What if your business had a tool for prediction?
What if your business had a tool to predict customer spending? You do, It’s RFM Modeling. And you already have all the information you need. An RFM model is a simple prediction tool for some advanced marketing stuff YOU can do yourself.
Part of marketing is identifying your best customers’ lifetime value and acquiring more customers just like them. Then it’s sending different kinds of messages to potential customers where the net isn’t as great.
RFM stands for: recency, Frequency, Money
RFM stands for Recency, Frequency, Money.
The larger data-set you use the more accurate the outcome.
Recency = how near in time since the last order?
Frequency = How often do repeat orders occur?
Money = How much was spent?
Don't let the wall of numbers scare you, its not that bad!
Doing this in excel is the easiest way, since you’ll be sorting data. Don’t let the wall of numbers scare you. You’ll just gather up recent sales data you already have. It may look like this:
First, sort this information by date of the last purchase, Recency, and divide in to 5 sections. Assign values 1-5:
One is best. then two, three, etc. The more recent a customer has purchased, the more they are apt to order again. The longer the gap, the less apt they are to order again.
Next is Frequency, the number of times they’ve ordered inside this time frame. Re-sort by the number of orders then assign 1-5 to the next column, more orders of course is better:
Now do Money, highest to lowest… sort by the total spent.
There’s some extra information in this example, total vs average spend. Average was included just as something to think about.
Now for the fun part!!
Sort the columns all in one operation, first by Recency, AND by Frequency, AND by Money. This time sort smallest to largest.
Your most profitable customers will be 111’s up at the top, the least profitable will be 555’s.
…It may have seemed obvious at first glance that Kimberly, Bonnie, and Nanci were going to be the favorites. But would you have guessed Leslie has a greater lifetime value than Alice in that first grouping? Alice has spent more in this time-frame, but Leslie’s frequency is much higher, so more valuable to your business.
Down at the bottom, even though Jimmy spent about $221 he’s not as valuable to the bottom line as Jack, who’s only spent about $64 in total. This is in part because Jack orders more often and showing he may continue to do so.
OK, so that’s the numbers part… The next part is where the voodoo comes in, applying what you see:
…How will you message these individuals to leverage their habits? You probably don’t need to offer Kimberly through Alice big discounts to keep shopping with you. You may give them some extra perk though, at low cost to you, or ask them to recommend you to their friends; maybe offer something for that action since you know they love your company.
Know that people shop for different reasons. It could be price, time-frame, or quality. Down at the bottom grouping if you discover your customers’ motivations you’ll know how you might nudge them to spend differently. Judy for instance may only come into town once a year to see family, so no amount of constant messaging or big discounts will change that. You may even annoy her. But you might send a message, about that time, that the next time she’s in, spending $50 will get her a big 20% discount doubling her normal purchase, and moving her up the ladder.
Judy doesn’t need to know why this offer, just that she’s being noticed and cared for. And Gosh, the timing couldn’t be better. This is marketing.
Hopefully you see lots of ideas could be tried to maximize both your customers’ happiness and your own bottom line by occasionally doing an RFM model to see how your marketing efforts will affect things over time.
Did you like this information? Please share it with a friend.
Do you need more info? or ideas? Contact Ground Control Marketing today.