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Recent Customers are your Best Customers Using RFM in your business -- by Chip House There's a hole in the bucketÄin fact several holes. Your business is leaking customers as fast as you bring them in. Why? Because the two of you aren't talking. One business I talked to lost 89% of its customers in just one year's time! With that kind of defection in progress, it makes no sense for him to buy another ad in the Yellow Pages. He's got to figure out how to plug the holes. So do you. In last month's article on The Power of Customer Retention, I discussed the fact that most businesses undervalue their existing customers and place too much emphasis on customer acquisition. This month I tell you how to plug the holes. Using RFM to Plug the Holes RFM stands for Recency (how recent was a customer's last purchase), Frequency (how often does the customer buy), and Monetary Value (the dollar value of their purchases). RFM analysis produces a ranking of customers relative to each other based on the probability that they'll buy from you again. Basically, with RFM you can predict which customers are most likely to buy from you in the future. Therefore, you can prevent customers from leaving you by doing a better job of talking to your top customers and making sure their needs are met. It's About Data Many business owners fail to recognize that they are sitting on a goldmine. Most businesses these days capture their sales in a computerized database so they can do their books, pay employees, etc. Most of them, however, rarely analyze the data at a customer level. Those that do will be shocked to see that many of their customers only buy from them once. They'll also notice that many customers have bought recently, bought often, and have spent lots of money. That's RFM at work! Recency Recency is the most powerful statistic for determining buying patterns. * Take a look at this chart below. It shows how response rates for this company's email marketing campaigns are highest for most recent customers, and lowest for customers that haven't purchased in a while. This same customer response pattern almost certainly applies to your business, as well. It is easy to apply RFM in your own business just by sorting your database in descending order by purchase date. Then, divide the database into 5 equally sized segments or "quintiles." So, if you have 5,000 total customers, the 1,000 that bought most recently will be in the top quintile, the second most recent 1,000 will be in the second quintile, and so on. Then, to keep track of who is in each segment, code each customer in the top segment with a "5", those in the second most recent segment with a "4," etc. Now put your coded database to the test and go ahead and send a promotion to all of your customers listed in your database, then keep track of who responds or buys from you. You'll notice that your #5's are your top responders, and your #1's hardly made the radar screen. Cool, huh? Once you know how a certain quintile performs, it is a great model to use for predicting response for future mailings. Maybe you'll want to conduct a survey of your top customers to see how you can improve, or understand what makes them tick. You could save your marketing dollars by mailing an offer to only your top two quintiles. Offer them special values due to their customer stature; tell them they are your best customers and you want to keep them around! Begin with the data, and then design your communication plan. In the end, only a strong communication plan can help you plug the leaky bucket and prevent customers from leaving you. |
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