We have recently been involved in carrying out RFM analysis for a few clients – and the results are always interesting! RFM stands for recency, frequency and monetary value.
By taking the client’s sales data and doing some magic on it in a spreadsheet, we’re able to show clients how much each customer has spent with them, each month, for the last few years (we can go back as far as the data allows).
By then building filters into the spreadsheet, it’s possible to see, at a glance how recently a customer bought from you; for example, did they used to buy every month, but stopped six months ago? Through the use of filtering, we’re able to list all customers falling into this category. Or, maybe you want to see those who bought monthly but stopped twelve months ago – again, a simple click will reveal this.
How much have your customers spent with you over the past three, six or twelve months, and what does the ‘league table’ look like in terms of their spending? Who’s top and who’s in second place? And does the league table for the past three months look the same as that for the past twelve? It’s all intriguing and insightful stuff! It also enables a Pareto Analysis of your customer base; very often, you’ll find that 80% of your revenue is coming from 20% of your customers.
By using filters, we’re also able to identify and list, separately, those customers buying monthly and those buying less frequently – bi-monthly, quarterly, even annually.
To date, the RFM analysis has been most useful for identifying ‘lost’ customers; those who were buying frequently, until recently, but have somehow disappeared. By identifying them, it allows you to implement a ‘win-back’ strategy. You may not have even realised they had stopped buying; once you’re aware, you can show them some love and hopefully get them back on board.
We’ve seen an instance of a customer, who used to spend quite a lot each month with our client, dropping their monthly spend, revealing that they had started using an alternative supplier in addition to our client. This gave our client the opportunity to go to their customer and offer a deal to win back 100% of their customer’s business by becoming their exclusive supplier.
There are only two ways to increase revenue from existing customers. You either find a way of increasing the average order value, or you encourage them to spend more frequently. They don’t have to buy the same product from you more frequently, although you may want to think about how you persuade them to do that; it could be that you promote other products to them, so they’re buying other things from you too.
We have yet to carry out an RFM analysis for a client without the client being surprised at the results. It’s very easy to become worried if revenue falls, or if it fails to grow as you planned. But only by carrying out an analysis like this can you really see why. And it will allow you to create plans to grow revenue based on the results.
Let us know if this is an exercise you think would be useful for your business
