RFM and Customer LifeCycles

Jim answers questions from fellow Drillers
(More questions with answers here, Work Overview here, Index of concepts here)

Topic Overview

Hi again folks, Jim Novo here.

Today we have a bit of confusion between RFM modeling and tracking Customer Lifecycles. Each has benefits and downsides, but the most important idea is to make sure you know what each is best at. Make sense? Let’s do the Drillin’ …

Q:  I have a small sampling of the RFM scores that correspond to the various lifecycle stages.  For instance, 111 & 112 correspond to the acquisition stage, 333 & 443 to the growth stage, etc.  However, I’m looking for a complete listing of all 125 possible RFM scores and their corresponding lifecycle stages.

Can you please send this my way?

A: Wow, I certainly hope you didn’t get this idea from me; if you did, I have done a terrible job of explaining something somewhere. I would be very interested in the source of this idea, that a LifeCycle stage can correspond to a single RFM code or score.

An RFM code or score is the ranking of a single customer against all other customers for likelihood to respond and future value at a specific point in time. High scores equal high future value; low scores equal low future value.

A single RFM score represents this ranking at a fixed point in time – the day the scores were created. There is no “cycle,” which implies “over time,” inherent in an RFM code. Only if you knew the previous RFM code or sequence of codes could you imply a “LifeCycle stage”. This is, of course, what my book is about – using a modified version of RFM to track and profitably act on customer LifeCycle behavior. If you know the LifeCycle, you can predict behavior. If you can predict behavior, you can dramatically improve marketing ROI.

If a customer is a 333, you don’t know if they are falling or growing into it. They could be coming from above it – falling in value, or coming from below it – rising in value. For example, most new customers start at a 51x – they have to, because by definition, they are “new” (R = 5) but have bought once (F = 1). But this same customer 3 months from now might be a 555 or a 222 – either ramping up or sliding into oblivion. If you don’t know what their score used to be, you can’t imply anything about a “cycle” or any “stage” in the relationship with the customer.

That said, customers in the 111 and 112 are typically old, defected customers – not new or “acquisition stage” customers as you called them. All customers start in the high numbers and work their way down into the low numbers throughout their lifecycle. The question is how long will it take to get from high to low, and can you do anything to slow this process or stop it. The scores tell you if what you are doing is working, and how to drive profitability following the two fundamental rules of High ROI Customer Marketing:

  1. Don’t spend until you have to
  2. When you spend, spend at the point of
    maximum impact

If you are looking for some generalized system, I wouldn’t worry about the detail of 125 RFM codes, there is really no meaning there unless you have millions of customers. The most important variable, from a LifeCycle perspective, is usually Recency, so you could roughly categorize the LifeCycle of customer into 5 blocks using the R score. The second two variables, F and M, are not so much about the lifecycle of the customer, but the value of the customer now and in the case of F (sometimes), future value. Any customer with a low R value but high “FM” value was a very valuable customer that isn’t a customer anymore. In terms of Lifecycle, they are at the end. In terms of value, they are at the top.

For more on actually putting these ideas on measuring and tracking Customer LifeCycle into practice, check out these series, in order of perhaps the most logical way to learn the concepts:

Customer Defection Rejection

Trip Wire Marketing

Measuring Engagement

and for a higher level / deeper structure / management view, see here:

Framework for Engagement


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