RFM post by Kevin Hillstrom

I was recently asked to evaluate how a catalog selects names for upcoming mailings. The Executive told me that her vendor asked her company to switch from model-based selections to … are you ready for this … to RFM … prompting me to offer a predictable response.
And I laughed and laughed. What idiots! My goodness. The vendor community is really failing my client base … again.
One problem.
In my arrogance, I forgot the original request – to evaluate how this company should select names for catalog mailings.
So I evaluated models against the RFM strategy.
The RFM strategy performed to within 0.3% of the prior modeling strategy – a modeling strategy that while not outstanding was at least credible.
Why would a 40 year old methodology perform almost as well as a credible regression-based modeling strategy? Several reasons.
  1. The annual repurchase rate of reactivation candidates at the margin is only about 7% in this example. When repurchase rates are low, RFM is competitive.
  2. The organic percentage is about 40%. So if the annual repurchase rate is just 7% at the margin, and 40% of the 7% will happen with/without aid of catalogs, then the effective annual repurchase rate is actually (1 – 0.40)*0.07 = 4.2%. A lower effective annual repurchase rate makes RFM more competitive.
Instead of judging a vendor for using a 40 year old methodology, I should have judged my pre-conceived notion that I am right and a vendor is wrong. I should have let the data make the case for using the methodology.

Read full article on Kevin Hillstrom’s site