In addition to basic measurements like the number of customers that come through the door, RFM – Recency, Frequency and Monetary Value – are three of the keys to success for almost every business. Recency is the measure of how recently someone has done business with us. The more recently a customer has done business with us, the more likely he or she will do business with us in the future. The question we ask when looking at this metric is: how can we motivate customers to come back to us? Techniques like “we’ve missed you” cards with a coupon, newsletters, seasonal specials, etc., are very effective in getting people back to our business.
Frequency measures just what it says, how frequently a client does business with us. The more frequently we interact with our customers, the more money that relationship is worth and the more loyal the client is. An example of Frequency is the number of times a dentist recommends that we have our teeth cleaned. In the past, dentists recommended a yearly check-up and cleaning. Recently, many recommend an annual check-up and quarterly or semi-annual cleanings. Some ways to increase Frequency are:
- Membership or subscription programs (think health club memberships or oil change discount booklets),
- Coupons for return visits that have expiration dates sooner than most customers would ordinarily return, and
- Direct mail with special, time-sensitive offers.
A variation on Frequency that improves customer loyalty and “life-time value” (LTV) is the number of our products that a customer buys or uses. Banks have done extensive research that shows that a customer with only one product (for example a checking account) is five times more likely to switch to another financial institution than one who uses three or more products. The research also indicated that it was five times more expensive to sell a product to a new customer than to sell an additional product to an existing one.
Monetary Value measures how much a customer spends with us in each transaction. An important way to improve the LTV of our customers is to increase the value of the product or service our customer buys (“up selling”) or to add an additional product to what our customer is planning to buy (“cross selling”). Large retailers have done research to let them understand buying patterns of various demographic groups. Their goal is to get each customer to buy one more product than they would ordinarily buy as a member of their group. Many chains now use data captured via loyalty cards to create custom coupons for each shopper based on their buying patterns. Some companies provide incentives that will add an extra item or two to the cart resulting in major improvements to LTV and profits.
By evaluating RFM and working on ways to increase each area by as little as 10%, the overall improvement can be significant in terms of customer loyalty and increased profits!