To truly understand the value of your customers, conduct the RFM analysis. RFM stands for Recency, Frequency, Monetary Value.
Recency measures how fresh your last sale with a customer was. Customers who most recently shopped are also the most likely to re-engage with you. A customer who shops with your store will continue to respond more positively to your offers than ones who have not purchased from you recently. It is a human trait to be more attuned to pay attention to brands we have recently used. You could set your initial Recency guardrails at “Purchased in the last 45 days”, “Purchased in the last 6 months”, “Purchased in the last year” to set 3 different levels. (see below)
Frequency is the lynchpin in creating a loyal customer base. Once you understand your customer’s pattern of returning to your store, you can specifically target promotions to increase their speed to return and purchase their needs exclusively with you. Again, you can look at your data and determine if you should set the thresholds at “Purchases 8+ times a year”, “Purchases 4-7 times a year”, “Purchases once a year.” (see below)
Monetary Value is a way to evaluate the size of your customer. It separates the whales from the anchovies. You will have to look at your own data to define what a “large”, “medium”, and “small” transaction means to you.
To conduct an RFM analysis, review the last 2 – 3 years of sales by customer: one that ranks all customers by Recency (the date of their last transaction); one that ranks all customers by Frequency (number of transaction during the overall time period) and one that ranks all customers by Monetary Value (the total sales during the time period.) Tier the RFM report into 3 groups for each report: the group that represents the top third, middle third and bottom third on all three reports. It is common to find that only 10-15% of your customers represent the top third while 60% or more represent the bottom third.
Assign the top third a number 3, the second third a 2 and the bottom a 1. Combine all three measures, to create categories of customers from 3-3-3 (they are in the top tier for Recency, Frequency and Monetary!!) to 1-1-1 (they are in the bottom tier for all three measurements.)
|Platinum||3-3-3 3-3-2 3-2-3 2-3-3|
|Gold||2-2-2 3-2-2 2-3-2 2-2-3|
|Silver||2-2-1 2-1-2 1-2-2 2-1-1 1-2-1 1-1-2 1-1-1|
Platinum Customers are your top-tier customers and the source of most of your profit. Provide them with the best services and offers. Platinum customers should get appreciation letters from the owner of the company and be recognized when they are in your store.
Gold customers are valuable. They should get offers to move them from Gold to Platinum status. Entice them to purchase larger quantities – with “buy more, save more” escalating discounts. Or, send offers to bring them in more frequently with urgent calls to action.
Finally, Silver customers should be cultivated. Offers are treated more as trial offers instead of frequent customer offers. Such as a discount when they use a competitor’s coupon.
The point is that you have limited funds to spend on marketing. You need to focus on the customers who will give you the highest return on your investment. This RFM analysis is the same one used by top, national retailers. It is as effective if you conduct it with a POS report and a spreadsheet as with an integrated e-commerce platform. It’s all about putting your information to work for you.
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