DEFINITION of Recency, Frequency, Monetary Value (RFM)
Recency, Frequency, Monetary Value is a marketing analysis tool used to identify a firm's best customers by measuring certain factors. The RFM model is based on three quantitative factors:
- Recency: How recently a customer has made a purchase
- Frequency: How often a customer makes a purchase
- Monetary Value: How much money a customer spends on purchases
RFM analysis often supports the marketing adage that "80% of business comes from 20% of the customers."
BREAKING DOWN Recency, Frequency, Monetary Value (RFM)
Nonprofit organizations have relied on RFM analysis to target likely donors, as people who have made donations in the past are likely to make additional donations. RFM analysis classifies customers with a number ranking system for each of the RFM factors. The "best" customer would receive a top score in each of the three categories score. This analysis allows comparison between potential contributors or customers. Despite the useful information that is acquired through RFM analysis, firms must take into consideration that even the best customers will not want to be over-solicited, and the lower-ranking customers may be cultivated with additional marketing efforts.
What the Three Factors of RFM Illustrate
The more recent a customer has made a purchase with a company, the more likely he or she will continue to keep the business and brand in mind for subsequent purchase. Compared with customers who have not made purchases with the business in months or even longer periods, the likelihood of engaging in future transactions with recent customers is arguably higher. Such information can be used to remind recent customers to revisit the business soon to continue meeting their purchase needs. In an effort not to overlook lapsed customers, marketing efforts could be made to remind them that it has been a while since their last transaction while offering them an incentive to rekindle their patronage.
The frequency of a customer’s transactions may be affected by factors such as the type of product, the price point for the purchase, and the need for replenishment or replacement. If the purchase cycle can be predicted, for example when a customer needs to buy new groceries, marketing efforts could be directed towards reminding them to visit the business when items such as eggs or milk have been depleted.
Monetary value stems from the lucrativeness of expenditures the customer makes with the business during their transactions. A natural inclination is to put more emphasis on encouraging customers who spend the most money to continue to do so. While this can produce a better return on investment in marketing and customer service, it also runs the risk of alienating customers who have been consistent but have not spent as much with each transaction.