Dylan's BI Study Notes

My notes about Business Intelligence, Data Warehousing, OLAP, and Master Data Management

RFM Analysis

Posted by Dylan Wan on March 9, 2008

RFM (recency, frequency, monetary) analysis is used by marketing to determine their campaign targets. It is based on three metrics from the previous sales records:

  • Recency – How recently a customer has purchased
  • Frequency – How often they purchase
  • Monetary – How much the customer spends

It should be considered as part of Marketing Analytics since it is used by Marketing. However, it is purely based on the sale data with the focus on the existing customers.

A marketing campaign with a more focus target can come better results. The usage of these metrics are based on the following assumptions:

  • “80% of your business comes from 20% of your customers.
  • Most-recent purchasers are more likely to purchase again than less-recent purchasers
  • Customers with more purchases are more likely to buy products than customers with fewer purchases
  • Purchasers who spent the most are more likely to purchase again than small spenders

In practice, the numeric measure are converted into the ranking and quintile. It is then used to generate the “RFM code”, which is a three digit code assigned to each customer. The details can be found in the reference link [1].

The RFM code can be used to predict the response rate and save the direct marketing mailing cost. However, as the article in reference [2], said, RFM is not as important in the electronic world. The email costs much less comparing to the direct mail.

One the other hand, it will allows you to design a better or custom message and thus gain a better response rate. In the article in the reference [3], a RFM Migration Analysis is used to analyze the customer migration patterns and to define the marketing strategies.

Reference

[1] Quick Profits with RFM Analysis, by Arthur Middleton Hughes, from Direct Marketing Institute

[2] Why RFM Works in Predicting Response, by Arthur Middleton Hughes, from Direct Marketing Institute

[3] RFM Migration Analysis, by Arthur Middleton Hughes, from Direct Marketing Institute

[2] Data Management Definitions – RFM Analysis, from SearchDataManagement.com

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One Response to “RFM Analysis”

  1. […] wrote the article RFM Analysis in 7 years ago. ¬†We recently posted a much more detailed explanations about how Oracle BI Apps […]

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