Recency Frequency Monetary value (R

Recency Frequency Monetary value (RFM) analysis
RFM is sometimes known as FRAC, which stands for: Frequency, Recency, Amount,
(obviously equivalent to monetary value), Category (types of product purchased – not
included within RFM). We will now give an overview of how RFM approaches can be
applied, with special reference to online marketing. We will also look at the related concepts
of latency and hurdle rates.
Recency
This is the Recency of customer action, e.g. purchase, site visit, account access, e-mail
response, e.g. 3 months ago. Novo (2003) stresses the importance of recency when he says:
Recency, or the number of days that have gone by since a customer completed an action
(purchase, log-in, download, etc.) is the most powerful predictor of the customer repeating
an action … Recency is why you receive another catalogue from the company shortly
after you make your first purchase from them.
Online applications of analysis of recency include: monitoring through time to identify
vulnerable customers, scoring customers to preferentially target more responsive customers
for cost savings.
Frequency
Frequency is the number of times an action is completed in a period of a customer
action, e.g. purchase, visit, e-mail response, e.g. 5 purchases per year, 5 visits per month,
5 log-ins per week, 5 e-mail opens per month, 5 e-mail clicks per year. Online applications
of this analysis include combining with recency for ‘RF targeting’.
Monetary value
The Monetary value of purchase(s) can be measured in different ways, e.g. average order
value of £50, total annual purchase value of £5,000. Generally, customers with higher
monetary values tend to have a higher loyalty and potential future value since they have
purchased more items historically. One example application would be to exclude these
customers from special promotions if their RF scores suggested they were actively purchasing.
Frequency is often a proxy for monetary value per year since the more products
purchased, the higher the overall monetary value. It is possible, then, to simplify analysis
by just using Recency and Frequency. Monetary value can also skew the analysis with
high-value initial purchases.
Latency
Latency is related to Frequency – it is the average time between customer events in the
customer lifecycle. Examples include the average time between web site visits, second
and third purchase and e-mail clickthroughs. Online applications of latency include putting
in place triggers that alert companies to customer behaviour outside the norm, for
example increased interest or disinterest, and then to manage this behaviour using ecommunications
or traditional communications. For example, if a B2B or B2C
organisation with a long interval between purchases would find that the average latency
increased for a particular customer, then they may be investigating an additional purchase
(their recency and frequency would likely increase also). E-mails, phone calls or
direct mail could then be used to target this person with relevant offers according to
what they were searching for.