Visual RFM: Segmentation You Can See

Visual RFM is a method of presenting recency, frequency and monetary data to help marketers decide not only whom to contact, but also how to vary offers to maximize their effectiveness. This allows using a visual RFM approach to maximize not only the effectiveness of the list, but also the effectiveness of the offer. Even the frequency of contact can be improved.

Segmenting With Offers and Messages; Maximizing list effectiveness is important, but so is maximizing the effectiveness of the offer. Recent first-time buyers should be followed up quickly. Small-dollar one-time buyers should receive retention offers sooner than larger-dollar multi-buyers, who are likely to remain active for a longer time. More loyal buyers should receive more frequent contact than less loyal buyers.

If customer segments are in fact different, shouldn't different segments receive different offers? For example, if a customer typically spends more than $500, does it make sense to send an offer for free shipping on orders more than $50? Does it makes sense to send an offer for 10 percent off the next order more than $500 to a customer who typically spends less than $50 per transaction?

The key to maximizing the effectiveness of offers and messages is seeing and understanding why different segments are different. By changing strategy to take advantage of differences in customer buying habits, marketers can improve on the performance in each segment. With the right offer, segments that otherwise would be unprofitable become profitable, and the profitability of better segments can be improved.

Understanding Visual RFM: Look at the sample portion of the Visual RFM sheet. Customer segments are based on recency, frequency, and monetary. If a cataloger has very different customer groups, they may need more than one sheet. For simplicity's sake, this example is for one set of buyers based on a company with an average order around $50.

The segments each represent a RFM grouping. For example, the upper left cell is all one-time buyers who spent $49 or less in the last 30 days. Those who made two purchases and spent more than$100 are in the upper right cell, and so on. The example chart shows only one- and two-time buyers for 12 months. Typically, the full chart covers one-, two- and three-time buyers and more and recency for four to six years.

The numbers in each segment represent:

* The number of contacts available in the segment (known before the offer is made)

* The dollars per contact in revenue (known after the offer runs)

* The response rate to the offer (known after the offer runs)

By looking at the responses to a past promotion, it can be determined which segments should be contacted. Counts can be determined for an upcoming promotion by adding up the contacts in different segments. An appropriate offer can be sent to each segment.

For catalogers, offers are usually varied with cover wraps, as ink jet messages tend to have relatively little effect. A series of “We miss you” or “We want you back” offers may be sent to less recent buyers. First-time buyers may get a quick follow-up enticing them to make a second order. Offers are made to bump up the average order in lower dollar segments.

Building a Strategy Based on RFM: Once a marketer has access to visual RFM information, there tends to be an immediate impact on the communication strategy. Rather than sending catalogs four times a year to everybody, some groups will be mailed more often (sometimes the same catalog, sometimes the same with a cover change.) Other groups may be contacted less frequently, with marginal segments reached only once during peak season.

Many catalogers do not have a strategy in place to convert single buyers into multibuyers quickly, but most have a retention strategy for less recent buyers. A key area for emphasis that often comes out of a visual RFM is how it makes more sense to work harder to turn one-time into two-time buyers while they still are recent and more likely to respond, than it does to spend large amounts trying to reactivate older, marginal buyers.

Of course, a marketer can build a solid communication strategy while using a traditional RFM model. The difference is that the traditional model is designed to emphasize a computer's abilities, and the visual RFM is designed to emphasize a person's capabilities.

Putting the Plan Into Action: Once the chart has been created for one past offer, it can be reproduced for each promotion. Counts are determined by producing the chart with only the number of available contacts and then adding results as the campaign progresses.

Often, it is just as effective to track each segment by key code in the traditional manner. The visual RFM chart is then created only on an occasional basis, perhaps quarterly or annually, to determine if the marketer still is “on track.”

The important thing is adding the visual RFM knowledge to the marketers' understanding. Even when the best RFM model is used, there is still room for improvement if offers and messages for different buyer segments are not being used effectively.

Alan Weber is vice president of database marketing at J Schmid & Associates Inc., Shawnee Mission, KS.

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