Market segmentation is one of the main pillars of marketing for any business today. However, sometimes companies make mistakes when categorizing. One of these mistakes is confusing categorization with demographics. Another mistake can be not specifying the purpose of the category; But undoubtedly, the biggest mistake is to categorize with traditional methods such as demographics (population, geography, etc.).
But why is it a big mistake to use traditional classification methods? The main reason is the advancement of information technology. This development has made people have access to more services, products and facilities. In fact, customers’ behaviors and expectations about how, when and where to buy and use the product have changed. These customer changes have caused companies to constantly try to change and coordinate themselves according to customer changes, and for this, it is necessary to have more accurate categories of their customers.
The importance of customer classification in marketing is so great that many managers and marketing professionals do not start marketing and advertising activities without having a correct classification of their customers. Each section or class of customers is a group of customers who have common needs and desires or, in a word, common behavior; But how does knowing these common behaviors help you?
- Get to know each of your customer groups better.
- Know how to treat each group of your customers.
- Be in a better competitive position and finally win this competition.
- You can optimize the stages of product design, production and supply.
- In addition to knowing exactly who your customers are, you know what they do.
- Be able to target profitable market segments and vice versa.
- Have a smart strategy for product pricing.
- Optimize your advertising campaigns and reduce the sometimes high cost of advertising.
- You can get more and more accurate feedback from each group of customers.
What the above mentioned have in common is the insight you will get after segmenting your customers. You cannot have many and different customers but not have an insight into their behavior and their desire for your product. Most of the successful managers have stated that in order to make smart decisions, they need a deeper knowledge and insight of their customers than in the past.
The RFM method is one of the oldest and most efficient customer segmentation methods in the world. RFM stands for Recency, which means the last time a customer made a purchase, Frequency, which means the number of times the customer made a purchase, and Monetary, which means the amount of money the customer made.
Classification of customers based on the RFM method is done according to these ۳ parameters. The last purchase time parameter deals with the issue of when your customer made a purchase. ۵ days ago, ۱۰ days ago, a month or several months? The segmentation of time periods is different in every business. It is possible that an organization wants to check its customers weekly or every ۱۰ days or monthly. For this reason, there is no single version for dividing time. In the next parameter, the number of customer purchases in the same specified time period is important. For example, if we consider the time period as monthly, we need to know how many times customer X has bought from you in the last month. In the third parameter, the customer’s purchase amount is important; In other words, customer X who made a certain number of purchases from your organization in the last month, how much did he pay you in total? In fact, the main question in the RFM method is “Which customer bought when, how many times and how much?”
To classify customers based on RFM, you should divide each of the parameters of time, number and purchase amount into ۵ categories and give a score from ۱ to ۵ for each. A score of ۵ corresponds to the category that has a higher value, and the number ۱ is assigned to the category that has the lowest value. With this, you will reach a ۳-digit number for each customer, the higher it is, the higher the group or segment. For example, if the customer gets the number ۴۱۳, according to the image below, it means that in the last ۳۰ to ۶۰ days, he has made ۰ to ۵ purchases worth ۱۰ to ۱۵ million. It should be noted that this division and numbers will be different for each business according to the goals and type of product.
Note that the RFM value is different from the RFM score. Value means the actual value of each of the R, F, M parameters for each customer; But the score is a number that is given to each customer from ۱ to ۵.
This method solves many challenges and problems in organizations that require more time to express; But the following questions are the questions that RFM analysis answers very quickly and clearly:
- Who are your best customers?
- What customers are about to be lost?
- Who has the ability to become your profitable customers?
- Who are the lost customers who do not need attention?
- Which customer should you keep?
- Who are your loyal customers?
- Which category of customers are your target market in the current campaign?
- By answering these questions, the RFM model can help you improve decision-making for each category of customers.
To categorize customers, it is necessary to consider a general score for each of them. This overall score can be obtained by averaging the three parameters R, F, and M; But if we examine different businesses, we realize that the value of each of these parameters is different in each of them.
For example, you cannot expect a customer to buy a refrigerator or air conditioner every month. In this type of business, the value of the monetary aspect (M) is greater than the number of purchases (F), and to calculate the overall score, a higher coefficient should be given to the M parameter. But in the cosmetics industry, the customer is constantly making purchases, and it is easy to understand that in this business, the number of purchases (F) and the last time the customer made a purchase (R) are more valuable than the purchase amount (M). Or in the internet taxi industry, the last time a customer requested a taxi and the number of times they requested a taxi is much more valuable than the cost the customer paid for their trips.
So, in fact, one of the important features of a data analysis group or a data analysis dashboard that categorizes customers based on the RFM method is that, based on different businesses and industries, it determines the value of each of the M, F, R parameters and categorizes customers based on Categorize these valuations in order to achieve a realistic classification of customers.
At Sekan, focusing on improving the business conditions of organizations, we have developed a customer data analysis platform based on the RFM method to be able to use advanced technologies to analyze the data resulting from the behavior and performance of customers and to make decisions for marketing managers. And sales help in the field of how to communicate with customers and get maximum profit from them.
So far, we’ve pretty much gotten to know how RFM works. In this section, we introduce the categories provided by this method for customer segmentation. For this, consider a business in which the value of each of the M, F, R parameters is almost equal and we assign each customer to one of these groups using the score he has in the RFM method.
- Heroes (۵۵۵, ۵۵۴, ۵۴۴, ۵۴۵, ۴۵۴, ۴۵۵, ۴۴۵): These customers buy from you continuously and with a high amount. A large share of your income belongs to this group. So try hard to keep them. You can give them a special discount or give them a gift that you don’t give to any of your regular customers. Similar to the group of loyal customers, try to maintain your relationship with this group as well. You can make them your ambassador and consider a profit for them to introduce each new customer to you. Try to constantly get feedback from them; Because they know your products and services better than you.
- Loyal customers (۵۴۳, ۴۴۴, ۴۳۵, ۳۵۵, ۳۵۴, ۳۴۵, ۳۴۴, ۳۳۵): This category of customers are very active and regularly buy and respond to advertisements, and they haven’t bought in a while. Therefore, customers are very valuable. About ۲۰% of your income comes from this group. You can easily communicate with them; Because they regularly visit your site and participate in your surveys. Your goal for this category of customers should be to get the satisfaction of these customers so that they maintain the same current behavior. Try to offer them the products they are interested in; But do not increase the number of your offers. You can ask them to share their positive experiences online.
- Customers who can become loyal customers: (۵۵۳, ۵۵۱, ۵۵۲, ۵۴۱, ۵۴۲, ۵۳۳, ۵۳۲, ۵۳۱, ۴۵۲, ۴۵۱, ۴۴۲, ۴۴۱, ۴۳۱, ۴۵۳, ۴۳۳, ۴۳۲, ۴۲۳, ۳۵۳, ۳۵۲, ۳۵۱, ۳۴۲, ۳۴۱, ۳۳۳, ۳۲۳): These customers have bought from you recently and for a relatively good amount. Try to keep them engaged and active. You can motivate them to increase the products in their shopping cart by offering them a bulk purchase.
- New customers: (۵۱۲, ۵۱۱, ۴۲۲, ۴۲۱, ۴۱۲, ۴۱۱, ۳۱۱) These customers recently bought from you for a moderate amount and this is their first purchase from you. You do not know the customers of this group. You should know that there is a good potential in front of you that you should evaluate. For example, you can give them a discount to see if there are customers who will add one more purchase to their shopping cart. In other words, are there customers who can be paid for or not? You can also send them a survey with the theme of “satisfaction with the purchase” to find out what they want and whether it is possible to contact them with different marketing methods or not.
- Promising customers: (۵۲۵, ۵۲۴, ۵۲۳, ۵۲۲, ۵۲۱, ۵۱۵, ۵۱۴, ۵۱۳, ۴۲۵, ۴۲۴, ۴۱۳, ۴۱۴, ۴۱۵, ۳۱۵, ۳۱۴, ۳۱۳) These customers have recently bought from you and in a short time, They have made several purchases. It is enough that you motivate them to buy from you again; Because most likely, they will spend a high amount with this purchase. Next, with the profit you get through this purchase, you can easily consider promotions and discounts for this group to turn them into your regular customers.
- Promising customers: (۵۲۵, ۵۲۴, ۵۲۳, ۵۲۲, ۵۲۱, ۵۱۵, ۵۱۴, ۵۱۳, ۴۲۵, ۴۲۴, ۴۱۳, ۴۱۴, ۴۱۵, ۳۱۵, ۳۱۴, ۳۱۳) These customers have recently bought from you and in the past short time, They have made several purchases. It is enough that you motivate them to buy from you again; Because most likely, they will spend a high amount with this purchase. Next, with the profit you get through this purchase, you can easily consider promotions and discounts for this group to turn them into your regular customers.
- Customers who need attention: (۵۳۵, ۵۳۴, ۴۴۳, ۴۳۴, ۳۴۳, ۳۳۴, ۳۲۵, ۳۲۴) Customers whose purchase amount and number are more than the average customers, but the date of their last purchase is before one month ago. This group is probably looking to figure out who to buy from next. You need to motivate them to choose you again and not your competitors. Increase your advertising for this group and based on the type of choice of these customers and the behavior you know from them, introduce them to the products they like. You need to show them that your product is unique and has all the features they want.
- Sleepy customers: (۳۳۱, ۳۲۱, ۳۱۲, ۲۲۱, ۲۱۳, ۲۳۱, ۲۴۱, ۲۵۱) The customers of this group had a small purchase amount and a relatively small number of purchases, and they did not shop for quite a while; But this time is not enough to assume them lost. Because of this, they are likely to buy again. So you might be able to convince them to buy from you again with a discount.
- Customers who have gone into hibernation: (۳۳۲, ۳۲۲, ۲۳۱, ۲۴۱, ۲۵۱, ۲۳۳, ۲۳۲, ۲۲۳, ۲۲۲, ۱۳۲, ۱۲۳, ۱۲۲, ۲۱۲, ۲۱۱) These customers have bought many times and for high amounts, but their last purchase is related to It is a long time ago; But in the last four weeks, they have visited your site or responded to your email. Probably only about ۵% of your revenue comes from these customers. For this group, don’t spend too much on advertising; Because most likely, the return of this advertising cost will not be positive. Just consider them in general company advertising.
- Customers who can’t be missed: (۱۵۵, ۱۵۴, ۱۴۴, ۲۱۴, ۲۱۵, ۱۱۵, ۱۱۴, ۱۱۳) These customers are already among the loyal and champions and have many orders continuously; But they haven’t placed a new order for a long time. Chances are they are still buying products; But from your competitors. In order to attract them again, you can consider a discount or a gift for them, or by introducing new products or products that they used to buy a lot, you can give them the incentive to buy again. Of course, probably a negative experience has caused most of these customers to stop buying from you; So try to find the reason for this lack of purchase. For example, you can directly ask them the reason in an email.
- Customers at risk: (۲۵۵, ۲۵۴, ۲۴۵, ۲۴۴, ۲۵۳, ۲۵۲, ۲۴۳, ۲۴۲, ۲۳۵, ۲۳۴, ۲۲۵, ۲۲۴, ۱۵۳, ۱۵۲, ۱۴۵, ۱۴۳, ۱۴۲, ۱۳۵, ۱۳۴, ۱۳۳, ۱۲۵, ۱۲۴) The customers of this group have made few purchases and have not bought from you for a long time. The customers of this section are a little more valuable than the previous section; Because they are more likely to respond to discounts and advertisements. So try to approach the customers of this group. But by comparing the profit you get from this group and the “can’t lose customers” group, decide which group you spend more on.
- Abandoned customers: (۱۱۱, ۱۱۲, ۱۲۱, ۱۳۱, ۱۴۱, ۱۵۱) customers with the lowest amount and number of purchases, whose last purchase was a long time ago and they have not had any activity in the last four weeks. A very small percentage of your total income belongs to this group. This group has the lowest priority. Try not to waste your resources on them; Because the probability of them returning is very low, and even if they do return, they will not buy a large amount.
As a marketing manager or e-commerce owner, you may be sensitive about many details of your new customers. You may look for many characteristics of your new customers, such as their age, gender, average income, and purchasing behavior, to find out whether these customers can become your regular customers or not.
The main advantage of the RFM method is to optimize what you already have, including your current customers, the services you offer, and the products you already have.
- It improves and makes marketing and advertising more targeted.
- It leads to long-term customer retention.
- The process of releasing and introducing a new product will be easy and successful.
- It leads to outstanding user engagement and loyalty.
- Reduces customer attrition rate.
- It improves the rate of return on investment in advertising campaigns.
- It gives you a better understanding of your business.
- It increases the profit and lowers the cost.
Finally, the segmentation based on RFM shows that the analysis of customers’ purchase behavior is considered one of the most important indicators of continuous purchases in the future and customer loyalty. This allows companies to target specific groups of customers with specific behaviors and thus receive more holistic feedback through increased loyalty and long-term customer retention.
