Recency, frequency, and monetary model allow online marketers to identify and market specific consumer groups based on their transactional behavior.
Ecommerce merchants have many reasons for segmenting customers and prospects. One example is organizing customers according to their interests and then sending out relevant weekly newsletters to those customers.
The Recency, Frequency, and Money Value (RFM) model gives merchants the ability to create segments around each customer’s buying behavior and then assign a three-digit RFM code to each segment.
The RFM model begins with ârecency,â a measure of when a customer has made a last purchase from your business.
âThe more recently a customer has made a purchase from a company, the more he or she will continue to keep the company and brand in mind for future purchases. Compared to clients who have not purchased from the company for months or even longer periods of time, the likelihood of engaging in future transactions with recent clients is arguably higher, âaccording to Investopedia.
However, recency is a relative term. If your online store sells consumables such as protein powder, a recent customer has likely purchased in the last month. But Carvana, which sells used cars online or at vending machines (yes, car vending machines), might consider a purchase in the previous 24 months to be recent.
To use the RFM template, determine what ârecentâ means for your online store. Then divide your store customers into five time segments. You will end up with ranges that describe when a particular buyer made a last purchase.
For example, you can create these recency groups:
- 0 to 30 days,
- 31 to 90 days,
- 91 to 180 days,
- 181 to 365 days,
- Over 365 days.
Traditionally, the RFM model has used a 10 point scale. But some online marketers use five points, which I did for this article. In an RFM model, a higher number is generally preferable. So, for a recency scale of 1 to 5, a score of 5 represents the most recent buyer.
- 0 to 30 days | 5
- 31 to 90 days | 4
- 91 to 180 days | 3
- 181 to 365 days | 2
- More than 365 days | 1
In this particular RFM model, a customer who bought from your ecommerce business 17 days ago would have a recency score of 5, while a customer who bought 130 days ago would have a recency score of 3.
The “frequency” in the RFM model refers to how often a specific customer buys from your business. Like recency, frequency is relative to your business.
For example, an online store selling fishing lures might have weekly sales to the same customers on a regular basis. So a frequent customer can buy from the store 52 or more times every year. Conversely, a frequent customer of a furniture store may only buy twice a year.
Similar to how you created categories for recency, divide the frequency into five ranges and assign a score to each. For example, a commodity can have the following ranges.
- More than 40 purchases in the previous year | 5
- 31 to 40 purchases | 4
- 21 to 30 purchases | 3
- 11 to 20 purchases | 2
- 1 to 10 purchases | 1
Using this example, a buyer who bought 27 times in the past year would have a frequency score of 3.
For the monetary value category, you can use a customer’s lifetime value, the average value of a customer’s orders, or what a customer has spent in the past year.
You will, again, develop five segments. Here is an example of a monetary value model for a luxury ecommerce brand.
- Spent over $ 40,000 in the past year | 5
- Spent $ 30,001 to $ 40,000 | 4
- Spent $ 20,001 to $ 30,000 | 3
- Spent $ 10,001 to $ 20,000 | 2
- Spent $ 1 to $ 10,000 | 1
Using the RFM model, you can divide your customers into segments and associate a three-digit score with each segment.
For example, the 5-5-5 group represents your top customers because they bought from your store very recently, they buy frequently, and they have a high dollar value. Conversely, the 1-1-1 customer group has not bought from your business for a long time, does not buy often, and does not represent significant dollar value.
Use these segments to configure marketing automation. For example, for a 5-5-5 customer, you might want to automatically notify your CEO, so she can contact and thank the customer for their business.
Likewise, groups 3-5-5 can automatically receive an offer by e-mail.
Your tactics will depend on your products and your industry. Either way, the RFM model is a powerful tool for segmentation and marketing performance.