RFM Analysis MGS 3040-05

1. RFM AnalysisMGS 3040-05 Marni McSween-Farmer Marco Luzuriaga Ross Ryan Annmarie Yoos Collaboration Exercises #2, pg. 366

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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