Using RFM Segmentation in eCommerce to Identify Best Customers & Retain Them
- Posted on September 16, 2022 by natalia
- Reading time about 5 minutes
With rising competition in the market today, many eCommerce brands are struggling to find out customers that are loyal to their business. One of the major issues faced by the eCommerce industry is still cart abandonment, costing $18 billion every year. Most businesses are investing in strategies to attract prospects, generate leads & guide customers to purchase the product using high-quality content & ads- only to realize buyers back out at the last moment.
One of the most effective ways to reduce cart abandonment rates, attract more sales & identify the most loyal customers is RFM-based customer segmentation. In this blog, we will check out what exactly is RFM segmentation, how it works, and fit into your Customer Loyalty Software strategies to boost customer loyalty.
What is RFM & How Does it Work?
RFM Segmentation stands for Recency, Frequency, and Money/Monetary, which defines where a customer stands in terms of their buying habits and loyalty when they shop at a store, book a flight ticket or order a product online. Understanding what makes every customer unique and how you can tailor offers and product recommendations based on their individual needs is essential to turn an opportunity into business profits.
RFM can be defined as a data-driven approach used by marketing professionals to group customers into different segments based on their transactional behaviors. The segmentation process is done based on these criteria, which are ranked between high to low. Every segment is given a score from 1-4 (1 being the highest). This means every customer is assigned a score from 1-4, which is their “RFM Value”. Higher the RFM score of customers, the more valuable they are to your business, which means it can help your business figure out the most loyal ones.
RFM model enables not just marketers to understand their customers better & make great business strategies but also helps in creating personalized experiences to keep the focus on making loyal customers out of the total available customers. Using RFM segmentation, your business can easily create different customer segments using the 3 variables discussed above and use them to build targeted marketing/promotional strategies for each group of customers.
What Makes RFM Necessary for Your Marketing Approach?
Many eCommerce brands are taking advantage of a Customer Points System to help in boosting customer loyalty. But this approach may not be effective if you cannot figure out which customers are loyal and which are not. That is where RFM segmentation is needed to separate the best customers from the ones that are less engaged or profitable to your business.
RFM approach is considered best for large organizations where they have to deal with a huge customer base by targeting only the most valuable ones to increase business profits on a lower budget. This helps your business to give more attention to the ones who are most likely to buy your products even at a high price.
Know How RFM is calculated & Tips to Perform RFM Analysis
RFM calculation can be done by analyzing the past behaviors of your customers & assigning them a score for every metric i.e. Recency, Frequency, and Monetary
Check how recently the customer made a purchase from your brand and measure in days/weeks/months since their last purchase. The customers who purchased more recently will be given a higher recency score.
As the name suggests, it will figure out how many purchases each customer made in the same period. The customers who made more purchases will get a higher score.
This tells how much money each customer spent on your products during the same period. Similarly, the customers who spend the highest order amount will be given a higher monetary score.
The idea behind RFM analysis is to identify the top 10%, 20%, and 30% of customers who spent the most money, who buy more often, and who bought most recently from your business over time. These are your best customers, for whom you can market effectively focusing on campaigns that work exclusively for them. This will eventually help in increasing customer lifetime value and grow your business sales in near future.
Mistakes to Avoid While Using RFM
Though RFM segmentation is a robust marketing approach to identify your best customers & retain them longer, it also comes with some limitations that must be kept in mind to avoid any misunderstanding and poor decisions.
– If you are considering a single transaction for a high recency score, it can mean the customer may not be very close to making the next purchase. This means, that recency value only improve as the customer make more purchase, not just one. For a more accurate recency score, it is better to consider more recent transactions.
– Another challenge is comparing customers with different purchasing patterns during the same period. For instance, if A purchased 3 weeks ago and B purchased 5 weeks ago but shops every six months, they can have the same score. Their value cannot help tell the likelihood of making the next purchase.
Undoubtedly, we can say that RFM is one of the most effective marketing tactics that a business can implement to convert their leads into actual customers. However, it is important to ensure that you know how to set up the recency, frequency, and monetary campaigns and make the difference in increasing sales & improving the bottom line.
If you are a business owner who is new in the market and looking for a way to turn more heads towards your business, RFM segmentation is a must for you. Novus, being a trusted end-to-end loyalty solution provider that can drive engagement & growth enabled businesses across the world to deploy custom-loyalty campaigns and RFM strategies to attain business goals faster.
For any concerns regarding RFM and ways to boost your customer loyalty, connect with the team of Novus & build Loyalty Software with RFM Analysis for customized marketing strategies to gain a competitive edge in the competitive era.