Contributed by Bruce Gregoire, President, WiseGuys Marketing
Adjunct Professor/Marketing, Carey School of Business, Johns Hopkins Univ.

man checking off 5 stars on chalkboard

Introduction – What is R-F-M?

While the axiom “all men are created equal” serves our country well, marketers know that not all customers are equal. R-F-M scoring of customers (Recency, Frequency, Monetary Value) offers a tried and true approach to differentiate customers, that marketing analysts have used for decades.

This post is Part 1 of a two-part series that will explain the theory of R-F-M: Later, in Part 2, we will explain how to realize the value of RFM by configuring your own customer database.

R-F-M is a set of 3 metrics assigned to each of your customers. Like grading students for reading, writing, and arithmetic in a classroom, R-F-M assigns three numeric scores to each customer in your database:

  • Recency scoring, as you might guess, is a measure of recent customer activity – usually from recent orders in your M.O.M. CMS table. Sort of “What have you done for me lately?” Recent customers get a higher score – “Higher” is “Better”.
  • Frequency is simply the count of those orders, over the lifetime of the customer. Multi-buyers get a higher score.
  • Monetary Value is the sum of the dollar value of those orders. Obviously, “Big spenders” get a higher score.

Why R-F-M?

In a word, “targeting” R-F-M helps a marketer predict “likelihood to respond” for each customer on file. Catalog and direct marketers love R-F-M: the higher the overall score, the more likely a customer will respond to their next mailing campaign. Targeting assumes that no organization has a large enough marketing budget for all customers in your database. Thus, score them!

More specifically, direct mail marketers use an R-F-M score to target high yield customers, and to predict response in direct mail campaigns.  This helps avoid mailings where printing and postage costs outweigh the anticipated return (and avoid what some will perceive as “junk mail”). The scoring is used by both small and large commercial marketers, as well as nonprofit organizations in fundraising efforts. In fact, my colleague David Raab recently shared that companies as large as Proctor & Gamble routinely employ R-F-M scoring. While your business may not rely on catalogs or direct mail to reach customers there is value in applying the principles of R-F-M to identify and increase engagement with your best customers.

Is R-F-M easy? No, but it is straightforward and accessible for business analysts and marketers, the good news is that your M.O.M. List Management includes a valuable tool that you may be ignoring: The R-F-M module.

Ancillary benefits of R-F-M

One of the great advantages about the R-F-M scoring in M.O.M. is that it is displayed on the “General” tab, visible by any user.

This “enterprise wide” view of the customer is what CRM evangelists promote as so very important.  Here are some reasons why:

  1. Identify “Gold” customers: All users (even your part-time data entry staff, perhaps hired for the holidays) can be trained to understand that a high R-F-M score means that a customer is very important to your company, and deserves VIP service, with special attention.
  2. Special attention: this may include routinely escalating customer
    complaints to a higher level, selectively offering free shipping, and other privileges not affordable for marginal customers. Also, with a high R-F-M score, they qualify for your next catalog mailing.
  3. Sales force support: for B-B marketers with a sales force, the R-F-M score is valuable to identify lapsed customers. Consider a low score as a trigger for your sales staff to re-activate these customers.

Summary:

Using R-F-M scoring does not guarantee success for your next marketing campaign. But like other predictive modeling tools, it has its place in your marketing toolkit. And within M.O.M., it provides a straightforward approach to rank your gold customers from marginal ones.

Coming up next….

Look for step-by-step instructions to implement R-F-M in the forthcoming Part 2: “Implementing R-F-M in MOM”. In the interim, if you want to jump-start your R-F-M scoring with M.O.M., contact the WiseGuys Marketing staff at 703-941-8109, or via email at BruceGregoire@WiseGuysMarketing.com. Mr. Gregoire is currently a M.O.M. Consulting Partner with Freestyle, and a M.O.M. consultant since 1999.