The RFM formula, described in the following article, is your best tool to optimize all your performance marketing campaigns which involve using your customer or prospect database and tactics that cost money per each contact or conversion. For instance:
- Telemarketing campaigns, as each telemarketing contact requires per-minute phone line costs and live agent’s work costs.
- Direct mail, SMS texts, voice mailings and robocalls – as each such contact costs money. (Some marketers make a fundamental mistake of testing these channels by using random customer records, obviously get no results and erroneously state these tactics do not work “in this day and age”).
- Bill-me-later or invoice-me schemes where you send your merchandise with the bill still to be paid.
- Cash-on-delivery payment schemes where you may expect a heavy rate of parcel refusal which will cost you for each unclaimed item.
- Free trials which involve set-up costs or sending the merchandise for approval and may, in the end, not convert to an actual sale where you get the money.
- Ecommerce sales where you may expect a heavy return rate (i.e. 30-50%), as in online stores dedicated to apparel.
- Follow-up for leadgen campaigns involving sales reps whose time is extremely expensive.
The RFM formula may help you as well in all those situations where your marketing budget is strictly limited or, for example, if your email volume is severely restricted due to your company’s internal policies and strategies.
Let’s dive in.
Setting Your CRM Database for Maximum Effectiveness
Fortunately for all of us in business, there are such things as customers. These are human beings who at some time or another in the past made the decision to buy from us. They were reasonably satisfied with what they got and began to develop a reliance on us as a source of supply.
They placed an order, were put in the customer database, they paid for what they got and finally received the product and used it to satisfaction. A habit pattern was established. As this pattern is retraced, the habits became more fixed and a profitable customer-seller relationship begins to exist.
Almost every company puts their customers in some type of a database so that at least transactional emails can be handled automatically and then promotional emails, SMS texts, phone calls or direct mail pieces could follow.
Then, as time goes on, the number of customers in the database usually becomes larger and larger, and the profit from promotional campaigns directed to those customers increases.
The only catch is this… the real customers in the so-called “customer” database become a steadily dwindling percentage. And conversely, the percentage of waste, or number of unsuccessful efforts to convert your customers and make them buy additional offers, creeps ever upwards.
This situation exists in almost every customer database, both in business-to-consumer and business-to-business spheres. The CRM department keeps the database up-to-date from the standpoint of correct phone, email and ship-to addresses as well as necessary opt-ins but often they do not maintain the internal quality of the customer database for maximum promotional effectiveness.
Case in Point #1: The B2C Perspective
The result of intelligent database “pruning” can be tremendous. Recently I had occasion to completely revamp the customer database of a large furniture ecommerce. The number of names in the database, which was regularly promoted to, totaled 140,000. But the quality of the database had deteriorated to the point where results of SMS texts, telemarketing calls and direct mail were only marginal, and only “zero-cost” emails were still profitable.
It took some effort to bring the customer database promotions into shape. When finished the “to promote” database shrunk to 70,000 customers and the campaigns to this reduced customer database were just as effective, total profit-wise, as campaigns to the larger one. Savings – 70,000 SMS texts at an average cost of $0.25 (or $17,500) plus tremendous savings in telemarketing costs at $7.50 a call.
But the sales results were far more important. With the customer names scheduled for promotion cut to 70,000 company’s management was able to conduct SMS & phone campaigns monthly and this monthly promotion has proved to be quite resultful. While competing furniture ecommerce sites have been registering sales declines, this firm has made small but steady increases.
The biggest problem in cutting the size of a campaign down is to determine how customers, who are least likely to convert, should be eliminated. Fortunately, the mail order industry over a hundred years ago pioneered the Recency – Frequency – Monetary ratio to do this job for us, ecommerce marketers in 2021 and beyond.
RFM Formula Explained
The large mail order houses of the past faced a yearly problem of determining who should get their 1500-page print catalog. Since Sears mailed approximately 7.5 million catalogs (at 5 lbs. / 2.25 kg a piece!) but had a customer file of 15 million, only half of the customer database could receive the costly catalog.
They knew statistically that mailing 15 million print catalogs would result in a dead loss and so necessity developed a procedure to select from the customer database of 15 million the 7.5 million people who would be most likely to make profitable purchases during the next catalog year.
That basically is what the Recency – Frequency – Monetary formula – RFM for short – is for. To determine the probability of profitable future business from various categories of customers.
Let’s put this into concrete form so that you can easily understand it and implement in your business right away. In the case of men’s clothing store, for example: the more often Sam Jones walks in for neckties, shirts or suits, the better customer he is likely to be – this is FREQUENCY.
If Sam Jones came in yesterday to buy a new hat, and walked out satisfied… chances are everything is all right between him and the retailer. The customer-seller bond is strong. The last purchase established his RECENCY.
Sam is not like Tom Brown who works in an office across the street. Tom dashes in about six times a year to pick up a couple pairs of socks or some handkerchiefs each time. Dollar-wise Tom spends about $100.00 a year. Sam, who buys his suits, hats, shirts and many other items, spends over $2,000.00 annually with this store. This is the MONETARY factor.
If the number of customers is limited and the establishment is small, the proprietor will know most of his better customers. He will probably have a “sensing” of the Recency – Frequency – Monetary ratio… and will use it intuitively to evaluate his customers.
However, as the size of the business grows, the need for converting this sensing into an automated system increases. The RFM formula can be used to shift this customer evaluation into simple procedures that will segregate customers by their sales potential.
Case in Point #2: The B2B Perspective
Now let’s take the case of a business training business and see how the Recency – Frequency – Monetary formula can be of assistance in cutting promotional costs, especially those of telemarketing, SMS texts, voice messages or direct mail, and increasing sales results.
A small business training business has built up its customer database to 16,000 names over the years. The customer database (the “house list”) was encumbered with names of companies who had bought a few on-site business trainings and some digital licenses for online training five years ago and had never purchased since. Prospects, inactive accounts, good accounts and prime accounts were all listed together.
The business training company’s head of sales and marketing had made sporadic attempts to clean up that database. But customer scoring standards or procedures had never been devised. None of the department’s staff could have been entrusted to understand which names need to be removed from “to promote” segment and which were to remain.
Decisions were left to the overworked head of department who was spending most of his time devising new marketing communications, new ideas for sales and new traffic sources to promote to.
There was a column in the CRM system which asked whether the account should be removed from “to promote” list, left on, or for new prospects, added to the list. There were practically no removals, almost always additions.
Whenever there was any doubt expressed about leaving a name on the “to promote” list or dropping it, the optimistic marketing and sales managers invariably insisted upon leaving it on – “After all, it only costs a few cents or dollars to send a direct mail piece / make a phone call / send an SMS text etc. to this fellow… and who knows? Something might come out of it!”
Several sales reps beefed up their “share of the list” by submitting remote prospects. The head of sales and marketing acknowledged he was inclined to go along with these practices because he was psychologically in favor of large campaigns.
Although it was recognized that the “to promote” list was unrealistic, even top management was soothed when they head reports such as “We’ve added a thousand new names to our customer database.”
Over the years, these pressures resulted in a hodge-podge of thousands of names and addresses – scattered among them were those accounts that actually were the life blood of the business.
Telemarketing, direct mail or SMS promotions that were tried had to carry a 85% burden of waste. Not enough contact was being maintained with the really good customers whose orders kept the business running. My analysis showed the campaigning effort was far too broad.
There was no penetration in depth – the business training company was not “staying in there” with its customers. They were not making enough phone / direct mail / SMS contacts and follow-ups to pick up seasonal orders.
Limiting and Dividing the Lists: the RFM Rules of Thumb
There is no law that says all names on all lists should get all mailing pieces or all phone calls. Yet many firms, in actual practice, behave as though there was.
I analyzed the accounts on the mailing and telemarketing list in detail, divided them into categories by frequency of purchase, by date of last purchase, and by total sales volume. After discussion with management we set up a point system for “recency” based upon the common 5-3-2-1 ratio.
This means that a customer who purchased within the year would get 5 points for recency. If his last purchase was 2 years ago he would get 3 points, then 2 points, 1 point, and 0 if he had not made a purchase in more than 4 years. Frequency was similarly handled and a point was awarded for each $400.00 of sales to establish the monetary value.
Customers with less than 18 points were eliminated from the “to promote” list. Customers ranging in value from 19-50 points were set up as a “regular” customer list and customers with point values of above 50 were segregated into a “prime” list. The total count shrunk to 6,200 names.
This enabled much more frequent campaigns, of much higher quality with stronger attention-getting appeal. Sales results: a substantial increase and yet total campaign expenses were reduced. In limiting your “to promote” list you may also want to reduce your prospect lists. These, which should contain the names of reasonably potential buyers, generally contain a healthy part of wishful thinking.
Applying the RFM formula is a lot of work – it takes time, supervision and experience. But there are few things that you can do to make your campaign results more profitable than applying the RFM intelligently to your particular business. It is infinitely better than the “meat axe” method of reducing a list by “junk all of the names who haven’t bought from us for 3 years or more.”
The Recency – Frequency – Monetary formula gets rid of the piddling account who gives you ten $8.00 orders during the year and who probably costs five times more to service than its sales volume justifies.
The RFM by itself is probably the simplest, yet the best, answer to constantly increasing costs. Yes, you can reduce your telemarketing or direct mail costs up to 50% and sometimes much more – just put the RFM to work for you.
- The benefit of the RFM is that it enables you to quickly segregate accounts who are due to be taken off the active campaign list and who possibly can be reactivated with special attention. And most important of all, in my opinion, is the fact that the RFM will automatically develop for you a “prime” customer list.
- In most lines of business 20% of the customers produce 80% of the sales. Yet, in most companies this prime list receives no special treatment, and instead they get the comparatively infrequent marketing touches that the rest of the database gets simply because the database is so large that the budget cannot stretch enough to permit weekly or monthly campaigning.
- The RFM formula is really a simple tool when you understand the basic principles. Put this tool to work in your business now and it will remain one of the most potent weapons in your sales promotional arsenal.