Customer Segmentation Through RFM Analysis :

How RFM Segmentation Can Help Retailers Re-engage Better?

Engaging your customers at the right time, place and with the correct message can guarantee better profits.Customer insights play a crucial role in knowing your customers better and targeting them with relevant information.

Instead of a bulk blast, you can send personalized messages that attract their attention and help you keep them coming back to your store.

RFM segmentation technique is a highly effective way of automatically building customer segments and knowing your best customers.

Here, we will try to define what RFM segmentation means, how it can help retailers and what are the outcomes you are likely to get.

Introducing RFM Segmentation

Broadly, RFM segmentation helps identify customers with similar spending habits and put them into a single cluster. There are three factors that govern this segmentation.

Recency

When was the last time the customer visited your store? You have to calculate this time period from today.

Let’s say their last visit was yesterday, then it is a very recent visit. Say, a customer purchased from your store one month ago, it will still be considered a recent purchase.

However, if they have not visited your store in the past one year, then their recency score would be very low. They may not be your active customer.

Frequency

The number of visits to your store also determines if they are engaged with your business or not. Say you are a coffee shop, and there is a customer who visits your store almost every week. Their frequency is definitely high. They are highly engaged, and would surely recommend your brand to others.

However, if a customer has not returned after their first visit, which was months ago, they are not actively engaging. They could have forgotten your brand. It is important to re-engage with them, and make them come back to you.

However, if you didn’t know the frequency or recency, you wouldn’t have known these details for your customer or how to engage them further.

Monetary

How much do they spend at your store per visit? This will also give you an insight into the average order value per visit and the total customer lifetime value.

Note: Customers that have a higher frequency, recency and monetary score will be your most active customers. However, if the scores are low, you might want to engage them with some incentive or communication.

Why Do You Need RFM Analysis?

Knowing your customer segments can help you predict potential customers better. It will also help you devise apt re-engagement strategies and evaluate the lifetime value of a customer.

We have identified a few benefits of RFM analysis that will help you realize the importance of this segmentation.

Helps you devise an engagement strategy

Each customer segment behaves differently. The way they engage with the brand is completely unique. For example, the loyalists are your most active customers. They are your repeat customers. The kind of communication or engagement strategy that you have adopted for this segment seems to be working.

This will guide you towards creating a defining engagement strategy for your inactive or lost customers. You can understand what kind of products they preferred when they visited, what they bought and their spending habits. This will help you craft the exact strategy that can win them back.

Target using relevant communication

When you send out communication, it should be highly relevant and useful to the target segment. You will know what they are looking for, when you have the segments and their habits defined.

Automated segmentation using RFM can help you know what the engaged customer looks like and how much they spend. Your communication strategy will depend on their preferences and habits. Similarly, to win the lost customers look at the value they provided while they were your customers. It will help you know what winning strategies you need to invest in.

The RFM Segments

Customer Segment	What It Means	Our Recommendations
Loyal Customers	They are definitely high spenders at your store. They come often, even if their frequency is not too high. They love engaging with the brand.	This is the segment that can become your champion customers and can even turn into brand advocates. You want to engage them better and increase profits from this segment. They are open to promotions and communication from your business. You can connect with them to upsell a product. You can even seek feedback and reviews from this segment. They will be more than happy to give the same.
Promising Customers	They are just one-step away from becoming the champion customers. They are your happy customers, who spend good money at your store. Their average order value is definitely high. They are also engaging well with your brand	If you offer recommendations to this segment, they will take it. They are open to receiving communication. You can use their recent purchases and spending habits to recommend new products. This will enhance engagement
New Customers	They are recent visitors at your store. There is a good scope that they might come back again.	You want to show them what is good about your business. The first time visitors are your best segment for incentives. Offering the right discounts and deals can get them to come back sooner to your store
Lost Customers	They have left your business or, they are no longer active. Their last purchase was long time ago and they are definitely the lowest spender at your outlet.	You want to re-engage and win them back. You cannot lose them to your competition. It is important to remind them of your brand. Send out a re-engagement campaign that will increase recall value and make them come back.
At Risk Customers	These are customers who haven’t been to your store in the recent times. They are big spenders and have purchased many times at your store. Their last visit, though, was long back.	A strong re-engagement strategy is recommended to keep them from going away. You need to try and engage them; communicate with them what went wrong. Tell them you are missing their presence at the store. A good winback message will get these customers right to your store.
Champions	Most active customers of your business. They bought products recently, their frequency of visits is very high and they spend maximum at your store. They are the most engaging segment	This is your most profitable segment. You want to make sure they remain in your business for a longer while. They are capable of becoming brand advocates. If you are planning a new product launch or want to send a promotional campaign, this is your segment for that. They are more likely to test new products.
Needs Attention	They are your most recent customers. They haven’t spent much at the store. Their RFM values are average.	This could be your impulsive or one-time buyer. They could be influenced by incentives. However, you are not sure what drives them to the store. You could send them an incentivized communication. Make sure to keep the incentives available for a limited time period. It is important to tap into this segment as soon as you can, and engage them, while you are still at the top of their mind.