What is RFM and Application of RFM in E-Commerce
By: Bugra Altun
Tags: Rfm Analysis, Data Science, CRM, Customer Segmentation

What is RFM and Application of RFM in E-Commerce

RFM is a method used to analyze customer value, we can segment customers using RFM model. It is a marketing technique used to quantitatively rank and group customers based on the recency, frequency, and monetary aggregate of their recent transactions. It is a simple and effective method for CRM and is often used.

RFM analysis ranks each customer based on the following factors:

Recency: How new is the customer’s last purchase? Customers who have made a recent purchase will continue to have the product in mind and will be more likely to repurchase or use the product.

Frequency: How often did this customer shop during a given period? Customers who buy once are often more likely to buy again. Additionally, first-time customers can be good targets for follow-up ads to convert them into more frequent customers.

Monetary: How much money did the customer spend in a given period? Customers who spend a lot of money are more likely to spend money in the future and are of high value to a business.

RFM analysis scores customers based on R and F factors. A score range of 1 to 5 is used, with 1 being the lowest and 5 the highest.

As can be seen in the table above, the Monetary factor is not included in this table. Because Recency and Frequency factors are important than Monetary. Monetary is the result of these two factors, that is, Monetary is obtained based on the scores of these two factors. Various implementations of an RFM analysis system may use slightly different values or scaling.

For example, a car dealership may find that the average customer is very unlikely to purchase several new cars in just a few years. But a customer who bought several cars (a high-frequency customer) should be very sought after. Therefore, the dealership may choose to weigh the value of the frequency score accordingly. Once an appropriate segmentation strategy has been established with the help of the RFM method, the business can efficiently allocate resources in a highly competitive market to run targeted marketing campaigns to specific customer types and meet the needs of different customers.

Application of RFM

So far, a general framework for the RFM method has been briefly presented. Now is the time to use the RFM model when dealing with the business problem of a UK based e-commerce company. The company needs to segment its customers into different segments and execute marketing strategies specific to each segment. Three segments deemed important within the scope of this project will be evaluated in terms of their structures, and then a marketing action plan will be created.

Importing required libraries and read dataset

Data Pre-Processing

Determining the last invoice date to find the newness of each customer and calculating RFM metrics

Converting RFM metrics to RFM scores

Mapping segments based on recency and frequency scores

Result

Now let’s interpret a few important segments from these segments.

At Risk

First of all, I think the “at risk” group important. There are about 600 customers in this group and their “monetary” is higher than most groups. “frequency” is almost 3, it comes after “champions” and “loyal customers”. I actually decided to put the “need attention” group here, but after I checking, I realized that it will be more useful to gain the “at risk” group instead of the “need attention” group.

In terms of the number of people, the “at risk” group is 3 times more and their “frequency” is higher. they just haven’t been shopping for a long time, but they used to do it often. This may be because they are not satisfied with the company anymore, they can’t find what they are looking for, etc. Were they satisfied and shopping before, but they do not anymore. by winning this group back with some strategies

income can be obtained. If the necessary and correct steps are not taken, we may lose them, if the right steps are taken to win them, they can move to the “loyal customer” segment and even be included in the “champions” segment in the future. I think we can win them by attracting their attention with strategies specific to this group, with discounts, promotions, and by dropping products on their homepages according to their interests. Even recovering only one third of this group will be more beneficial than recovering the entire “need attention” group.

Champions

Secondly, I find the “champions” group important. Actually I’m a bit torn about adding the “champions” group to the top three because these customers are already almost the most and most frequent shoppers. In other words, before doing this analysis, something was done right and these people were included in the champions segment. Of course, this right thing needs to be researched. We are a company and since profit is the most important thing for companies and we thought that the champions group was the most profitable group, I thought that I could not pass this group over.

What I can suggest for this group is to research what makes them champions, and to make the champions group the most loyal clientele by putting whatever is done right, keeping the line intact and even on top of it. They already shop frequently and a lot, there is no need for much discount, sometimes small discounts can also attract them :).

Loyal Customers

Finally, I think the “loyal customers” group important. Loyal customers are also a very valuable segment. 820 people, each of them a potential champion, and their number is not less. This group is definitely a very valuable group and one that should be considered. We can try to bring this group to the champions group by giving special discounts, promotions, and showing them more products and similar products that they are interested in.

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