So much otherwise good marketing is misdirected at the wrong customers. “Free shipping” is a great offer for someone almost ready to buy who needs just one more reason to do it now, but it won’t move someone who isn’t ready yet. Similarly, many of your offers will work wonders with your best customers, but may appear to be poor campaigns when unleashed on a larger target market segment—your typical customers. The question is how to tell who your best customers are.
Does it sound like conventional wisdom that you should direct most of your marketing efforts at your best customers? Or that the customers most likely to buy from you should get the most attention from your marketing resources? Yes and yes. But perhaps you don’t know how to identify your best customers. If so, then you may want to learn about a technique used by direct marketers that does the trick.
Traditional direct marketers identify their best customers using the RFM rating. RFM stands for Recency, Frequency, and Monetary. You can use these three metrics to target your very best customers:
- Recency. The more recently that an action has been taken, the sooner it is likely to recur. So, your most recent purchasers are the ones most likely to repurchase soon. Those who visited your Web site yesterday are more likely to visit again today. Those who listened to last week’s podcast are more likely to listen to this week’s.
- Frequency. The more frequently an action occurs, the more likely it is to be repeated. Your most frequent purchasers are most likely to repurchase soon. Those who visited your Web site every day last week are more likely to visit tomorrow. Those who have listened to the last four podcasts are more likely to listen to this week’s.
- Monetary. The higher the value of the action, the more likely it is to be repeated. Customers with the largest orders are more likely to repurchase. Those who have purchased a subscription to your Web site’s premium information are more likely to visit tomorrow. Those who paid for your Webinar are more likely to listen to your free podcasts.
By targeting customers that had bought most recently, most frequently, and with the highest order sizes, catalog marketers can afford to mail catalogs more frequently to that group (and less frequently to less valuable groups). They increased their revenue while decreasing their costs.
Why did this work? Because RFM is a measurable proxy for customer interest. Your most interested customers—the ones who are most valuable to you—have purchased recently (they are current customers), have purchased frequently (they are regular customers) and spent a lot of money (they are profitable customers). These customers are the most interested in what you sell and they are the most responsive to your marketing message and your offers.
RFM is a rating system that you customize for your own business, so you may need to experiment to find the optimum formula. A car dealer calculates purchase Recency in years, while Apple rates iTunes customers in days. Frequency is often calculated over a period of months, but seasonal businesses may want to use one year. Monetary ratings vary widely based on the cost of your product or service. Regardless of how you calculate RFM ratings for your business, the point is to start doing it now so that, over time, you will home in on your very best customers. You don’t have to do it perfectly from the start, but make sure you do start.
RFM has everything to do with how you personalize your Web site. Using this rating, you can decide who your best customers are and show them your best offers.
For example, when customers with high RFM ratings visit your Web site, you know that free shipping is a relevant offer, because they frequently purchase from you. You also know that promoting other products you sell may also be relevant offers, because the more they buy from you, the more likely it is that they’ll buy more yet.
If you haven’t been targeting your best customers, imitate those smart catalog marketers and give RFM a try.
