RFM-Model

What is the RFM-Model?

Customer segment	R	F&M	Definition
Champion ♥︎	4-5	4-5	Customers with the highest potential value and strong engagement.
Loyalist ☻	2-5	3-5	Customers who have a strong relationship with the brand and make regular purchases.
Potential Loyalist [☺︎]	3-5	1-3	Customers who have the potential to become loyal but need more nurturing.
New ⊕	4-5	0-1	Customers who are new to the brand and have made their first purchase.
Need Attention ‼	2-3	2-3	Customers who are showing signs of disengagement and need attention.
At Risk ☹︎	0-2	2-5	Customers who are at risk of churning and need immediate attention.
Hibernating ☾	1-2	1-2	Customers who have not made a purchase in a long time.
Lost ⊖	0-2	0-2	Customers who have churned and are no longer active.

What does RFM mean?

R → Recency : When was the last time a customer has purchased a product from your brand

F → Frequency : The numbers of times a customer has made a purchase.

M → Monetary Value : The total amount of money a customer has spent on your products or services.

How does it work?

1. Assign Scores: You give each customer a score for each of the RFM factors (Recency, Frequency, Monetary). Usually, you divide your customers into groups (e.g., top 20%, next 20%, etc.) and assign scores from high to low (e.g., 5 for the top group, 1 for the bottom group).

2. Combine Scores: You combine the individual RFM scores to create an overall RFM score or segment. For example, a customer with a recency score of 5, a frequency score of 4, and a monetary score of 5 might be in your "Champions" segment.

3. Create Segments: Based on the combined scores, you create customer segments. Here are some common segments:

   • Champion ♥︎: High scores in all three categories. These are your best customers.

   • Loyalist ☻: High frequency and monetary scores, but their recency might be a little lower.

   • Potential Loyalist [☺︎]: High recency and frequency scores, but their monetary value might be lower.

   • New ⊕: High recency score, but frequency and monetary scores might be lower

   • Need Attention ‼:

   • At Risk ☹︎: High monetary value, but their recency and frequency are declining.

   • Hibernating ☾:

   • Lost ⊖: Low scores in all three categories.

4. Targeted Marketing: Once you have your customer segments, you can tailor your marketing efforts to each group. For example:

   • Champions: You might offer them exclusive deals or early access to new products.

   • At-Risk Customers: You might send them a special offer to win them back.

   • Lost Customers: You might try a re-engagement campaign.

There are more targeted marketing strategies below this article.