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What is RFM?

RFM is a widely used marketing segmentation method based on the parameters Recency, Frequency, and Monetary. It is a proven method for segmenting your contacts based on their purchasing behavior. 

Concept

The three-dimensional RFM segmentation method starts by dividing customers into five equal groups per parameter. 

  • Recency: Number of days since last purchase. Divided into 5 equal groups, with 5 being the most recent customers and 1 being the customers who have been away the longest.

  • Frequency: Number of purchases made by the customer within a certain period. Divided into 5 equal groups, with 5 representing customers with the highest purchase frequency.

  • Monetary: Total value of the customer within a certain period. Divided into 5 equal groups, with 5 representing customers with the highest cumulative value. 

These three digits are displayed as the RFM code and are further grouped into 11 segments based on these specific characteristics before use. 

Derivatives

The RFM segmentation results in two final values that can be used for further analysis and optimized selections.

  • RFM code: The RFM code is a numerical reflection of the quintile values that a customer has for Recency, Monetary, and Frequency. The 125 possible combinations that arise from this range from 111 for the worst customers to 555 for the very best customers.

  • RFM segment: Before use, the 125 possible RFM codes are grouped based on specific purchasing behavior into 11 intuitive and workable segments.

Advantages

RFM segmentation is a widely used segmentation method with proven added value for marketing teams. The segmentation and values are constantly recalculated to reflect the most up-to-date picture of the customer.

The advantages of RFM segmentation are:

  • Recent changes in purchasing behavior are effectively addressed by segmentation, which can continuously reflect the current situation .

  • Comparisons with previous RFM calculations provide a direct and clear picture of the migrations between segments and how loyal customers are.

  • RFM is suitable for reflecting the stability or volatility of your customers .

  • RFM is suitable for getting started quickly in order to optimize the return on campaigns and select the right customers for those campaigns.

RFM in practice

RFM segmentation is available in myMIP as an indicator and is always visible in the dashboards for further analysis. RFM segmentation has two end products: the RFM segments and the RFM code.

RFM segments

The RFM segments are structured to provide clear, action-oriented segments that can be used immediately: 

  • CHAMPIONS: Top customers who are active.

  • LOYAL CUSTOMERS: Good customers who are active.

  • POTENTIAL LOYALISTS: Active customers who do not spend much (yet).

  • NEW CUSTOMERS: Recent customers who still need to build value.

  • PROMISING: Recent customers who have already spent a lot.

  • NEEDING ATTENTION: Customers who have spent a lot but haven't bought anything in a while.

  • ABOUT TO SLEEP: Customers who have not visited recently, but have not yet built up much.

  • AT RISK: Regular customers who have not visited for some time.

  • CAN’T LOSE THEM: Top customers in terms of monetary value, but last time was a long time ago.

  • HIBERNATING: Customers who no longer visit and have not accumulated much.

  • LOST: Lowest RFM scores.

RFM code

The second end product, the RFM code, is a three-digit code ranging from 111 to 555. This code reflects the quintile value of the three parameters: Recency, Frequency, and Monetary. 

There are a total of 125 (5x5x5) possible combinations, which reduces practicality.