To perform an RFM analysis, each customer is assigned a score for recency, frequency, and monetary value, and then a final RFM score is calculated. Recency score is calculated based on the date of their most recent purchase. The scores are generally categorized based on the values. Similarly, the frequency score is calculated based on the number of times the customers purchased. Customers with higher frequency receive a higher score.
Finally, customers are assigned a score based on the amount they spent on their purchases. For calculating this score, you may consider the actual amount spent or the average spent per visit. By combining these three scores, a final RFM score is calculated. The customers with the highest RFM score are considered to be the ones that are most likely to respond to their offers.
Good news is that RFM is based on past customer results and does not require heavy data analysis.Here is a step by step guide on how to perform RFM segmentation:
- Sort your list for recency, in order of highest to lowest.
- Divide the list into five equal segments.
- Give the top 20 percent a recency score of 5, the next 20 percent a score of 4 and so on.
- Sort each recency segment by frequency and divide into five equal segments, resulting in 25 recency plus frequency segments.
- Each of these segments is then sorted for monetary and divided into five equal segments, leaving you with 125 segments that have RFM scores ranging from 555 to 111. This is your RFM index. Customers with a score of 555 are the best customers.