RFM analysis: the benefits of the approach to increasing business profitability
Although the same target group includes consumers with similar needs, status and expectations, each has its own peculiarities in interacting with the company. Understanding the differences in the behaviour of potential customers allows you to choose an effective strategy for attracting them. One of the tools for doing this is RFM analysis. This approach segments customers according to three main characteristics:
– recency – how much time has passed since the last purchase;
– frequency – how often the customer makes purchases;
– monetary – the cost of the purchase.
By evaluating customers according to these parameters, you can significantly improve communication and offer your customers bonuses or promotions that interest them.
Benefits of RFM analysis
RFM analysis is not only interesting from a personalisation point of view. Based on its results, it is possible to revise marketing efforts and make a forecast to achieve business objectives.
Using this method, you can obtain different target audience segments, and specialists independently decide how many of them to develop a marketing strategy for.
There are some parameters to consider when using RFM analysis:
– the methodology works effectively for companies with a base of more than 10,000 customers;
– the larger the number of customers, the more visible the segmentation;
– the methodology is also applicable to medium and small companies, but in this case, it is more difficult to identify a large number of customer groups.
Benefits of implementing RFM analysis:
– allows to increase the company’s e-commerce profits by 20%;
– increases the efficiency of email newsletter use by 20%;
– 6-8% higher conversion rate in advertising campaigns;
– reduces advertising costs and boosts company profits.
Using this method, it is possible to identify the company’s most profitable group of customers and, taking into account their characteristics, to develop an effective strategy for promoting and increasing loyalty.
RFM analysis rules
Working with RFM analysis means following a clear algorithm of actions:
1. Order history compilation. This stage transfers all data for analysis into a single database; the process can be manual or automated.
2. Tables. All information is formalised into tables, assigning recency, frequency and monetary parameters to each company.
3. Division by segmentation ranges. The most commonly used score is a 5-point system for each parameter. For example, how long ago the order occurred and how much the order was for.
4. Segmentation. Based on the scores, customer groups are formed. A segment may contain more than 90% of the customers. In this case, the best solution is to divide a large group into several smaller ones.
5. Strategy development. After segmentation, you can start to develop an individual approach to each category of customers.
Based on RFM analysis, it is easy to develop personalised offers and select individual terms of cooperation for customers. This increases the efficiency of marketing efforts and reduces costs.
