Broadly, this post explains how to use RFM (Recency, Frequency, and Monetary Value) analysis for more effective digital marketing. Specifically, it describes how Small Business marketers can use RFM analysis, a fundamental and proven direct marketing analysis technique, to identify best customers.

RFM analysis is based on the idea that the customer who bought from you most recently, who buys from you most frequently, and who spends the most money with you is the customer most likely to buy again.

How to use RFM analysis, a proven technique to identify high-value customers. Smaller audiences that are more likely to convert means more effective Digital Marketing. Click To Tweet

Historically RFM analysis was first used by direct mail, non-profit, and catalog marketers. RFM data analysis was used to analyze and target customers that are most likely to buy again. This could be a donation or another purchase from the catalog. It could also be a cross-sell or an up-sell. The reasoning behind the practice is simple – people who donated or bought from you in the past are likely to buy or donate again.

How to Use RFM Analysis to Help My Small Business Digital Marketing

How to use RFM analysis - customer value quintiles

Customers are ranked and put into quintiles for each of the RFM parameters. Each quintile is assigned a ranking number of 1-5 (with 5 being the highest). The three scores put together are referred to as the RFM score and 555 would be a perfect score and your ideal customer.

There are times when each parameter is given a weight. This is a nuance that can be used after some time has past and experience gained.

Most small businesses don’t use any analysis to manage their marketing so if all you do is simple RFM analysis to improve your marketing efficiency, you will be ahead of the competition.

One quick and easy thing to do would be to tag high scoring customers in your ESP (Email Service Provider) and use email marketing to make them feel special. They likely know that they are important customers. Make sure they know that you know. There are five relationship marketing principles and one of the most important is “Good customers expect to be rewarded.”

Another option would be to create a custom audience in Facebook’s ad manager. You can target this audience directly with ads for products that will interest them. You can also use the custom audience to create a lookalike audience. These would be Facebook users who aren’t your customers today but they look just like your best customers. This increases the likelihood that your marketing will attract more customers to your brand or service who look like your best customers into a sales funnel.

Caveat Emptor

Although RFM calculations and analysis are useful tools, they do have their limitations. For example, a business should avoid over soliciting customers with the highest rankings.

Conversely, marketers should remember that consumers with lower RFM score, while you shouldn’t ignore them, are unlikely to ever be great customers. They simply don’t need your product as much as the best customers. These customers will be the majority of your customers but they don’t represent the majority of value so they should not be where your budget is directed.

How to Use RFM Analysis – Conclusion

There are a few simple steps that almost any business can follow. Much more advanced and subtle analysis can be done but the following will take you a long way:

  • Identify your best customers (top two value-based quintiles)
  • Build a best-customer loyalty program to reduce churn
  • Cross-sell and up-sell appropriate products and services
  • Use targeted digital marketing to find more customers like your best customers

We have a lot of experience with this idea so please don’t hesitate to contact us if you want to discuss how these techniques can improve your digital marketing.