Sometimes, better copy isn’t the solution to a client’s marketing problem.

As a value-added copywriter – someone offering your clients more than vowels and consonants – you should know how to generate success for you clients, even if it doesn’t mean another rewrite.

Which is why I’m introducing you to three letters: RFM

RFM spreadsheet

They stand for Recency, Frequency, and Monetary. And they represent a simple, smart way to dramatically increase profits.

Why Segment?

Smart marketers preach the gospel of “know thy customer.” RFM segmenting uses customer data most businesses have already collected to define their customers by their past buying habits – the single best predictor of what the future holds.

And yes, a few of you just stopped reading. This is, after all, the stuff of the direct response nerd – the data-mining spreadsheet geeks who dwell in the shadow areas behind the more glamorous “creative” work.

Nothing could be further from the truth.

RFM is just one more tool in the savvy marketer’s toolbox; an extremely useful item that solves problems for marketers the same way hammers solve problems for carpenters.

And I pity the copywriter who sits down at a meeting, wants respect – and then has to ask what RFM stands for. Don’t be that yutz.

Why RFM?

Easy. It tells you – quickly and easily – how your customers are behaving.

Let me help you visualize how it works.

Take a long list of customers and their data. The basic idea is to divide them according to their habits, creating a grid where each square holds customers that are distinguished from the customers in the other grids.

We do this by assigning an RFM “score” – easily done if you have access to customer data.

Each letter corresponds to a customer trait. For example:

  • “Recency” tells you how long it’s been since a customer last shopped (or bought, or surfed your site – whatever)
  • “Frequency” tells you how often a customer shows up
  • “Monetary” is how much they spend

Let’s start with the easiest: Monetary.

All you’re doing is dividing your list into five equal-length segments, and assigning the customers in each segment a score from 1 to 5 (let’s make 5 the biggest spenders, 1 the least).

(Hint: You can use any grid size, so if your list is small, using scores from 1 to 3 is easier and still plenty effective.)

So everyone who has spent from $1-20 at your e-commerce site gets a “1″. From $20-$40, they get a “2″. And so on. The top spenders get a 5. (CHAID is a far more scientific way to do this, but it’s also far more complex. Keep it simple at first.)

Then you do the same for the Recency and Frequency. Divide those lists into five equal-length segments, assign them a score from 1 to 5 (5 being the more desireable behavior), and viola!

You’ve got an RFM grid.

What? “Where’s my grid” you ask?

Simple. You don’t actually draw a grid and place names in it. You create virtual one by combining scores.

For example, your “best” customers are those who scored a “5″ on all three attributes. They’re your 555s – the people who visit most often, spend the most, and and did it just recently.

By contrast, an RFM score of 135 means:

  • Recency = 1 (they haven’t showed up in a long time)
  • Frequency = 3 (they used to come fairly often – a middle of the road type)
  • Monetary = 5 (when they came, they spent big)

By contrast, your 111 customers haven’t visited recently (R=1), don’t come often (probably once: F=1), and didn’t spend much when they did show up (M=1). Don’t invest too much marketing to this group.

See How it Works?

You want your middle-of-the-road customers? They’re likely the 222/333 crowd.

Want to know who used to spend and visit a lot – but hasn’t in a while? (And believe me, that’s useful information.) Look for the 155/255/145/245/154/254 crowd.

Quick Quiz: What’s the RFM for a customer who showed up relatively recently, never came back, but spent a lot?

(Answer: Recency (R) = 4 or 5; Frequency (F) = 1; Money (M) = 4 or 5. So you’re looking for a 414, 515, or some similar combination).

I saw this procedure done on a casino marketing database that contained literally millions of records.

They created an RFM grid using a simple database (On smaller lists, a spreadsheet will do).

Given the competitive nature of the casino business, how much of a monetary return did they enjoy through the simple act of segmenting their customer list?

To call it “sizable” is to call Everest a “big hill.”

This stuff works.

More Useful Than You Know

It’s tempting to look at your newly defined RFM rankings and do the obvious thing – market the hell out of your 555 crowd.

That’s probably a mistake.

My advice? Don’t overlook all the niche possibilities (copywriters understand niches).

For example, marketing to your high-value crowd is obvious; they’re already great customers.

But what about the customers who used to be great customers, but aren’t any more? That’s a potentially rich vein of ore – especially since you can now easily identify them.

How about the big spenders who only showed up a couple times, then stopped? Is it worth marketing to get them to come back? (RFM = 525/515/424/etc)

And how about the steady spenders who fell a little below your radar, then stopped coming? Aren’t they worth an attempted jump start? (RFM = 222/233/etc)

For that matter, you can target specific traits of specific groups. For example, you can identify the folks show up rarely, but spending lots when they do. What can you do to bring them around more often?

See the utility?

Class Dismissed… Almost.

RFM is a basic building block of marketing, and smart marketers are also applying it in the online arena (often using variations like RFD [D = duration, as in how long someone spends on a microsite]).

It’s not the kind of thing a direct response copywriter will do every day, but if your client is using RFM to segment a list, then you’d damn well better know what’s happening – and what segments you’re marketing to.

If your client isn’t using it – but should be – then you become the hero for suggesting it.

RFM is a universal technique that sees use at any business with repeat customers.

Casinos, airlines and others like them use fairly complex RFM systems to market more effectively, but there’s no reason a smaller company – or e-commerce site – wouldn’t benefit from this simple, quick, no-special-tools-required technique.

Keep marketing, Tom Chandler.

UPDATE: Multichannel Merchant just posted an article about email list segmenting. It mentions RFM in passing, but focuses on other email-specific traits. My take? It’s easy to say “notice that someone buys once every three months and market to them then” but how do you maintain that level of granularity in your work?

Frankly, I say stick to the basics and add where it’s possible, but don’t get sucked into the vortex of data generated by online marketing – unless you’ve got the time, tools and budget. There are probably easier fruit to pick.

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