Want to improve your marketing costs and boost profitability? Try using a model built around recency, frequency and monetary (RFM) segmentation, says Bill Singleton, president of Algonquin, IL-based consultancy Singleton Marketing.
The model, created by using RFM data from your transaction file, highlights the customer segments that should be used as the basis for selecting lists and groups to which to prospect.
By using statistics such as the number of customers, average sale size, and date of last purchase, Singleton says, you can construct a powerful model of your customers. Here’s how.
Recency: Looking at customers’ most recent purchase date, group all of them into three segments: most recent 20% of your customers, the next 60% of your customers in terms of recency, and the bottom 20%, or the customers with the oldest purchase dates. Then assign numbers to the segments: 300 for the most recent segment, 200 for the next group, and 100 for the last group.
Frequency: By calculating the average number of purchases all of your customers make, you will find a number that will work to segment your file. If your sales cycle is long, you’ll want to keep the frequencies low, such as one and two or more purchases. Set these breaks so that they split each frequency segment into the top 20% of customers with the most frequent purchases, the second 60%, and bottom 20%. Number these segments 30, 20, and 10, respectively.
Monetary: Follow the same procedure and split each monetary segment into the top 20% in terms of dollar amount spent, the next 60%, and the bottom 20%. Number these segments 3, 2, and 1, respectively.
You should have nine customer segments to work with. Add up the recency, frequency and monetary segments’ numbers to get the final segment codes.
Sort your customers in descending order by their segment codes so that they run from 333 for the segment with the most recent, most frequent, and highest average sale customers down to 111 for the oldest, least frequent and lowest average sale customers.
By doing so, he says, you can improve profit by concentrate on mailing more to the top segment and reducing or eliminating mailing to the bottom segments, likely those who only bought from you once.
Secondly, you can internally identify where you’re having the most success. Look at them internally. Are there particular sales people the customers are buying from for example? The answers will give you direction.
Once you’ve identified the top segments of your house file by RFM, Singleton says, you can enhance those customers with demographic information, standard industrial classification (SIC) codes, or other external data for prospecting. You can use that profile as a look-alike model to go back to a list firm and say, give me more of my top customers.