How to Use RFM Data Analysis for Best-in-Breed Email Marketing Performance

Jordie van Rijn

This is a post from Jordie van Rijn, an Email Marketing Consultant with substantial experience in email marketing and marketing automation. He works for Email Monday. Jordie doesn’t blog for us on a regular basis but is a friend of State of Digital.

 


An email list can be one of the most valuable assets for a marketer. Because people need to “opt-in” to email lists, it’s naturally full of customers and potential customers that can be considered “warm leads.” The question is, how do you maximise the value of your email list? One solution could be to combine it with another powerful marketing technique, Recency Frequency Monetary (RFM) analysis.

Although smaller businesses may segment their email lists manually, for larger, more mature organisations with sophisticated data capturing techniques, RFM makes a lot of sense.

Effective RFM does mean collating your email list with sales data sources, which can’t be done efficiently unless you’re using a proper Business Intelligence (BI) tool. That shouldn’t put you off because self-service BI tools like Sisense, Jaspersoft, and Spotfire are designed for non-techies to use.

In fact, data discovery is what self-service BI is all about. “When you don’t know where the answers are, you need to ask a lot of questions,” Sisense’s Eran Levy recently wrote. “When you don’t know where to find valuable insights, you need to look at your data from all the different perspectives you can think of, slicing it, dicing it, zooming in and out, until you accidentally meet a new and unexpected understanding. This process is called ‘Data Discovery,’ and it is the secret weapon of today’s visionary marketers.”

How RFM Analysis Works

RFM is a marketing technique that analyses customer and sales data to find your most valuable customers, based on their past purchasing habits. It does this by focusing on specific signals, as follows:

  • Recency — How recently has this contact purchased products or services from your business, visited your website or store, or interacted with you in a meaningful way?
  • Frequency — How often does this contact purchase products or services from your business, how often do they visit your store or website, and what is the frequency of their interactions with you?
  • Monetary value — How much money does this contact spend with your business, in terms of profitability or revenue?

RFM analysis takes audience data and segments people according to each of these parameters. It assigns a “score” to each subscriber for their recency, frequency, and monetary measures. These scores are then combined to band contacts according to how valuable they are to your business.

Of course, there are other ways to segment email lists, based on demographics, industry, interest topics and more, but RFM works because it combines your list with actual purchase history. It uses the hard data you already have, rather than trying to work out the intent of your potential customers.

What RFM Segmentation Looks Like in Practice

When you segment your list according to RFM, you will create different bands of customers. Here’s how you can approach each one with unique messaging:

  • High RFM customers — Make them aware of your more high-end products and services. Give them unique discounts and high-value rewards for being such active supporters of your business. Encourage them to refer others and reward them for doing so — this band of people make for great customer advocates.
  • Medium RFM customers — Make them aware of particular sales and promotions that you’re running. This would be your “standard” email marketing, combining awareness, value-add, and other messaging.
  • Low RFM customers — These are the people who don’t spend much or buy often from your business. You might want to offer free trial periods, one-off discounts, and other ways to get them to try out your services. You’re trying to encourage the people in this band to become medium RFM customers.

Why RFM Works

RFM is based on a simple principle — If customers have purchased from you before, they are likely to purchase again. It’s a powerful and proven approach, customers who already have trust and a relationship with your brand and business are likely to keep supporting it.

As Margaret Rouse at TechTarget says, “For more than 30 years, direct mailing marketers for non-profit organisations have used an informal RFM analysis to target their mailings to customers most likely to make donations. The reasoning behind RFM was simple: people who donated once were more likely to donate again.”

How You Can Use RFM to Boost Email-Referred Sales

Here’s how to leverage the power of RFM analysis and use it with your email list to create strong messaging and results.

1. Gather together your customer data

Go through your sales records, client relationship management software, analytics, and any other sales or customer tools to capture data from the various different sources. Ensure you can identify the recency, frequency, and value of sales and other interactions.

2. Combine the customer data together

Once you have your data collected, combine it together so you have a “single source of the truth.” Consolidate and cleanse your data to eliminate false positives and negatives.

3. Work out your RFM scores and customer banding

Establish how you will want to segment your customers, and define the different ranking you will apply in each of the three areas. Map those scores into customer bands so you can segment customers accordingly.

4. Analyse your data and assign RFM bands

Run your data analysis against your cleansed data to identify and segment your customer base. Assign your customers to the appropriate bands.

5. Combine the output with your email list to find your most valuable customers

Now it’s time to match your email list with your RFM analysis output to identify the customers and email addresses most valuable to your business.

6. Message your customers

Once you’ve identified the banding for each of your customers, it’s time to get busy writing creative copy.

Sridhar Mutyala at Eight Leaves puts it well. “You can now start to analyse the characteristics and purchasing behaviour of this group and try to understand what distinguishes them from typical customers,” he writes. “Do they tend to buy a subset of your products or services? Do they live in demographically similar neighbourhoods? Are their lifestyles and/or life stages similar? Why do they perceive more value in your business than the folks who you see once or twice?”

Advice on Combining RFM and Email Lists

1. Get the right Business Intelligence and analysis tool

Cleansing and consolidating your data, analysing it, and acting on it can take time and effort. Make things easier for yourself by getting a decent business intelligence and data analysis tool. It will make your data collection and analysis process much, much easier.

2. Don’t over market to a particular customer segment

There’s a temptation to over market once you have identified your most profitable and valuable customers. Avoid that temptation! It’s important to keep customers engaged, but not bombard them with messaging. The last thing you want is people unsubscribing from your email list.

3. Rerun your analysis frequently

Rerun your RFM analysis on a regular basis, so you can track your marketing efforts. If you’ve managed to market successfully, you’ll see RFM values creeping up.

4. Remember you can use RFM for areas outside email marketing

You don’t need to limit yourself to email marketing. RFM can also be used with direct mail, SMS messaging, social media marketing, and with entire customer audiences through targeted marketing techniques.

One unusual area where RFM is used a great deal is in casinos, as Statistical Concepts points out, “If you’ve ever been to a casino you’ve seen RFM analysis combined with life-time value analysis. These are the principles upon which casinos issues complimentary hotel rooms, meals, show tickets and everything else they offer ‘for free’ to patrons of their establishments. Even the so called ‘free drinks’ you can get in a casino are carefully distributed based on a real time size-up of your value to the casino based on RFM analysis.”

Get Started with RFM Analysis for Your Email List

If you have mature customer data collection, and an active email list, RFM marketing can create a strong return on investment. Make sure you invest in a powerful business intelligence and analysis tool and use your insights to boost customer engagement and drive more profit.

Know about what is changing in marketing!

Keep up with the latest digital marketing developments, views and how-tos through State of Digital’s digest newsletters. Be the first to hear about events, white papers, e-books, webinars, training and more!


About State of Digital Guest Contributor

This post was written by an author who is not a regular contributor to State of Digital. See all the other regular State of Digital authors here. Opinions expressed in the article are those of the contributor and not necessarily those of State of Digital.