RFM Segmentation Identifying the Worth of Each Customer

Published On: 01 Sep 2022


RFM analysis in retail helps understand different groups of customers, purchase history, analyze shopping patterns & spot most valuable customers from the rest.

Being a DTC business owner, you can give a lot to your customer in the form of deals and discounts. However, not every shopper has a common spending habit.

Some shoppers are loyal and diligently purchase from your brand, while others are only around during product launches or for a particular product they are unable to find anywhere else.

There is a difference between purchasing habits of these two shoppers, who while shopping from the same brand, contribute differently to its growth.

Approaching them with one common messaging will waste resources or worse, lead to marketing fatigue, pushing several of them away.

In fact, 74% of customers do not engage if the content or offer is not relevant to them.

This is where RFM segmentation comes into the picture.

What is RFM segmentation?

RFM segmentation was first introduced in an article by Jan Roelf Bult and Tom Wansbeek, "Optimal Selection for Direct Mail," published in a 1995 issue of Marketing Science.

Also known as RFM analysis, it is a marketing model that helps businesses determine their best customers by analyzing their spending habits. Interestingly, it often connects with the old marketing nugget - the Pareto Principle which states that 80% of business comes from 20% of customers.

RFM segmentation model further builds upon the Pareto Principle by giving business owners and marketers tools and insights to target this highly profitable group and optimize their campaigns to curate omnichannel strategies for them.

However, that is not all RFM does. It also offers information about the hibernating group of shoppers that need a wake-up call, the lukewarm group that is responsible for a trickle of revenue but can do better, and many more, all of which we will discuss as we read further.

RFM stands for Recency Frequency Monetary value where:

Recency (R): How recently a customer has made a purchase.

Frequency (F): The rate at which the customer purchased from your business.

Monetary Value (M): The total monetary valuation of the purchases made by the customer.

RFM analysis in retail helps understand different groups of customers, their purchase history, analyze their shopping patterns, and spot the most valuable customers from the rest.

Benefits of RFM segmentation

RFM is an effective tool for businesses across scale and sectors. It does not require extensive knowledge in the marketing sciences and helps break down a sea of customer groups for a clearer analysis.

Here are some more benefits RFM segmentation has to offer:

  1. Retain loyal customers - The RFM variables classify customers based on their purchase activities into low, medium, and high value. With this clear categorization, businesses can address their loyal audience and keep them engaged with custom campaigns and offers to ensure their retention.
  1. Streamline customer acquisition - RFM identifies the ideal customer which makes it easier to list down the traits of a loyal customer and curate strategies to attract more of those kinds. You can also stay away from low-value customers and allocate minimal resources to that group, thus saving time and money.
  1. Increase ROI - With data provided by RFM analysis, DTC business owners can regulate the money they invest in different target audiences. Instead of spending more on low-value customers, you can invest more effort and money in high-value customers to gain more ROI.

An RFM segmentation example is Mail order company SilverMinds Direct which managed to improve its ROI by 20x with the help of RFM segmentation.

How does RFM segmentation work: How to get started?

1) Collect relevant data points

In RFM segmentation, data points are the three values of Recency Frequency Monetary Value.

Based on these values, you/your marketing team can determine the shopping activity of every customer and how they are impacting the overall revenue of the business.

RFM Segmentation - Data Points

2) Setting the RFM scales

Categorize customers based on their shopping activities.

Which shopper brought which product and how often did they shop at your business? What was the value of their total purchases?

These are the questions that help set up the RFM scales which can be broadly divided into loyal customers, customers who need a nudge, or those who are hibernating.

Setting up the RFM scales lays the foundation for score allotment.

RFM Segmentation - RFM Scales

3) Assigning scores

Each customer is given a rating based on their "recency frequency monetary value" post analyzing their purchase history.

RFM Segmentation - Assigning scores

If a person made a high-value purchase around a month back and has already shopped with the brand in the current year, then that customer is most likely to have a score:

R(5) , F(4) , M (5) = 5,4,5

Aggregate = 14 / 3 = 4.66 out of 5

Which makes him/her a loyalist - a shopper category that your business cannot and should not lose!

RFM Segmentation - Assigned Customer Score

4) Labeling each segment

These segments are created based on the customer's RFM score.

RFM Segmentation - Labeling Segments

The RFM grid shown above is a standard practice most businesses adopt to define their customers, and later plan their target campaigns to keep each segment engaged.

Based on their scores, the segments are named as follows:

RFM Segmentation - RFM Segments

The major challenge in RFM segmentation is that calculating the RFM scale is difficult. If your DTC brand sells only one product, this analysis may not be suitable for you. Lastly, the RFM analysis depends on historical data and not future prospects.

How to engage with each customer segment?

We know the different segments. Now the burning question is — how to engage with each of these segments?

Let's try dividing and conquering.

For champion buyers

Seldom does anything work better than word-of-mouth marketing: a form of retention marketing.

Champion buyers epitomize word-of-mouth like no other. They are not only your biggest buyers but your path to getting more leads and referrals.

Instead of buying more from you, you can use them to scale your business by including them in your product launches. You can also keep them interested with insider rewards and refer-a-friend campaigns to boost participation.

Men's soap brand Dr. Squatch has a referral program with double-sided incentives for both advocates and their friends. Going a step further, they A/B tested whether friends were more persuaded to convert by a $10 credit or free soap bar.

Dr. Squatch found that a free bar provided more incentive to purchase:

RFM Segmentation - Dr Squatch Referral Program

For your loyal customers

Your loyal customers consider you their first choice when it comes to a product or service from your sector. However, it is easy for the competition to tip you over from the top position.

In order to stay in their good books, you can keep them engaged with ongoing campaigns and even gamification for customer engagement in the form of store points. For every purchase they make, send an email, a text or even a WhatsApp message (if they have subscribed to that) thanking them for their purchase and informing them of new points that are added to the store wallet.

Clothing brand Souled Store keeps their customer engaged via a strong loyalty and referral program that subtly also helps boost their social media engagement:

RFM Segmentation - The Souled Store Loyalty Program

Engaging your potential loyalist

They have the capability to become a big ticket for your brand. Since they have already made a sizable purchase from your platform, bring them close to your brand via post-purchase marketing.

One way to re-engage with them is by giving discounts on categories they have already purchased from you. Alternatively, suggest new styles and trends via emails specifically sent to them to capture their interest in purchasing the said style.

Beardbrand uses a creative email to re-engage with their inactive customers. The re-engagement email is based on a fact: Human hair grows about 0.5 inches each month.

Instead of plainly writing that I haven't visited their website in three months, they use this trivia by saying:“Your beard grew 1.5 inches since your last visit”:

RFM Segmentation - Beardbrand Email Campaign

After catching the reader's interest with a smooth and engaging introduction, they conclude the email with product recommendations:

RFM Segmentation - Beardbrand Product Recommendations

Even here, instead of merely saying recommended products, the CTA “Check out what I've missed” triggers a FOMO.

Keeping your new customers interested

They might have bought something from you around 2 months ago and it's time to bring them back.

Sway them back with curated discounts and deals. Make sure that they know you remember them by talking about the timeline they have been missing for. You can also mention what happened in this duration and why they missed out on it. Targeted email campaigns, SMS marketing, and in-app push notifications work great for such targeted messaging.

Fashion brand Princess Polly uses SMS marketing to provide personalized shopping experiences and boost loyalty among its Gen-Z customers:

RFM Segmentation - Princess Polly SMS marketing

This casual and fun campaign got them a 41% conversion rate and 73X ROI from the non-engaged segment alone.

Lure your promising customers with offers

These are new members who recently made small purchases. In order to retain them and encourage them to shop more, make them feel valued.

Show your appreciation by promising small rewards on their next purchase or an extra product which that might enjoy.

Indian beauty brand Nat Habit encourages users to buy any of their three variants of their lip butters and as an appreciation, they will send a free variety:

RFM Segmentation - Nat Habit Try Lip Butter Campaign

Such offers allow shoppers to sit up and take notice.

Focus on customers that need attention

These customers shop well on your platform but need a reminder once in a while. A great way to re-engage with them is by creating customized limited-time offers which create urgency.

BarkBox uses urgency-driven popups to offer limited-time benefits at different times:

RFM Segmentation - BarkBox Urgency Driven Popup

Using national dog day, the DTC brand nudges visitors to make a purchase.

Awaken your customers that are about to sleep

Engage, engage, engage! You need to reconnect with them immediately because they are a flight risk. For them, personalized messaging is very important where deals and offers are curated for this target audience.

Send these customers a 'miss you' message via email or different messaging platforms. You can combine your message with an enticing deal to bring them back.

On-demand marketplace Zazzle did an incredible job at tugging the heartstrings of the customers who need a little bit of coaxing:

RFM Segmentation - Zazzle Personalized Messaging

Since everyone likes discounts, you can also offer renewal discounts and attract them to buy from you again. These discounts can be on products that were earlier bought by these customers or you can also recommend new products that they might like.

Engaging customers who are at risk

They once bought high-value products, a long time ago and it's time to bring them back.

You can provide helpful resources (tips, testimonials/success stories), based on their purchase history and reconnect with them. Such resources help your customers recognize your engagement and communication beyond just selling.

Since they have been MIA for a long time, you can also try renewal campaigns specially crafted for them. The other way to do so is by using a product recommendation quiz to keep customers engaged, provide a delightful experience, learn more about customers and store their data (in a non-creepy way) and personalize the shopping experience.

Makeup brand Jones Road Beauty directs customers to take a quiz to help them find the perfect shade of the new bundle they've launched (Face Pencil and Miracle Balm):

RFM Segmentation - Jones Road Beauty Quiz

Connect with customers you can't lose

These high ticket clients turned up the money flow but now they are gone. You can bring them back by running promotions that specifically cater to their purchases, based on their history.

You can also connect via post-purchase surveys and feedback, asking what went wrong. Based on their answers, you can launch campaigns that will suit them.

Here's how MeUndies, the DTC brand selling men's underwear uses a survey to get customer feedback on the brand's membership program:

RFM Segmentation - MeUndies Customer Survey

Re-engage with your hibernating customers

Waking up dormant customers is more effective than taking the longer route of acquiring new customers. Wake them up with reactivation emails and messaging.

For other DTC companies that don't want to include discounts and offers, messaging can be around growing or engaged communities, product launches, new categories and much more can be helpful.

Case in point is this Birchbox win-back email example, where the brand uses an incentive (free cleanser) to make it a sweet deal:

RFM Segmentation - Birchbox Winback Email

Attend to your customers who are lost

Losing a customer is not easy but winning them back is not entirely impossible. Surveys and feedback often allow a chance to understand why these customers went away.

While it is difficult to attract folks to just survey and feedback forms, you can offer them discounts and deals upon completion. Automatic emails acknowledging the receipt of survey answers can carry the discount codes as well.

Kate Spade uses an interesting email for customers to come back. Rather than offering a discount, the email lists reasons why you should check out the online store:

RFM Segmentation - Kate Spade Checkout Store Email Campaign

Improve your customer retention strategies with RFM analysis

Running a DTC brand is not easy but RFM analysis can help you get there. RFM segmentation is scalable and helps you analyze 10, 100, and even 10,000 customers and their shopping history.

You can reward them, remind them and recaliber their spending activities with the insights you receive as a result of RFM segmentation. Whether you are a small business owner or a marketing team of a DTC company, having customer data is non-negotiable.

Make better campaigns with RFM analysis.

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