Continuing on the theme of segmentation, RFM Analysis is another tool for understanding and identifying different types of customers.  RFM stands for recency, frequency and monetary value.  This tool will help you:

1. understand customer value quickly when limited data are available (e.g., just purchase data)
2. develop a basic value segmentation that can be used to determine if your customer strategy is optimal
3. find untapped markets if there are segments which are not targeted
4. gain insight into gaps that might exist between accepted wisdom about the customer base and actual purchase behavior

The name suggests that recency is the most important factor for determining a customer’s value followed by frequency and monetary value.  However, you can set different priorities.  For one of my clients, monetary value was more important than recency and frequency.  Thus, their analysis was driven by monetary value first, recency and finally frequency.  It all depends on your product and the typical buying cycle.

The actual analysis involves calculating the R, F, and M dimensions, specifically:

1. creating a reasonable number of categories based on the date of most recent purchase (e.g., date was within the last month, within most recent 2 to 6 months, within prior 7 to 12 months, etc.)
2. breaking the number of purchases into a reasonable number of categories similar to recency
3. summing all revenue and creating a reasonable number of categories similar to recency

The number of categories you create depends on how you intend to implement the RFM analysis and should be guided by the means and standard deviations of the variables.

The fun part comes when you bring all of this together.  You first need to decide which dimension is most important and which is the least important.  Next, you need to determine the number of segments you want.  Will it be high, medium and low or 1 through 10?  If there are too few segments, then the segmentation will not be very targeted.  If there are too many segments, it may become a burden to implement and may ultimately be considered too complicated to use.  Business judgement and knowledge of the customers’ behavior should drive the creation of the segments. 

Once the segments have been decided, business rules or code can be written so that the segments are applied to your customer base on a regular basis.  This has the advantage of identifying new best customers or up and comers that can then be targeted with a special welcome communication.    Further, the segmentation can be used with other tools to drive marketing messages and campaigns.  However, you may need to revisit your RFM segments from time to time as your business changes significantly.   For example, if you raise or lower prices significantly after the segments are put into production, you will want to reassess the original recency categories.

Last week I attended a Marketing Analytics conference  in Boston sponsored by iKnowtion.  At a time when companies are cutting expenses, including staff and marketing budgets, iKnowtion is investing in their future.  They are also engaging in a dialogue with the larger Marketing Analytics community through the conference and their blog.  (In the interest of full disclosure, I know several people at iKnowtion but have never worked there.)

The conference began with a talk by Tom Davenport, the Author of Competing on Analytics with Jeanne G. Harris.  He set the stage by providing examples of how companies recognize the importance of analytics but reminded us that marketing is still a combination of art and science.  As the emphasis shifts more towards the science of marketing, we need to recognize that the “art” is still relevant.  He further challenged us to move beyond reporting to provide more value and insight.

Next was a panel on driving business value featuring speakers from GM, CVS Pharmacy, and ConstantContact.  Each speaker provided a brief case study of how analytics has helped their business.  In one case, analytics changed the focus of the business.  In another, it led to the rebalancing of product marketing.  Finally, the rigors of “test, measure, and learn” enabled one company to optimize media effectiveness across channels.

After lunch there was a lively digital panel discussion around social media, the future of web-enabled communities and the challenges of measuring the impact of companies’ efforts in this space.  Given the evolving nature of social media, it is no surprise that there were divergent opinions.  I, for one, appreciated the candor and the healthy discussion that ensued.  To quote Jane Austen, “My idea of good company…is the company of clever, well-informed people, who have a great deal of conversation.”

The conference wrapped up with a return to the theme of competing on analytics.  This free flowing discussion touched upon a range of topics, including how to become a company that uses analytics for competitive advantage.  Interestingly, one of the panelists thought that finding good talent was the biggest challenge we face.  As a Marketing Analytics professional who hires and develops staff, I am in complete agreement.  There is stiff competition for the best analytic staff and I have found it difficult to find technical competence coupled with business acumen.  In fact, the discussion about finding, training and retaining analytic staff continued at the bar, after the conference formally ended.

iKnowtion has plans to hold the conference again next year and I encourage you to attend.

Do you spend a lot of time on YouTube? If so, you may have already seen this but I was surprised to see the MC Hammer video on YouTube.  Am I the only one surprised to hear the words “behavioral targeting” being spoken by MC Hammer?  Who knew that MC Hammer and I would have something in common.  We both believe that analytics enables you to allocate your marketing dollars effectively.

If you haven’t seen it, watch MC Hammer on Analytics from YouTube.