Thoughts on RFM Scoring – John Miglautsch

RFM Basics

Direct marketing is fundamentally the scientific control of customer acquisition and contact.  The recurring question is whether Customer A merits an additional contact based on his past purchase behavior. This question applies equally to direct mail, catalog, phone, field or Internet contact.
The process of making this decision is customer segmentation. Not all customers have purchased identical amounts. Some have ordered more often, some have ordered more recently. Consequently, not all customers should be contacted with the same effort and expense. The cornerstone of direct marketing segmentation is RFM (Recency, Frequency and Monetary

values).

Since direct marketing segmentation is a science, it is important to quantify customer behavior so that we can test the short and long term effect of our segmentation formulae. The purpose of RFM is to provide a simple framework for quantifying that customer behavior. Once customers
are assigned RFM behavior scores, they can be grouped into segments and their subsequent profitability analyzed. This profitability analysis then forms the basis for future customer contact frequency decisions.
RFM Scoring
The purpose of RFM scoring is to project future behavior (driving better segmentation decisions). In order to allow projection, it is important to translate the customer behavior into numbers which can be used through time.

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