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RecencyFrequencyMonetary
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Can be used for prospects and existing customers. Gender, Age, Income, Interests, Lifestyle ... Step 1: Determine how to measure recency based on customer ... – PowerPoint PPT presentation
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Title: RecencyFrequencyMonetary
1
RecencyFrequencyMonetary
- Behavioral Segmentation of Customers
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RFM vs. PsychographicSegmentation
- RFM
- Focus on customer behavior
- Best for predicting of future customer behavior
- Can be used primarily for existing customers
- Recency, Frequency, Monetary
- Psychographic
- Focus on customer characteristics
- Best for understanding customer behavior
- Can be used for prospects and existing customers
- Gender, Age, Income, Interests, Lifestyle
3
Recency Best Predictor of Response
- Exact Quintiles
- Step 1 Determine how to measure recency based on
customer decision process. - Step 2 Sort customers by most recent business
decision. - Step 3 Assign a 5 to the top quintile, a 4 to
the next 20, and so forth. - Step 4 Realize recency best predictor of
response to a promotion.
- Hard Coding
- Step 1 Determine how to measure recency based on
customer decision process. - Step 2 Select exact time intervals for each of 5
groupings (5 given to purchase in the last 3
months, 4 to purchase from 3-6 months ago, and so
forth). - Step 3 Sort customers according to recency.
4
Frequency Possibly Best Predictor of Loyalty
- Step1 Use same customer behavior as selected for
recency. - Step 2 Decide on a meaningful time interval
(visits to solon per year, shopping at Vons per
month, e-mails sent per day etc.) - Step 3 Sort customers according to frequency.
- Step 4 Assign a 5 to the top quintile, a 4 to
the next 20, and so forth. - Step 5 Monitor this behavior to determine
retention patterns and possible defection. - Step 6 Realize that frequency is not as
predictive as recency for promotion but may be
better at gauging loyalty.
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Monetary Directly Related Customer Worth
- Step 1 Decide how to track spending patterns
(total bill at resort per visit, room rate,
dinners, golf etc. at resort per visit). - Step2 Determine meaningful time interval for
tracking and calculation (week, month, year). - Step 3 Sort customers by spending amount per
time interval. - Step 4 Assign a 5 to the top quintile, a 4 to
the next 20, and so forth. - Step 5 Realize that spending amount is not as
predictive as recency, or frequency except for
bigger ticket items.
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Classifying Customers by RFM Codes
- Step 1 Sort by Recency Code and assign numbers
as before (5,4,3,2,1). - Step 2 Sort by Frequency within each Recency
Code (start with the 5s in recency, than 4s and
so forth). Then assign numbers to frequency
quintiles as before within each recency code. - Step 3 Sort by Monetary within Recency and
within Frequency (start with the 5s for recency
and frequency). For example, a 551 would indicate
that among the most recent and frequent
purchasers this customer is at the bottom in
terms of amount spent. - Step 4 Generate 5 X 5 X 5 125 RFM Cells.
- Step 5 Sort all 125 cells in descending order
(555,554,553, 111).
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Business to Business RFM
- Step 1 Same procedures as for end-consumers but
classification now is 5 x 2 x 2 20 cells
(recency, frequency, and monetary respectively). - Step 2 Sort by code in descending order.
- Step 3 Consider sending sales force to the top
20 and direct mail to some portion of the
remaining 80.
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Break-Even Analysis
- Promotional offers need to be tested according to
proper sampling procedures (to be discussed later
in semester). - Break-Even Response Rate
- Break-Even Index (BEI)
- Use BEI to identify winning RFM cells.
- Economics suggests promoting only to winning cells
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