RFM Model First, customers are divided into 5 equal sized groups (20% in each group) Customers are then given an R, F, & M score Using a score of 1 to 5, 20% of the most recent customers get an R score of 1. The second most recent get an R score of 2 and this continues until all 5 groups receive a score. The 5 groups are reorganized to repeat the procedure for the F & M scores. (see spreadsheet – Supplier Rankings)

1. Collaboration Exercises #2, pg. 366
With comment
Collaboration Exercises #2, pg. 366

2. Marni McSween-Farmer Marco Luzuriaga Ross Ryan Annmarie Yoos
Collaboration Exercises #2, pg. 366

3. What does RFM stand for?
 RFM stands for Recency, Frequency & Monetary Analysis
 Recency: When did the customer make their last purchase?
 Frequency: How often does the customer make a purchase?
 Monetary: How much money does the customer spend?
Collaboration Exercises #2, pg. 366

4. What is RFM Analysis?
 RFM Analysis helps companies decide which customers to give select
offers and promotional items.
 It is a way for companies to find ways to increase customer spending.
 Companies can use it to target lost customers and give them incentives to
purchase items
 RFM Analysis can help companies keep track of their customers and build
a relationship that can increase sales and productivity.
 It also identifies minimal losses – customers spend low dollar amounts in
small quantities
Collaboration Exercises #2, pg. 366

5. How does RFM Analysis work?
 First, customers are divided into 5 equal sized groups (20% in each group)
 Customers are then given an R, F, & M score
 Using a score of 1 to 5, 20% of the most recent customers get an R score of
1.
 The second most recent get an R score of 2 and this continues until all 5
groups receive a score.
 The 5 groups are reorganized to repeat the procedure for the F & M
scores.
 (see spreadsheet – Supplier Rankings)
Collaboration Exercises #2, pg. 366

6. What is RFMPD Analysis?
 RFMPD includes 2 additional variables.
 P stands for Payment. This measures when the company receives
payment.
 Customers who pay quickly receive a P score of 1 with the slowest paying
receiving a score of 5.
 D stands for Date. This is the date of the customers last payment.
 Customers are sorted by decreasing D values.
 The final score is based on a value for R, F, M, & P.
Collaboration Exercises #2, pg. 366

7. Uses of RFM Analysis
 Marketing departments of any company
 Customer Service Departments
 Customer Relations Departments
 Ranking Suppliers
 Ranking Salespeople
 Airlines
 Credit Card Companies
Collaboration Exercises #2, pg. 366

8. Strengths of RFM Analysis
 Companies have data that can be used for target marketing.
 Marketing budgets will be focused on customers who are more recent,
more frequent and spend more.
 Specific targeting can increase profit and reduce costs; companies gain by
not spending on customers who will not add value
 You can offer incentives to middle scoring customers to increase their
purchases
 Analysis is quick and easy to interpret
Collaboration Exercises #2, pg. 366

9. Weaknesses of RFM Analysis
 It only looks at three variables and there may be others that are more
important
 Customers with low RFM scores may be ignored, even though they may
have legitimate reasons for spending more with other vendors.
 Opportunities may be missed to solidify business relationships leading to
loss of future sales and referrals.
 A customer with a low recency value and high spending could be ranked
lower than a customer who made a recent purchase and spends 10 times
less
Collaboration Exercises #2, pg. 366

10. Effectiveness of RFMP Analysis
 Customers scoring the top 20% also pay the fastest. Companies will be
able make money faster and this can be used to reduce other liabilities.
 Customers in the lowest 20% are slow payers and companies can choose to
limit credit or change payment terms to reduce the amount of outstanding
debt.
Collaboration Exercises #2, pg. 366

11. 1, 1, 1, 5 Customers
 Customer is one that has recently ordered, buys frequently, spends large
amounts of money but they are a slow payer.
 To speed up the payment process, companies can change payment terms
and offer incentives to pay earlier.
 For example, if the due date is 30 days, but payments are received with 10
days, the buyer will receive a 2% discount off the bill (2/10 net 30).
Collaboration Exercises #2, pg. 366

12. 5, 5, 5, 1 Customer
 This customer has not ordered recently or frequently, spend small
amounts of money but always pays on time.
 This customer is spending more money with competitors.
 Make an effort to find out why the customer is spending elsewhere to see
if there is anything the company can improve on.
Collaboration Exercises #2, pg. 366

13. RFMP or RFM?
 RFMP is a better method because it include the variable of payment. With
more variables, you have a clearer picture of the customer’s value to the
company.
 RFMP also takes into account the customer’s payment history.
 If a customer pays on time, you know that there are no cash flow issues.
 Slow payers may be having financial problems which may increase in the
future.
Collaboration Exercises #2, pg. 366
Comments:
The (P) Payment however is part of the (M) Monetary – if the customer is generating money then
it could be divided or sub-divided to payment history
I see that the P is valuable but it is not the case to make it a main variable (h.Meligy@ieee.org)

14. Using RFM for Salespeople
 RFM Analysis of Salespeople gives managers a clear picture of how a
salesperson is performing
 You can analyze the amount of revenue generated per person and compare
different salespeople
 It is also possible to identify opportunities for additional training,
promotion or employment termination.
 (see spreadsheet – Salespeople Rankings)
Collaboration Exercises #2, pg. 366

15. RFM or No RFM?
 RFM is best suited for companies who offer a rewards program. They are
able to track spending and can offer their high profile clients incentives to
spend more.
 RFM is worst suited to companies who provide products that are unique
and will not be purchased in large quantities.
Collaboration Exercises #2, pg. 366