1 high-value item from your business like a boiler. In the past 30 months, Henry has had no issues with the boiler and when it needs replacing in several years out, he may reach out to you again.
But Henry may need annual tune-ups, cleanings, service visits, and other ancillary products specifically for his boiler purchase.
With an RFM analysis, you can offer relevant products to your customers at the right moments and continually offer brand value. Tom will likely respond to frequent email drops promoting sales for smaller tools and parts, while Henry may respond to promotions for tune-ups and ancillary products for a boiler. And near the end of the boiler's warranty, he may be in the market to purchase a warranty extension or a new boiler.