The following is from the May 2009 Drilling Down Newsletter. Got a question about Customer Measurement, Management, Valuation, Retention, Loyalty, Defection? Just ask your question. Also, feel free to leave a comment.
Q: First of all thank you for your help. I have some questions I would be pleased if you answer them for me.
A: No problem!
Q: 1. RFM analysis – is it possible to use some other ranking technique rather than quintiles? Using quintiles for bigger databases will cause many tied values, isn’t it a problem?
A: Sure, you can use it any way it works best for you. There is no “magic” behind quintiles, you can use deciles or whatever works best. It’s the idea of ranking by Recency, Frequency, and Value that is the key concept in the model.
I’ve seen dozens and perhaps hundreds of variations on the core RFM model, depending on how you classify a “variation”. One change that’s common is changing the scaling, as you mention above, to accommodate the size of the database. Smaller databases use quartiles or even tertiles. Larger databases, choose the ordered distribution that meets the need.