Recency–Frequency–Monetary Value are three measures considered jointly to determine the value of a customer or group of customers in terms of the time since the last purchase was made, the number of purchases made during a period of time, and the dollar value of the purchases made.
For example, a customer who purchases $100 worth of goods over a two-month period is more valuable than a customer who purchases $100 worth of goods over a two-year period.
Although difficult, it is possible to quantify the value of recency and frequency by using a system that assigns a value from 1 to 10 to various recency/frequency values.
For example, the frequency rating for a customer who purchases five times in a six-month period may be rated an 8. The recency of his last purchase was one week ago, and that is a 10, for a total customer rating of 18.
Another customer made one purchase in the last six months, earning a frequency rating of 2. His purchase was five months ago, which earns a recency rating $ of 2, for a total customer rating of 4.
A rating scale can also be used for the monetary value of the purchases, which, added to these recency/frequency ratings, will produce an overall relative rating for the customer.