RFM analysis answers a number of urgent questions that scaling eCommerce brands have about their businesses.
- How can I find my High Value Customers?
- How can my brand be more profitable?
- How can I improve my retention marketing program?
- How can I build customer segments based on purchasing behavior?
- What’s a reliable and data-driven way to optimize my marketing spend?
While RFM analysis can’t do everything, it is a powerful way for eCommerce brands to reliably segment their customers and learn a great deal about them.
At Daasity, we love RFM and automate it for our brands, so we wanted to put together a complete guide to walk through what it is and what makes it so powerful.
What is RFM Analysis?
RFM analysis allows eCommerce brands to segment and rank their customers by value over a time period, using three dimensions: Recency (how recently someone purchased), Frequency (how frequently someone purchased), and Monetary (how much they spent).
In short, RFM analysis shows who your best and worst customers are—and everyone in between.
These three dimensions are key, as they correspond to core pillars of customer behavior.
- Recency: Customers who have bought more recently are more likely to respond to marketing content, which means they may be more likely to take advantage of an offer or read more about your brand and its products.
- Frequency: Higher repurchase rate is a reliable indicator of customer enthusiasm and engagement.
- Monetary: Customer segments based on amount spent allows you to understand which customers are bigger spenders than others.
For a quick overview of RFM, here’s Daasity CEO (and Renowned RFM Enthusiast) Dan LeBlanc:
Although there are a number of ways to rank customers, we recommend (and provide) RFM segmentation by decile: that is, dividing a brand’s customers into 10 segments, from most to least valuable by 10% increments. The result is a clean and easy-to-interpret “Top 10” ranking system:
What makes RFM Analysis so powerful?
Identifying High Value Customers (HVCs)
RFM Analysis is the clearest way an eCommerce brand can identify its High Value Customers: the customers who have an outsized impact on a brand’s profits (specifically, gross margin per customer, a.k.a. Customer Lifetime Value), and those who you may lose money on, all expenses considered.
In the top chart of this screenshot from the Daasity App, it’s clear that there’s a sizable difference between customers with an RFM score of 1 and an RFM score of 2. Specifically, customers with an RFM score of 1 have a 2.3x greater Customer Lifetime Value than customers with an RFM score of 2, which, in the case of this brand, translates to about 4 million dollars in gross margin for the brand.
The differences between the value of RFM segments become dramatic as the RFM Scores decrease. Customers with an RFM Score of 1 have a 43x greater Customer Lifetime Value than customers with an RFM Score of 10.
In the case of another RFM Analysis, you can see a similar pattern: RFM Score 1 customers are worth about $130 more on average than RFM Score 2 customers:
However, what is noteworthy here is that RFM 10 customers actually have a negative LTV, which means that the brand is actually losing money on the segment. Some brands, in fact, may be losing money on customers even with scores of 5, depending on their CAC.
Leveraging RFM Analysis for your brand
Retaining the Top 20% (and especially the Top 10%)
As a general rule, the more valuable a customer (or, in this case, customer segment) is to your business, the more you should do to ensure that they remain regular customers for as long as possible. In the case of the brand above, RFM Analysis reveals that the Top 20% (RFM Score 1 and 2) of its customers are responsible for 60% of its profits, and the Top 10% of its customers are responsible for 42% of its profits.
These are remarkable numbers, and they serve as a bold, size 1000 font sign that says, “SELL TO ME!” RFM Score 1 customers should be given the highest priority (your most compelling offers, plenty of loyalty points, early access to products, upsells and cross-sells, etc.), but RFM Score 2 customers have the highest potential to become RFM Score 1 customers. It is vital to nurture them in order to level them up into RFM Score 1.
By increasing the number of High Value Customers with high RFM Scores, your brand will grow faster, be more profitable, and have a more efficient and effective marketing spend. At Daasity, we’ve seen this to be universally true: the brands that focus efforts on maximizing value from their High Value Customers grow to be large, profitable brands.
Avoiding the Bottom 20%
Improving profitability and optimizing your marketing budget with RFM Analysis isn’t only about building value among your RFM Score customers but saying goodbye to your lowest RFM Score customers—not every customer you have will love you equally, and that’s okay. The Bottom 20% (RFM Score 9 and 10) of the brand’s customers only make up 3.1% of its total LTV, and the Bottom 10% make up a tiny 0.9% of LTV.
For your customers with these low RFM Scores, you may be best served lowering/discontinuing your marketing spend dedicated to them and refocusing it on your High Value Customers to generate even greater value from them.
How to Leverage RFM Analysis, RFM Scores, and RFM Marketing with Daasity
Daasity centralizes and automates all your eCommerce data, metrics, and analyses, and with our Audiences feature, we enable you to automatically push data (updated daily) to marketing platforms such as Klaviyo and Attentive. In the context of RFM Analysis, this means you can automatically update customer profiles in these platforms with RFM Scores, and create laser-precise marketing campaigns by developing messaging to fit specific RFM segments.
Targeting the Top 21% to 40% of Your Customers (RFM Score 3 and 4)
Your Top 21-40% of Customers are the customers who aren’t your best customers, but they could be. If you can boost their RFM, you can expect them to generate the lion share of your brand's profits (i.e., join the illustrious ranks of RFM Score 1 and 2). These customers love your brand, and if nurtured properly, will continue to make frequent purchases from your brand for years to come.
Using this Daasity Playbook, you can target these segments in Klaviyo and Attentive, increase their purchase frequency, and how much they spend at your brand.
Customizing RFM based on your brand’s needs
Depending on your eCommerce brand’s individual customer base, your industry, and the types of products you sell, you may want to adjust certain elements of your RFM. With Daasity, you can, so that your analytics solution is as unique as your brand.
We provide guidelines about how best to leverage each dimension, but if you’re ready to jump in and change how you have your RFM calculated, you can. Additionally, if you'd like help figuring out how best to tailor RFM dimensions for your brand, one of our super-powered data masters will be there to help.
Final RFM Analysis thoughts
If you’re looking to find your best and worst customers, develop better targeting in your marketing program, optimize spending, and much more, RFM Analysis is the way to go. RFM is rooted in the most important dimensions of customer behavior, and it can help power your eCommerce brand to new data-driven heights.
If you’d like to learn even more about RFM Analysis and/or have RFM automated (and the rest of your data) for your brand, we’d love to chat with you. Data is our passion, and putting your data to work for you is our business.