Jim answers questions from fellow Drillers
Hi again folks, Jim Novo here.
Sometimes the traditional RFM model does not work very well for a specific business model. For example, small business databases can be too small to fill out all 125 RFM segments properly, resuslting in distortions of predictive capability. Optimizing the traditional RFM approach for unique business model criteria is a very useful skill, and it’s actually not difficult if you understand the levers of the business model. To Drill or not to Drill, that is the question …
Q: I’ve used your site a lot and found it to be very informative.
A: Thanks for the kind words!
Q: I have a question about the use of RFM analysis for a low margin, eCommerce business. I read that for a relatively small customer list (<50k) using just the “RF” of the RFM analysis would be preferred since the “M” tends to hide shifts in behavior.
A: Well, the M tends to smooth shifts regardless of the size of your list. In addition, if you have a small list, 125 segments is too many to be really useful, so RF at 25 segments in more intuitive. The real issue with M or Monetary Value is up and coming, accelerating customers. If you use total spend (M), it will “punish” them with a lower rank. But the fact is they have more future potential because Recency is low and Frequency is ramping. Inversely, M tends to reward customers who have spent a lot in the past with a higher rank, though they may actually be declining or defected customers. Predicting the future is more profitable than reporting on the past, so given a choice, I would drop “M.” This is especially true on the web, where communication costs are low and changes in behavior can be very rapid.
Q: My question to you is, since I’m talking about a low margin business, wouldn’t “M” actually be more valuable than “F” for the analysis? For example, if 40% of my customers are driving 70% of my sales and 100% of my profits, that says that 60% of my customer base is losing me money. I don’t want them to be given a higher value rating because they’re placing MORE unprofitable orders than someone placing fewer but profitable orders. You see what I’m saying???Continue reading New RFM: Using RF or RM Instead of RFM