Database marketing has evolved over the years. Nowadays CLV (customer lifetime value) is often recommended by academics, at least for customers with predictable payments. It is a bit more challenging to know how to rank customers with less predictable payments patterns. An old, somewhat crude method, was RFM (Recency, Frequency, and Monetary).
Keiningham, Aksoy and Bejou discuss RFM (and other methods). They point out that only three variables are considered when using RFM to consider the value of a customer. Recency being when did the customer last buy (generally the more recent the better as this proxies for engagement). Frequency being how regularly do they buy — more is better. Monetary being how much do they spend — again more is better.
RFM has the great advantage of being simple. Sadly with simplicity comes the fact that RFM is pretty crude. “The biggest problem with RFM, however, is that it assumed that how recently, how frequently, and how much a customer spends are the only three variables that determine the value of a customer. Clearly, they could be numerous other alternate and/or supplementary factors that determine “best” customers…” (Keiningham, Aksoy and Bejou, 2006). Like some other approaches they note RFM is far from a perfect solution.
The authors argue that CLV (Customer Lifetime Value) can be used to optimize performance. They suggest that with CLV “…managers can set an upper threshold for investing in customer relationships without the risk of overspending”. (Keiningham, Aksoy and Bejou, 2006). That comment needs a caveat or two but certainly CLV gives information that RFM doesn’t.
RFM is something anyone working in database marketing should know of. It is a bit too crude for many purposes but it can be interesting (and it never hurts to know another acronym).
Read: Timothy Keiningham, Lerzan Aksoy and David Bejou (2006) Approaches to the Measurement and Management of Customer Value, in David Bejou, Timothy Keiningham, Lerzan Aksoy editors, Customer Lifetime Value: Reshaping the way we manage to maximize profits, Routledge