Business Intelligence/Decision Models

RFM Analysis

Outline

Explain how RFM works, and how you can use it to improve response rates and reduce costs

SPSS RFM With transaction files With customer files

Use of RFM with Target Variable2

Recency, Frequency, and Monetary (RFM) Analysis

According to Hughes! Always improves response and profits

Better than any demographic model

The most powerful segmentation method for predicting response

Old-fashioned RFM? Never assume a CHAID program or

even a regression model will outperform an old-fashioned RFM…

(David Shepard)

Response by Recency Quintile

3.49%

1.25% 1.08%0.63%

0.26%

0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%

5 4 3 2 1

Resp

onse

Rate

Recency Quintile

Response by Frequency Quintile

1.99%

1.56%

1.31%

0.92% 0.93%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

5 4 3 2 1

Re

spo

nse

Ra

te

Frequency Quintile

Response by Monetary Quintile

1.61%

1.45% 1.46%

1.22% 1.23%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

5 4 3 2 1

Big Ticket: Response to $5,000 CD Offer by Monetary

Monetary Quintile

Percentage of households promoted who purchased

1.68

1.17

0.88

0.66

0.32

5 4 3 2 10

0.5

1

1.5

2

RFM Code Construction 1

FM

One SortFive Sorts

Twenty-five sorts

Database

5

4

3

2

1

35

34

33

32

31

335334333332331

R

RFM Code Construction 2

F M

1st SortDB

5

4

3

2

1

R5

4

3

2

1

5

4

3

2

1

DB DB2nd Sort 3rd Sort

RFM Code Construction 3 Predefined subjective breaks:

R = < 2 wks, 2-6 wks, 7-8 wks, and > 12 wks F = 10, 8, 6, 3, 1 M = > $500, $300-500, $200-300, $100-200, < $200,

11

RFM Code Construction 4 R = 5, 4, 3, 2, 1 @ weight = 10 F = 5, 4, 3, 2, 1 @ weight = 5 M =5, 4, 3, 2, 1 @ weight = 1 Weighted sum

Score = xiwi

Ex. RFM 421 = Score 51

Let’s stick with this one!

FM

One SortFive Sorts

Twenty-five sorts

Database

5

4

3

2

1

35

34

33

32

31

335334333332331

R

Break Even Response Rate BE = Unit Cost / Unit Profit

Example:• Unit cost = .55• Unit profit = $33• Thus $.55 / $33 = 0.0167 or 1.67%

Number of Cells 5 x 5 x 5 = 125 cells How many individuals per cell so that

response is significant? Minimum 4 / BE Ex. 4 / .0167 = 240 individuals per cell # of customers +/- 30,000

Use Common sense:5x4x4, or 5x4x3, or 5x2x2, or 4x2x3

15

Customer Database

Nth

Systematic Sampling:Selecting every Nth case

300,000 Records

30,000 Records

For Nth by 10, select every tenth record.

Result will be a statistical replica of the database

Result of Test for 30,000# RFM Reach Response Rate 1 555 240 20 8.15% 2 554 240 16 6.56% 3 553 240 13 5.62% 4 552 240 10 4.33% 5 551 240 11 4.51%

6 545 240 9 3.78% 7 544 240 12 4.98% 8 543 240 6 2.88% 9 542 240 10 4.26%

10 541 240 7 3.10%

11 535 240 10 4.13% 12 534 240 9 3.83% 13 533 240 8 3.35% 14 532 240 6

2.70%

Case Study # of customers 2,100,000 Test with 30,000 Left with 2,070,000 If 555 RFM 125 cells 16,560 customers per cell

18

Test Response Rate by RFM Cell

-200

-100

0

100

200

300

400

500

555 455 355 255 111

Index of Response 0 = Break Even

34/125 cells above BE

Break Even Index (BEI) BE: .0167 set to 0 or 100 as a reference point Ex. Assume Response = .025 for a given cell

If BEI set to 0 BEI = [(Resp – BE)/BE] * 100 Ex. [(.025 - .0167)/.0167]*100 Ex. 49.7 rounded 50

If BEI set to 100 BEI = [Resp/BE] * 100 Ex. [.025/.0167] * 100 = 150

Profit from Test Program

Quantity Rate Amount

Gross Profit 402 $40.00 $16,080

Fixed Costs 30,000 $0.55 $16,500

Profits (Loss) ($420)

Test, Full File & RFM Selects Compared

Test Full File RFM Select

Response Rate 1.34% 1.17% 2.76%

Responses 402 23,412 15,540

Net Revenue $16,080 $936,480 $621,596

Quantities 30,000 2,001,585 563,040

Fixed Costs $16,500 $1,100,581 $309,672

Profits -$420 -$164,101 $311,924

RFM Procedure Transaction file

• Run RFM on transaction file• Create an new RFM dataset• Merge with customer file

Customer file• File is already prepared• Run RFM on time since last purchase,

number of purchases, and money spent

24

SPSS Means Procedure Compare Means Means

DV Response Variable (0/1) IV RFM (Means and N)

Copy output table to Excel Sort all columns by mean response Descending order

Determine BE and economics

25

Selected RFM

26

RFM score Mean N Cost Income515 .46 547 $ 410 $ 1,008 512 .42 1097 $ 823 $ 1,860 514 .42 530 $ 398 $ 892 513 .41 185 $ 139 $ 304 511 .38 318 $ 239 $ 488 411 .34 302 $ 227 $ 416 415 .34 565 $ 424 $ 760 414 .32 561 $ 421 $ 708 412 .31 1205 $ 904 $ 1,516 413 .30 185 $ 139 $ 224 312 .28 1543 $ 1,157 $ 1,704 311 .27 527 $ 395 $ 576 314 .27 724 $ 543 $ 768 315 .25 749 $ 562 $ 744 313 .24 132 $ 99 $ 128 211 .21 1053 $ 790 $ 904 213 .18 1318 $ 7,667 $ 13,000 $ 5,333

Total .07 82882 $ 62,162 $ 21,920 -$ 40,242

U. Cost U. Profit BE

0.75 4 0.1875

Bits and Pieces Recency with continuity:

Change in buying decisions Frequency?

Purchases in year or # of items Transactions in a year # of visits, # of calls

Tests and Rollouts

Caution about RFM Customer reach

File fatigue

Use RFM for testing

Use it to identify your best customers

Objectives? Profit, ROI, Reach

RFM Customer File

RFM Customer File

RFM Customer File

RFM Customer File

RFM Customer File

RFM Customer File

RFM Sort Analyze

Compare MeansMeans

RFM Sort, Import into Excel

36

RFM Mean N111 .1975 319112 .1937 320113 .1531 320114 .1438 320115 .1531 320121 .0562 320122 .0281 320123 .0438 320124 .0438 320125 .0344 320131 .0094 320

………..…

535 .1219 320541 .0719 320542 .0688 320543 .0594 320544 .0656 320545 .0500 320551 .0219 320552 .0188 320553 .0281 320554 .0250 320555 .0281 320Total .1484 39999

RFM EconomicsEx. Catalogue

Fixed Cost $4.00

Gross Profit $20.00

BE $4 / $20 = .20

Sent to all 39,999 Cost $159,996

Resp .1484 5,936 Gross $118,720 - $41,276

Sent to > .20 10,240 Cost $40,960

Buyers 4,367 Gross $87,340 $46,380

37

RFM EconomicsEmail

Fixed Cost $0.02 Unsub. .025

Gross Profit $20.00 Worst Case

.050

BE .02/20 = .001 CLV $100

Sent to all 39,999 Cost $800

Resp .1484 5,936 Gross $118,720

Cust. Loss 20,000 $2,000,000 - $1,882,100

Sent to > .20 10,240 Cost $205

Buyers 4,367 Gross $87,340

Cust. Loss 256 $25,600 $61,53538