Database marketing has evolved over the years. Nowadays I would say that CLV (customer lifetime value) has surpassed RFM. CLV is certainly more often recommended by academics (including me) nowadays. (CLV certainly works best 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, Monetary.
RFM
Keiningham, Aksoy and Bejou discuss RFM (and other methods). To assess the value of a customer the authors outline that only three variables are considered when using RFM .
- Recency being when did the customer last buy — generally the more recent the better for the firm as this proxies for engagement.
- Frequency being how regularly do they buy — more is better for the firm.
- Monetary being how much do they spend — again more is better for the firm.
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.
CLV Rather Than RFM: Recency, Frequency, Monetary
CLV (Customer Lifetime Value) — the authors suggest — is a better tool 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, see here, 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. Still you might see RFM still utilized and is part of marketing history. Plus it can always be interesting to see these metrics. (A general rule of looking smart is that it never hurts to know another acronym).
For more on CLV see here.
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