Introduction
This document aims to thoroughly explain the Recency, Frequency, and Monetary Value (RFM) analysis methodology and how it is utilized in the Loyaltymaster Console.
Our discussion will cover the RFM analysis approach, how Loyaltymaster segments your customer base, and how you can use this information to enhance your marketing campaigns greatly.
RFM Analysis: Definition and Methodology
RFM analysis is a customer segmentation strategy used to rank and categorise customers based on their transactions' recency, frequency, and monetary value. It's an effective way to identify target audiences and utilise marketing budgets efficiently.
With this remarkable tool, you can immediately identify the 20% of your customers who brings in 80% of your profit.
You'll also be able to identify customers who, for various reasons, choose not to return to your business. This is based on their recency.
Recency
Recency refers to how recently a customer made a purchase. Customers making recent purchases are more likely to repeat purchases as the product and brand remain fresh. The definition of "recent" may vary depending on the nature of your business.
Frequency
Frequency refers to the number of purchases a customer makes within a given timeframe. Regular customers can be identified by their frequent purchases, and this metric plays a crucial role in identifying individuals who will likely remain loyal to your brand after their initial purchase.
Monetary Value
Monetary value is the total amount a customer spends within a set period. Analysing monetary value can offer insights into consumer behaviour. For instance, customers with high monetary value may not purchase as frequently as others but are more likely to buy the most expensive products when they do.
Scores are assigned to customers for each factor, allowing businesses to analyse objectively and determine the most effective audience for advertising and marketing campaigns.
Using Loyaltymaster for RFM Analysis
Loyaltymaster automatically segments your customer base using RFM analysis.
Customers are segmented based on their purchasing behaviour within specific periods (0-30 days, 31-60 days, 61-90 days) and their number of purchases or visits.
For example, within a 0-30 day period:
- Customers making 0-3 purchases are categorised as "Beginners."
- Customers making 4-7 purchases are labelled "Growths."
- Customers making 8-12 purchases are designated as "Champions."
The categories adjust for longer periods, with labels like "Doubtful," "Medium (borderline)," and "Loyal - Regular" applied to different customer segments based on their purchasing behaviour.
RFM Segmentation in Loyaltymaster
Let's consider a practical example to illustrate the RFM segmentation process further.
Joe's Retailers customers have automatically been segmented into categories "Beginners," "Doubtful," or "Sleeping," depending on their purchasing frequency within specific periods.
Similarly, the most active customers making 8-12 purchases monthly are deemed "Champions," contributing significantly to the business's revenue.
It makes sense that the management at Joe's retailers should pay attention to customers who frequently purchase but have not done so recently.
Such customers may require manual contact or targeted marketing to re-engage them.
Loyaltymaster provides these insights daily.
Leveraging RFM Analysis for Business Growth
With the provided RFM analysis, you can identify "sleeping" customers and initiate actions to re-engage them.
Through webhooks and APIs, you can connect Loyaltymaster to external tools to alert you when a customer is categorised into a particular segment, enabling you to run automated messages or funnels.
You can also use the built-in Push Messaging tool to message clients who fall under a specified "Label automatically"
Very loyal customers or "Champions" should be treated as brand advocates.
You can encourage these customers via the built-in referral system to share their loyalty cards with friends, and this is a Free way to expand your customer base.
Overall, understanding your customer base through RFM analysis provides an excellent opportunity for business growth.
Conclusion
RFM analysis is an effective tool for understanding your customer's behaviour, and Loyaltymaster makes this process simple and intuitive.
By segmenting customers based on their recency, frequency, and monetary value of transactions, businesses can target their advertising and marketing campaigns more effectively, re-engage inactive customers, and cultivate their loyal customer base to drive business growth.