Here’s a guestpost from our friends at Omniconvert about the RFM method.
There is no doubt that the world has changed considerably in the past few months.
While some business sectors are struggling to revive themselves and adapt to the new challenges of the world, there are other businesses that have flourished and grew a lot during the Covid-19 outbreak.
One of these sectors is definitely eCommerce.
It has been proven that each recession or downturn doesn’t only change the rules of the game in business, but it also changes people and their emotions, their drive and their purpose.
That is why reality has just begun to sink in in the eCommerce industry.
The focus is now on Customer Value.
What is Customer Value?
In 1998 they were discussing the fact that only a few retailers understand and measure their Customers Value. Funny enough, that same argument stands today. In the eCommerce sector, there are only 20-30% online retailers that are focused on doing anything in terms of increasing their customer value, or at least understand what Customer Value really is.
Simply put, Customer Value is the acknowledgment of what a product or service is worth to a Customer versus the possible alternatives.
Normally, Customer Value equals Benefits minus Cost (CV=B-C).
The importance of knowing your CV is immensely important; Only knowing the value that your customers have will be further able to create value.
The biggest issue with this metric in eCommerce is the fact that it is often overlooked. In eCommerce, Customer Value is identified as the Customer Lifetime Value of your client base, and the client base is the most valuable thing any online shop has.
The reason why companies like Amazon, Costco, etc. have been so successful over the years because they understood the effectiveness of using Customer Value as a growth metric.
They chose to focus on growing Customer Value and Loyalty rather than chasing quarterly sales and constant acquisitions and because of this they are world leaders in terms of customer centricity and loyalty.
How to increase your Customer Value?
The constant run for acquisitions and pulling resources into the acquisition engine alone is leaving eCommerce communities worldwide bleeding out customers.
In fact, if an eCommerce’s business whole game is doing acquisitions, then they are leaving some serious money on the table.
“I think the biggest problem companies have is value. They don’t know what value is. They don’t know what the value of their own products is. And they don’t know how buyers use value and price to make decisions. It is very rare to walk into a company that truly understands how their customers value their products.” – Mark Stiving from Impact Pricing
There are a couple of ways to address the issue of “value”:
- creating a customer loyalty and referral program
- improving the customer journey
- improving the overall customer experience
- implementing NPS surveys
- and my favorite and the one we will go more in depth about in this article is: RFM Segmentation and Analysis.
What is RFM Segmentation?
RFM Segmentation is a marketing practice used to identify and monitor Customer Lifetime Value by grouping customers into different segments based on their buying behavior.
Buying behavior refers to a customer’s transaction history in terms of recency, frequency and monetary values.
This practice is used to create customer clusters based on their recent purchases, the frequency of their purchases, and the monetary value of their orders.
RFM Segmentation helps eCommerce stores increase their customer base through Customer Value Optimization.
RFM analysis is based on the Pareto Principle that states: “80% of your business comes from 20% of your customers.”
By examining how much time passed since a customer made his last order, the number of orders they’ve made, and how much money they’ve spent with your company, you can understand which are your ideal customers, and how you can delight them by personalizing their experience in order to increase their number of transactions within your store.
Unlike other growth metrics, RFM is only using first-party data. This means the data that your store has (your customer base, orders, products, product categories, product description, etc.) in order to create the RFM Score.
When it comes to RFM you will be able to identify two metrics: RFM Value and RFM score. While having the same principle as a foundation, these metrics are fairly different.
The RFM value describes the actual value of the customer while the RFM Score is usually a number from 1-5 attributed from that Value.
We can refer to a customer as a “Soulmate” if that customer has a 555 RFM Score (Recency – 5, Frequency – 5, and Monetary – 5). That means this is an active customer that has placed a big number of orders and spent a lot of money within a store compared to other customers. The lifetime value of this particular group of customers is very important to be monitored by eCommerce Managers.
The “Soulmates” are your Ideal Customer Profile. Being able to identify your “Soulmates” can contribute to your Revenue Growth.
An eCommerce Manager can use this profile to tailor customer experience based on their “Soulmates” buying behavior in order to retain these customers and delight them.
Besides learning which are your ideal customers and which are the ones you are in danger of losing, you can also narrow down other different types of customers such as:
- New Customers that have high-value orders which you need to work on to transform them into repeat customers
- Customers that have toxic habits such as a High Product Return Rate
- Customers that used to purchase frequently and with a high order value that have stopped buying from you since a long time ago
- Customers that only purchase from you when you offer discounts, etc.
What can RFM do for an eCommerce business?
Knowing and understanding Customer Value is important to any eCommerce focused on growth because Customer Value is the true indicator of your customer acquisition quality but at the same time is a clear indicator of your success in retaining and delighting your existing customers.
RFM stands right at the basis of defining Customer Value.
Monitoring Customer Value can help find answers to the following questions:
- What could I do to create Value for my Customer?
- What am I doing to damage the Value for my Customer?
- Does customer experience create Value?
- How can I increase monetary value but retain customers at the same time?
- What makes your Ideal Customers happy? What part of the customer experience are they fond of and makes them come back and purchase again?
- Besides their buying behavior, what other qualities do my Soulmate customers have in common? How can I use this segment to create lookalike audiences and make smarter acquisitions?
Software for Customer Value Optimization
The numbers don’t lie: Retaining customers brings companies a ton of ROI.
If you want to dig deeper into your consumers’ behavior, you don’t need an RFM analyst, you can use an RFM software to make the most out of your transactional data.
Reveal by Omniconvert – A Customer Value Optimization (CVO) platform that serves as an unique source of truth about your Customer Value. Reveal will help you create personalized customer experiences within your store that can ultimately empower you to retain your customers more and make smarter decisions regarding your acquisitions.
Reveal is integrated with Shopify and plans to become one of the best Shopify apps on its niche.
REVEAL’s – RFM tool will provide you with powerful insights into your Customer Buying Behavior. You will be able to grow the Customer Value of your existing customer base by accessing the most important metrics:
- RFM Segmentation & Analysis
- NPS Score Monitoring
- Buying behavior
- Ongoing Personalization
Wether you are new or not to Customer Retention you now have the opportunity to invest and learn more about how you can improve your relationship with your customers and how you can grow their trust with your shop by offering them delightful experiences.
If you’re not convinced that Customer Retention and Customer Value Optimization are important, you should definitely check Frederick Reichheld of Bain & Company (the inventor of the net promoter score) that shows increasing customer retention rates by 5% increases profits by 25% to 95%.
Valentin Radu is a serial entrepreneur, data-driven marketer, CRO expert, international speaker, father, husband and pet owner.
Nowadays he is the CEO and Founder @Omniconvert, an awarded and funded customer experience optimization platform, focused on eCommerce companies and he is also hosting The eCommerce Growth Show, a weekly webinar with data-driven experts from the eCommerce landscape.