The document discusses RFM (Recency, Frequency, Monetary) analysis, a framework that companies use to analyze customer data. It assigns scores to customers based on how recently they purchased (Recency), how often they purchase (Frequency), and how much they spend (Monetary). This identifies high-value customers to target with incentives. The document also discusses RFMPD analysis, which includes additional variables like payment and date. RFM/RFMP analysis helps companies improve marketing, customer service, and salesforce performance.

1. RFM
Analysis
Theoretical
Framework

2. What does RFM stand for?
RFM stands for Recency, Frequency & Monetary Analysis
Recency: When did the customer make their last purchase?
Frequency: How often does the customer make a purchase?
Monetary: How much money does the customer spend?

3. What is RFM Analysis?
 RFM Analysis helps companies decide which customers to give select
offers and promotional items.
 It is a way for companies to find ways to increase customer spending.
 Companies can use it to target lost customers and give them
incentives to purchase items
 RFM Analysis can help companies keep track of their customers and
build a relationship that can increase sales and productivity.
 It also identifies minimal losses – customers spend low dollar amounts
in small quantities
COLLABORATION EXERCISES #2, PG. 366

4. How does RFM Analysis work?
First, customers are divided into 5 equal sized groups (20% in each
group)
Customers are then given an R, F, & M score
Using a score of 1 to 5, 20% of the most recent customers get an R score
of 1.
The second most recent get an R score of 2 and this continues until all 5
groups receive a score.
The 5 groups are reorganized to repeat the procedure for the F & M
scores.
(see spreadsheet – Supplier Rankings)
COLLABORATION EXERCISES #2, PG. 366

5. What is RFMPD Analysis?
RFMPD includes 2 additional variables.
P stands for Payment. This measures when the company receives
payment.
Customers who pay quickly receive a P score of 1 with the slowest
paying receiving a score of 5.
D stands for Date. This is the date of the customers last payment.
Customers are sorted by decreasing D values.
The final score is based on a value for R, F, M, & P.
COLLABORATION EXERCISES #2, PG. 366

6. Uses of RFM Analysis
Marketing departments of any company
Customer Service Departments
Customer Relations Departments
Ranking Suppliers
Ranking Salespeople
Airlines
Credit Card Companies
COLLABORATION EXERCISES #2, PG. 366

7. Strengths of RFM Analysis
Companies have data that can be used for target marketing.
Marketing budgets will be focused on customers who are more recent,
more frequent and spend more.
Specific targeting can increase profit and reduce costs; companies gain
by not spending on customers who will not add value
You can offer incentives to middle scoring customers to increase their
purchases
Analysis is quick and easy to interpret
COLLABORATION EXERCISES #2, PG. 366

8. Weaknesses of RFM Analysis
 It only looks at three variables and there may be others that are more
important
 Customers with low RFM scores may be ignored, even though they
may have legitimate reasons for spending more with other vendors.
 Opportunities may be missed to solidify business relationships leading
to loss of future sales and referrals.
 A customer with a low recency value and high spending could be
ranked lower than a customer who made a recent purchase and
spends 10 times less
COLLABORATION EXERCISES #2, PG. 366

9. Effectiveness of RFMP Analysis
Customers scoring the top 20% also pay the fastest. Companies will be
able make money faster and this can be used to reduce other liabilities.
Customers in the lowest 20% are slow payers and companies can
choose to limit credit or change payment terms to reduce the amount
of outstanding debt.
COLLABORATION EXERCISES #2, PG. 366

10. 1, 1, 1, 5 Customers
Customer is one that has recently ordered, buys frequently, spends
large amounts of money but they are a slow payer.
To speed up the payment process, companies can change payment
terms and offer incentives to pay earlier.
For example, if the due date is 30 days, but payments are received with
10 days, the buyer will receive a 2% discount off the bill (2/10 net 30).
COLLABORATION EXERCISES #2, PG. 366

11. 5, 5, 5, 1 Customer
This customer has not ordered recently or frequently, spend small
amounts of money but always pays on time.
This customer is spending more money with competitors.
Make an effort to find out why the customer is spending elsewhere to
see if there is anything the company can improve on.
COLLABORATION EXERCISES #2, PG. 366

12. RFMP or RFM?
RFMP is a better method because it include the variable of payment.
With more variables, you have a clearer picture of the customer’s value
to the company.
RFMP also takes into account the customer’s payment history.
If a customer pays on time, you know that there are no cash flow issues.
Slow payers may be having financial problems which may increase in
the future.
COLLABORATION EXERCISES #2, PG. 366

13. Using RFM for Salespeople
RFM Analysis of Salespeople gives managers a clear picture of how a
salesperson is performing
You can analyze the amount of revenue generated per person and
compare different salespeople
It is also possible to identify opportunities for additional training,
promotion or employment termination.
(see spreadsheet – Salespeople Rankings)
COLLABORATION EXERCISES #2, PG. 366

14. RFM or No RFM?
RFM is best suited for companies who offer a rewards program. They
are able to track spending and can offer their high profile clients
incentives to spend more.
RFM is worst suited to companies who provide products that are unique
and will not be purchased in large quantities.
COLLABORATION EXERCISES #2, PG. 366