Serious RFM Marketing: Advanced Segmentation for All

Insight

In the face of fierce competition and skyscraping CACs, taking advanced segmentation and thoughtful personalization seriously is no longer a “should do.” It’s a “must do.” 

Leveraging an RFM marketing strategy is, therefore, a “must do'' for today’s serious marketer. 

With RFM, you segment your customer base by behavior and value. In doing so, you can match messaging to customers simply and elegantly, driving more revenue by delivering personalized experiences.

In this piece, we want to cover how marketers can incorporate RFM into their marketing strategies to separate themselves from the pack. 

But first…

Some Background: Explaining Daasity’s RFM Scoring system

Via RFM (which originates from the direct mail days), marketers segment customers based on three dimensions of behavior: Recency, Frequency, and Monetary, over a particular timeframe.

  • Recency: how recently they purchased from you
  • Frequency: how frequently they purchased from you
  • Monetary: how much they spent

These three dimensions are key, as they correspond to core pillars of customer behavior: the goal of RFM is to determine how much customers are worth to your brand.

The traditional approach to RFM

Traditionally, marketers would rank order customers based on the three dimensions and bucket the lists into pentiles (i.e., 5 groups), where group 1 is the most valuable and group 5 is the least valuable. 

To see how this works, let’s look at Recency.

Using a customer list, you would rank order those customers based on their last purchase date (over a timeframe) from most to least recent. Then, you would break the customer ranking into 5 buckets. Group 1 would include the top 20% most recent purchasers, group 2 would include the top 21%-40% of purchasers, and so on. 

You would then do the same for Frequency and Monetary over the same timeframe.

The rating system would include a three digit grouping for each customer. For example, customers A-C in this chart are rated 1-5 based on where they fall in each dimension:

Based on this grouping, customer A is the most valuable, customer C is the second-most valuable, and customer B is the third-most valuable. 

With this approach, you end up with 125 segments of varying sizes. This RFM approach was manageable in the early days of direct mail, but it is now extremely difficult to manually track, calculate, and manage. 

Daasity’s Approach to RFM

To make RFM easier to track and interpret, Daasity breaks customers down into deciles (i.e., 10 groups) and automatically calculates all RFM Scores, every day, via the following formula:

rfm score = F times the square root of M, both divided by R

In this system, the 10 groups correspond to scores of 1-10. A score of 1 is the best and corresponds to the top 10% of customers. Likewise, a score of 2 corresponds to 11-20%, a score of 3 corresponds to 21-30%, and so on. 

We call customers with RFM Scores of 1 and 2 (the top 20%) a brand’s High Value Customers (HVCs), as they have an extremely outsized impact on your revenue and profitability. For example, a brand’s score 1 customers may be 2.3x more valuable than score 2, and they may be 43x more valuable than score 10 customers. 

We also define score 3 and 4 customers (21-40%) as Multi-Buyers. These customers have more potential than the rest to become HVCs.

Now, on to the show:

How eCommerce marketers benefit from RFM marketing

Increase CLV

Customer lifetime value (CLV) is one of the most important metrics to track and increase in order to keep your eCommerce business thriving. 

While one-time customers often end up costing your business in the long run, building long-lasting relationships with high value customers (HVCs) is fundamental to a long-term eCommerce strategy.

With RFM, you can easily target your HVCs, tailor your messaging to them, and send them your very best offers via email and SMS. 

As Blake Imperl, Manager of Partnerships Community & Insights at Attentive explains, “An effective SMS campaign strategy should lean on RFM marketing data as a way to avoid batch and blast sending, to recognize your HVCs, engage lapsed subscribers and customers, and maximize your ROI through thoughtful messages. For some messaging inspiration, check out Texts We Love to see how brands are communicating with different customer segments:” 

example of a text to a VIP from an eCommerce brand called Mate

Drive more profitable revenue 

We all know the old adage that the cost of making a sale to an existing customer is at least 8x cheaper than acquiring new customers (and, actually, it can be even cheaper than that).

By targeting your customers based on their RFM scores, you can create efficient and highly profitable campaigns on your owned channels that meet customers where they are (in terms of their buying behavior). This increases the likelihood that they’ll continue purchasing from you. 

For example, you may find that some of your RFM 3 and 4 customers have certain product affinities making them more likely to repurchase and become HVCs when you offer them those products. 

Or, you may find that a subset of your RFM 1 customers is not price sensitive and has a higher likelihood of buying your most expensive products when you feature those products in messages they receive. 

Move more of your product catalog

Most of your acquisition campaigns probably focus on promoting your hero product, but they may not promote products that pair well with the hero product: enter retention and RFM marketing. 

Let’s look at it from the perspective of a fashion brand:

For a fashion brand, customers might come in to buy a popular dress that they see in an ad (i.e., your hero product). With RFM, you can focus on improving retention and moving your product catalog by recommending accessories that pair well with the dress.

image of a fashionova PDP with highlighted cross-sell
Fashionova offers these two items as cross-sell opportunities on their PDP, but by targeting RFM segments, they can work on moving these products via post-purchase offers.

Decrease churn

With RFM, marketers can prevent customer churn by better understanding why each segment stays with the brand and working to prevent churn in the first place.

For example, if your most loyal customers are churning, you can conduct surveys or reach out to them to understand why they're not buying. 

Once you determine why they're leaving (product issues? pricing? lack of a rewarding loyalty program? or something else?) you can begin rectifying those issues and keep your customers as long as possible.

How RFM scales with your brand's growth

Brands like Nike & Apple have teams dedicated to analyzing data and continuously optimizing their performance (that’s how Daasity got started years ago!). 

As an eCommerce marketer, you probably don't have access to the resources that Fortune 500 companies do, but you wish there were a way to build a data-driven marketing program, right? 

As your business grows, however, you need an eCommerce analytics platform that scales with the volume of data generated across your customer-facing channels. 

With RFM at the SME level, you can create more authentic experiences at scale, using a range of customer data to achieve one-to-one omnichannel personalization.

How to market to your RFM segments

How do you determine your RFM segments and the types of campaigns best suited to each segment? 

We’ve got you covered.

High-value customers (top 20% of customers)

These are your best customers, with RFM scores of 1 and 2, and they are the most important customers for any brand to focus on. They are your most loyal customers who are currently buying the most frequently from your business. Motivating these customers to buy more is the fastest way to increase both your top and bottom line.

Think of your HVCs as the pillars of your profitability.

Your goal must be to focus on rewarding them in ways that go far beyond simple loyalty and rewards programs to increase their purchase frequency. It’s absolutely vital to make these customers feel valued and that they are stakeholders in your brand.

Here are some example rewards for being a HVC/VIP:

  • Exclusive access to new products/promos 
  • Beta Testing/Early access to new products
  • Free products
  • Higher tiers of loyalty points and incentives, such as free shipping, higher discounts\
  • Exclusive events 
  • Both digital and physical
  • Personal messages from the founders/team
  • Referral requests
  • Birthday gifts
text: you should leverage both email and SMS to communicate with your HVCs. With email, this is typically a 3-5 step flow for each offer or campaign. Then, leverage SMS to coordinate 1-2 messages that pair with the emails.

Churning HVCs

Your Churning HVCs (i.e., RFM 1 and 2 customers who haven’t purchased in nearly a year) should be your second-biggest focus besides active HVCs. 

You’ve already done a lot of work and spent a lot of money to acquire them and drive them to repurchase: it would really suck to lose them.

Target these customers with:

  • Extra-special incentives, discounts, and free shipping, to motivate them to buy before they hit the lapse date (i.e., a year). 
  • Feedback surveys and questionnaires 
  • Promoting additional products in your catalog
text: send your churning HVCs a discount ladder as they approach their lapse date to motivate them to repurchase. This is a crucial moment where you might lose the customer.

Lapsed HVCs

Your lapsed HVCs (HVCs who haven’t purchased from you for more than a year) should be your third-biggest focus. Try:

  • Showing them new product arrivals and most popular items 
  • Dynamic product recommendations
  • Additional Incentives: Gift With Purchase (GWP), free shipping, larger loyalty reward bonuses 

Potential HVCs (top 21%-40% of customers)

These customers are repeat shoppers who occasionally purchase from your store, with RFM scores of 3 and 4. They’re not HVCs yet, but they can be. 

This is where you can get some wins by repurposing what you’ve built for your HVCs and see what value translates to this group, from both a customer motivation and a company finance perspective.

We recommend a multi-step flow here, where the customer has multiple touch points that show how much you value them. Here are some campaign ideas for this group:

  • Replenishment emails (if you sell consumables): “Here’s what you bought last time!”
  • New releases: What’s recently been released, and promote your new products/collections
  • New product recommendations: “Here are some related products based on what you bought last time”

How Daasity makes RFM marketing easy

Daasity centralizes all the eCommerce data generated by Shopify, Klaviyo, Gorgias, and other tools, and we provide RFM analysis out of the box. With our Audiences feature, we enable you to automatically push data (updated daily), including RFM scores, to marketing platforms such as Klaviyo, Facebook, Sailthru, and Attentive. 

This means you can automatically update customer profiles in these platforms with RFM scores, and you can create laser-precise marketing campaigns by developing messaging to fit specific RFM segments.

Interested? Check out our on-demand demo.

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