At its core, the Recency, Frequency, Monetary (RFM) score is a tool to understand customer value by comparing individuals to one another. This helps marketers understand who their most valuable customers are (or their VIP customers), which customers have lapsed, who their repeat customers are, etc. RFM has been used in database marketing for about 20+ years.
- Recency - How recently did the customer purchase?
- Frequency - How often does the customer purchase?
- Monetary Value - How much does the customer spend?
How RFM is calculated
To calculate RFM, Ascent360 looks at all customers, records, and transactions in the customer database, and divides the customer list into equal groups of 20% (known as quintiles).
Recency
Customers who have purchased from your business recently are much more likely to respond to a new offer than someone who made a purchase in the distant past.
Recency quintiles are based on the date of a customer’s most recent purchase at your business and are organized by the minimum and maximum number of days since last purchase. As a result, the more recent a record’s last transaction date is, the higher the quintile score will be assigned to that record. Customers with the top 20% most recent transactions are given a code of "5". The next 20% in terms of recent purchases is coded as "4", and so on until all records in your database are now assigned either a 5, 4, 3, 2, or 1 in terms of recency.
An example of how a recency quintile breakdown might look is as follows:
5: Purchase made in the last 7 days – 60 days
4: Purchase made in the last 60 days – 120 days
3: Purchase made in the last 120 days – 240 days
2: Purchase made in the last 240 days – 300 days
1: Purchase made in the last 300 days plus
Frequency
Frequency quintiles are based on the sum quantity of total lifetime transactions each customer has made at your business.
Customers are sorted in your the database by this number — from the most to least frequent — coding the top 20% as "5", and the less frequent quintiles as 4, 3, 2, and 1. It is important to note that brand new customers will have a recency code of "5", but a frequency code of "1", resulting in the lowest frequency quintile containing your newest customers.
A frequency quintile breakdown:
5: Five transactions or more
4: Four transactions
3: Three transactions
2: Two transactions
1: One transaction
0: Zero transactions
Monetary
Monetary scores are organized into quintiles based on the sum of an individual's total lifetime spend. Your biggest spenders will be assigned a “5”, and the others, 4, 3, 2, and 1. Customers are organized into your database by the minimum and maximum amount of total dollars spent with your business.
An example of the monetary quintile breakdown:
5: $400 to the highest lifetime total dollar sales associated with a record in your database
4: Between $200 and $400
3: Between $100 and $200
2: Between $50 and $100
1: Between $1 and $50
0: $0.00
Putting the three scores together
RFM analysis depends on Recency, Frequency, and Monetary measures, but the real power of this technique comes from combining them into a three-digit RFM "cell code".
Using the quintile system explained above, all customers end up with three digits in their database records. They are either 555, 554, 553, 552, 551, 545, and so on, down to 111. There are 125 different "cells" in total, with all cells containing approximately the same number of customers.
This comprehensive RFM scoring method gives marketers important insight into their customers’ purchase history and provides them with a clearer picture of what their customers need and when. They can then use that information to create unique customer segments that will receive uniquely tailored and personalized marketing messages at different times. The RFM score not only provides insight on how your customers have behaved in the past, but it also provides actionable data to use for targeting them in the future.
Want to learn more about RFM scores and how to use customer data to create a more impactful customer experience? Reach out to the team at Ascent360 and sign up for a personalized demo today!
