The best way to prioritize your customers: RFM segmentation and risk analysis
Philippe Pavillet
Feb 1, 2023
Dealing with many customers and building customer loyalty takes time and effort. Salespeople will generally be up to speed with their top clients, but beyond that, unless they only have a few customers, there is no way they can follow and understand where each client is in their buying lifecycle - and thus no way of knowing who to reach out to if they want to be the most efficient. That is why having a systematic methodology for customer prioritization is key. It provides an overview of the situation of your customer base and tells you which customer to contact when thus preventing them from leaving. But you may ask, how can I do this?
The answer is, the best way to prioritize is by segmenting your customer base. For that, if your customers tend to place orders in a repeated manner (such as in cosmetics, food, toys, lifestyle, transportation, tools, consumables, …), the best place to start is the RFM segmentation. It is a data-driven customer behavior segmentation technique that combines the following criteria to build homogenous customer sub-groups:
RECENCY: it measures the time past since the last purchase. The data suggests that customers who have made recent purchases are more likely to buy new products than those who have purchased long ago. The value is determined by the type of trade, as some businesses have a much higher buying frequency than others. Eg: cosmetics VS electronics
FREQUENCY: this variable measures how often they have spent in the past. The more regularly you see a customer, the higher their engagement with your brands & services… Here, the value is a combination of the product’s lifecycle, the ability for the customer to keep stocks of your products and to sell them quickly and in large quantities…
MONETARY: it measures how much they have spent on each purchase. Statistics show that customers who have invested more in the sum of their purchases in the past are more likely to continue spending significant money with the company than those whose purchases have been smaller.
However, is the RFM segmentation accurate enough to get all your customers grouped?
The RFM segmentation method usually segments customers into subgroups such as VIP customers, loyal customers, potential customers, recent customers, customers going to sleep, etc. While it takes into account the recency, frequency, and monetary values, there is still something missing in this segmentation: what if your VIP customer is actually at-risk? Even if a customer has a good position based on RFM values until now; the customer could have passed his next order date without placing an order or could have spent less than expected, dropping into an at-risk category. But, how can we know that? By using predictive analysis. It allows you to know each customer’s expected next order date and amount and therefore pay attention to the risk of churn of each customer.
Thus, a more dynamic and specific approach to grouping your customers is adding predictive risk analysis to your RFM segmentation. This way, your customers will be segmented into core, loyal, recent, etc. subgroups, and beyond that, they will be grouped into active, at-risk, or churned customers.
By combining both RFM and risk analysis, companies can clearly understand the situation of each of their customers and thus make personalized offers. Personalization makes the customer feel more important and understood, increasing the conversion rate. 91% of consumers are more likely to buy from brands that recognize, remember, and provide relevant offers and recommendations. As a result, revenue also increases: marketers see an average 56% increase in sales when using personalized experiences. Apart from that, prioritizing customers helps sales reps not to waste time on useless follow-ups and to know what to say and when to contact each customer, which reduces customer churn.
While you could use Excel to create an RFM segmentation model, you will quickly discover that it is no small endeavor! On top of this, to be truly effective, it will need to be done on a very regular (think: daily) basis. According to Hubspot, salespeople spend only ⅓ of their day actually talking to prospects - so we suggest not giving them more admin, data-crunching work!
The good news is that today there are off-the-shelf solutions that can do it for you!
Discover how Fructifi - the B2B customer retention software - combines RFM segmentation and risk analysis to prioritize customers while automatically creating dynamic marketing campaigns.
© 2018-2023 Fructifi all rights reserved - Legal mentions - Terms & Conditions - Privacy policy
© 2018-2023 Fructifi all rights reserved - Legal mentions - Terms & Conditions - Privacy policy
Proudly incubated in Paris at
© 2018-2023 Fructifi all rights reserved - Legal mentions - Terms & Conditions - Privacy policy