RFM Analysis

RFM analysis is a marketing technique used to segment and analyze customer behavior based
on three key metrics: Recency, Frequency, and Monetary Value. This method is widely used in
customer relationship management and marketing to identify different customer segments and
tailor marketing strategies accordingly.
Here's a breakdown of the RFM components:
Recency (R): This measures the time elapsed since a customer's last purchase or interaction.
Customers who have made recent purchases are often more engaged and responsive to
marketing efforts.
Frequency (F): This refers to the number of times a customer has made purchases or engaged
with the business within a specific time period. High-frequency customers tend to be loyal and
valuable.
Monetary Value (M): This represents the amount of money a customer has spent on purchases.
Customers with high monetary value contribute significantly to a business's revenue.
The RFM analysis process involves assigning a numerical score to each customer for each of
the three components. These scores are then combined to create a segmentation or ranking of
customers based on their overall RFM score. Businesses can create different segments based
on these scores, such as "high-value customers," "loyal customers," "dormant customers," etc
The use of RFM analysis offers several benefits:
Customer Segmentation: RFM analysis helps divide customers into distinct segments
based on their purchasing behavior, allowing businesses to tailor marketing strategies
to each segment's unique characteristics.
Targeted Marketing: By understanding the behavior of different customer segments,
businesses can create targeted marketing campaigns. For example, they can send special
offers to high-value customers or re-engagement emails to dormant customers.
Personalization: RFM analysis enables personalized marketing efforts. Businesses can
send recommendations, product suggestions, or promotions based on a customer's past
behavior.
Retention and Loyalty: By identifying and focusing on high-frequency and high-value
customers, businesses can enhance customer retention and build loyalty, thus increasing
customer lifetime value.
Resource Allocation: RFM analysis helps allocate marketing resources more effectively
by concentrating efforts on segments that are most likely to respond positively.
Churn Prediction: Monitoring changes in RFM scores can help identify customers who
are becoming less engaged or valuable. This can aid in predicting and mitigating churn.
Product Development: RFM insights can provide ideas for product or service
improvements based on the preferences and behaviors of different customer segments.
It's important to note that while RFM analysis is a powerful tool, it's often more effective when
combined with other customer segmentation and analysis methods. Additionally, the
interpretation of results and the determination of optimal strategies should consider the specific
context and objectives of the business.
See the steps of doing RFM analysis
First, we need to calculate the R score, F score, M score, and RFM score:
Recency (R) Score:
Calculate the time since the customer's last purchase or interaction. This can be
measured in days, weeks, or months, depending on your business's preference.
Assign a numerical score based on recency. For example, you can use a scale of 1 to 5,
where 5 indicates the most recent activity and 1 indicates the least recent activity.
Frequency (F) Score:
Count the number of purchases or interactions the customer has had over a specified
time period (e.g., in the last year).
Assign a numerical score based on frequency. Like with recency, you can use a scale of
1 to 5, where 5 indicates the highest frequency and 1 indicates the lowest frequency.
Monetary Value (M) Score:
Calculate the total amount of money the customer has spent on purchases over the
specified time period.
Assign a numerical score based on monetary value. Once again, you can use a scale of
1 to 5, where 5 indicates the highest monetary value and 1 indicates the lowest monetary
value.
RFM Score:
Combine the individual R, F, and M scores to create the RFM score. One common
method is to concatenate the three scores together. For example, if the R score is 4, the
F score is 3, and the M score is 5, the RFM score would be 435.
Alternatively, you can use a weighted approach where you assign different weights to each
component based on their importance to your business. For example, if recency is more
important, you might assign a higher weight to the R score.
After calculating the RFM score we will apply the segmentation based on the calculated score.
Segmentation:
After calculating the RFM scores for all your customers, you can segment them into
different groups based on their scores. You can create a grid or a table with different
combinations of R, F, and M scores and label each segment accordingly. For example:
High RFM Score: 555 - High-value and highly engaged customers
Low RFM Score: 111 - Low-value and less engaged customers
Then we will interpret the segments
Interpretation and Action:
Interpret the segments and decide on appropriate marketing and engagement strategies
for each segment. High RFM score customers might receive exclusive offers, while low
RFM score customers might receive re-engagement campaigns.
Remember, the exact scoring and segmentation approach can vary based on your business goals
and context. Some businesses might use more granular scales than the 1 to 5 examples provided
here, while others might adjust the time periods and weightings based on their industry and
customer behavior patterns. It's essential to adapt the approach to suit your specific needs.

EXAMPLE
Let's go through the steps of calculating the R score, F score, M score, and RFM score with an
example:

Let's say we're using a scale of 1 to 5 for all the scores, with 5 being the highest and 1 being
the lowest.

Example customer data:

Recency (R): The number of days since the last purchase.
Frequency (F): The number of purchases within the last year.
Monetary Value (M): Total amount spent within the last year.
Customer A:
Recency: 10 days
Frequency: 6 purchases
Monetary Value: $500
Now, let's calculate the scores:
Recency (R) Score:
Determine the scale. Let's say that a recent purchase within the last 30 days gets a score
of 5, while a purchase made more than 180 days ago gets a score of 1.
Customer A's purchase was 10 days ago, so using the scale, the R score could be around
4.
Frequency (F) Score:
Determine the scale. Let's say that a customer who made more than 10 purchases gets
a score of 5, while a customer who made only 1 purchase gets a score of 1.
 Customer A made 6 purchases, so the F score could be around 3.
Monetary Value (M) Score:
Determine the scale. Let's say that a customer who spent more than $1000 gets a score
of 5, while a customer who spent less than $100 gets a score of 1.
Customer A spent $500, so the M score could be around 3.
RFM Score:
Combine the R, F, and M scores. In this example, let's concatenate them.
Customer A's RFM score might be 433.
Now you have the individual scores and the combined RFM score for Customer A. You
would repeat this process for each customer in your dataset.

Segmentation:
Create segments based on the RFM scores. For simplicity, let's create a few segments:
High-Value and Engaged (e.g., RFM score 555)
High-Value and Less Engaged (e.g., RFM score 554)
Medium-Value and Engaged (e.g., RFM score 455)
Low-Value and Engaged (e.g., RFM score 355)
Dormant (e.g., RFM score 111)
Interpretation and Action:
Tailor your marketing strategies for each segment. High-Value and Engaged customers
might receive VIP offers, while Dormant customers might receive re-engagement
emails.
It's important to note that the scales, criteria, and segmentations used in this example
are simplified for illustrative purposes. In a real-world scenario, you would need to fine-
tune these based on your business's actual data and goals. The idea is to find the best
combination of recency, frequency, and monetary value criteria that make sense for
your specific business context.