RFM analysis is a marketing technique used to segment and rank customers based on their purchasing behavior over a period of time. RFM stands for Recency, Frequency, and Monetary. It is a powerful way for brands to reliably segment their customers and learn a great deal about them.
- Recency: This dimension presents how recently someone made purchase.
- Frequency: This dimension measures how frequently someone purchased in selected time period.
- Monetary: This dimension measures how much they spent in selected time period.
RFM analysis allows companies to segment and rank their customers by value over a time period, using three dimensions instead of only one (in most cases only Monetary value is used for segmenting customers). In short, RFM analysis shows who your best and worst customers are, and everyone in between.
Traditionally, marketers using RFM would rank order customers based on the three dimensions and bucket the lists into pentiles (i.e., 5 groups), where group 5 is the most valuable and group 1 is the least valuable. To make RFM easier to track and interpret, some companies break customers down into deciles (i.e., 10 groups).
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