Marni McSween-Farmer Marco LuzuriagaRoss RyanAnnmarie Yoos Collaboration Exercises #2, pg. 366

What does RFM stand for? RFM stands for Recency, Frequency & Monetary Analysis Recency: When did the customer make their last purchase? Frequency: How often does the customer make a purchase? Monetary: How much money does the customer spend? Collaboration Exercises #2, pg. 366

What is RFM Analysis? RFM Analysis helps companies decide which customers to give select offers and promotional items. It is a way for companies to find ways to increase customer spending. Companies can use it to target lost customers and give them incentives to purchase items RFM Analysis can help companies keep track of their customers and build a relationship that can increase sales and productivity. It also identifies minimal losses – customers spend low dollar amounts in small quantities Collaboration Exercises #2, pg. 366

How does RFM Analysis work? First, customers are divided into 5 equal sized groups (20% in each group) Customers are then given an R, F, & M score Using a score of 1 to 5, 20% of the most recent customers get an R score of 1. The second most recent get an R score of 2 and this continues until all 5 groups receive a score. The 5 groups are reorganized to repeat the procedure for the F & M scores. (see spreadsheet – Supplier Rankings) Collaboration Exercises #2, pg. 366

What is RFMPD Analysis? RFMPD includes 2 additional variables. P stands for Payment. This measures when the company receives payment. Customers who pay quickly receive a P score of 1 with the slowest paying receiving a score of 5. D stands for Date. This is the date of the customers last payment. Customers are sorted by decreasing D values. The final score is based on a value for R, F, M, & P. Collaboration Exercises #2, pg. 366

Uses of RFM Analysis Marketing departments of any company Customer Service Departments Customer Relations Departments Ranking Suppliers Ranking Salespeople Airlines Credit Card Companies Collaboration Exercises #2, pg. 366

Strengths of RFM Analysis Companies have data that can be used for target marketing. Marketing budgets will be focused on customers who are more recent, more frequent and spend more. Specific targeting can increase profit and reduce costs; companies gain by not spending on customers who will not add value You can offer incentives to middle scoring customers to increase their purchases Analysis is quick and easy to interpret Collaboration Exercises #2, pg. 366

Weaknesses of RFM Analysis It only looks at three variables and there may be others that are more important Customers with low RFM scores may be ignored, even though they may have legitimate reasons for spending more with other vendors. Opportunities may be missed to solidify business relationships leading to loss of future sales and referrals. A customer with a low recency value and high spending could be ranked lower than a customer who made a recent purchase and spends 10 times less Collaboration Exercises #2, pg. 366

Effectiveness of RFMP Analysis Customers scoring the top 20% also pay the fastest. Companies will be able make money faster and this can be used to reduce other liabilities. Customers in the lowest 20% are slow payers and companies can choose to limit credit or change payment terms to reduce the amount of outstanding debt. Collaboration Exercises #2, pg. 366

1, 1, 1, 5 Customers Customer is one that has recently ordered, buys frequently, spends large amounts of money but they are a slow payer. To speed up the payment process, companies can change payment terms and offer incentives to pay earlier. For example, if the due date is 30 days, but payments are received with 10 days, the buyer will receive a 2% discount off the bill (2/10 net 30). Collaboration Exercises #2, pg. 366

5, 5, 5, 1 Customer This customer has not ordered recently or frequently, spend small amounts of money but always pays on time. This customer is spending more money with competitors. Make an effort to find out why the customer is spending elsewhere to see if there is anything the company can improve on. Collaboration Exercises #2, pg. 366

RFMP or RFM? RFMP is a better method because it include the variable of payment. With more variables, you have a clearer picture of the customer’s value to the company. RFMP also takes into account the customer’s payment history. If a customer pays on time, you know that there are no cash flow issues. Slow payers may be having financial problems which may increase in the future. Collaboration Exercises #2, pg. 366

Using RFM for Salespeople RFM Analysis of Salespeople gives managers a clear picture of how a salesperson is performing You can analyze the amount of revenue generated per person and compare different salespeople It is also possible to identify opportunities for additional training, promotion or employment termination. (see spreadsheet – Salespeople Rankings) Collaboration Exercises #2, pg. 366

RFM or No RFM? RFM is best suited for companies who offer a rewards program. They are able to track spending and can offer their high profile clients incentives to spend more. RFM is worst suited to companies who provide products that are unique and will not be purchased in large quantities. Collaboration Exercises #2, pg. 366