What Has Happened to RFM?

Recency, frequency, monetary (RFM) analysis has been around for more than 50 years. It works wonderfully in managing offers to customers. It is worthless for prospects, however, because it is based on transactions. Companies that use RFM have saved millions of dollars by not sending communications to those who are unlikely to respond. The principles are described in detail in my book Strategic Database Marketing.^[1]

As an example of the way RFM works, look at Figure 6-1, which diagrams an actual mailing to 500,000 customers coded by RFM.

Figure 6-1: RFM Break-Even Chart

The company did not break even on those customers in cells below the 0 line; in other words, the profit from sales to them was less than the cost of mailing to them. This type of analysis is done to a small test sample coded by RFM. From the results of that small test sample, you can accurately predict the behavior of 2 million customers coded in the same way. The result was that this firm mailed only to those cells that were profitable. It doubled its response rate. This is the power of RFM. It still is a vital tool in direct marketing using regular mail.

The Web has changed the situation, however. Since emails are so inexpensive, there is little point in restricting offers to existing customers in order to save money. You email to everyone. RFM, however, is still a useful way to categorize customers, even email customers.

^[1]RFM software is available free for downloading at www.dbmarketing.com. During the last 5 years, an average of three companies per week have downloaded this software. It works wonderfully for direct mail. In the standard RFM coding, there are 125 cells, from 555 (the most responsive) to 111 (the least responsive).