Business Acumen Cases -

CRM Analytics - RFM Model

Lecture Objective:
1. Introduction to CRM Analytics
2. How CRM analytics can be used in business?
3. Customer Segmentation using RFM

Case Study:
A company in the e-commerce sector wants to segment its customers and determine
their marketing strategies according to these segments.

For example: If the company has a 50K marketing budget - and that amount is not
enough to target everyone - How would you strategize spending this budget?

Introduction to CRM:
● Customer relationship management (CRM) combines practices, strategies, and
technologies that companies use to manage and analyze customer interactions
and data throughout the customer lifecycle.
● CRM helps businesses to gain an insight into the behavior of their customers
and modify their business operations to ensure that customers are served in the
best possible way.
How is CRM analytics used in Business?

● Now that we know what CRM is - how do you think CRM analytics can be
useful to this business?
● And more importantly, let's talk about how we can use analytics to help
streamline our marketing budget with this case study?
● CRM analytics gives insights into customers and how well the sales and
customer service teams are reaching them.
● Helps analyze customers' habits to retarget and optimize sales of existing
customers.
● Analyzing customers, finding audiences belonging to certain behaviors, and
organizing campaigns suitable for that audience.
● CRM offers you the opportunity to improve your profitability, productivity, and
efficiency.

Customer Segmentation:

● Imagine in a company, the marketing team will launch a campaign. For efficiency
because of limited resources, it must get revenue or other metrics as much as
possible.
○ This means that you need to optimize your targeting criteria so you spend
more on customers that will generate more revenue for the store.
● Segmenting your customers can help you focus your marketing efforts, so you
can increase profits and overall customer satisfaction
● What are the different ways in which you feel you can group your customers
to focus on?
● Variables that are very often used for customer segmentation includes:
○ Demographics
○ Psychographic (segmentation using psychological characteristics
including personality, lifestyle, social status, activities, interests, opinions,
and attitudes)
○ Geographic
○ Purchase Patterns
 ○ Customer preference for products / services etc.
● Let's take one of these segmenting attributes and talk about how we can use
this attribute to strategize our marketing budget?

Customer Segmentation Using RFM Clustering Model

● Let's talk about another kind of segmentation - which is built from
understanding the customer purchase behavior. What do you think is meant
by customer purchase behavior?
● RFM stands for Recency, Frequency, and Monetary Value.
● RFM helps the company understand the customer’s characteristics based on
their historical transactions.
● To extract information about their buying behavior, we need to analyze the RFM
factor.
● Then, the RFM factor for each customer would be ranked as the RFM segment
for targeted marketing campaigns.

RFM :

● Recency: How recently a customer has made a purchase, either in months, days
or weeks depending on your market’s typical purchase cycle?
● Frequency: How often a customer makes a purchase, typically measured over
the twelve months leading up to each customer’s last purchase?
● Monetary Value: How much money a customer spends on purchase, either
in-total or on-average over the same twelve month period?

● Methodology:
○ Calculate RFM score for each customer by grouping the score for R, F & M
-> 1(lowest score) & 5(highest score).
○ The lower limit and upper limit of the RFM score can be chosen by the
analyst based on the data range.
○ You can use intuition , or a quantile system to group the values into each
score.
■ For eg: to calculate recency with below data using Quantile
methodology.

For eg: one way to group this is if “Months Since Last Purchase
Date” < 20th percentile then Recency Score = 5 ;
<40th percentile but >20th percentile = 4 and so on

○ Example of calculating R,F,M scores using intuitive or business

methodology:

○ Concatenating all three scores together you get an easy way to divide-up
your customers into segments (or “RFM cells”).
 ○ For eg: almost-lost but previously loyal customers (153, 1 for recency, 5
for frequency and 3 for monetary value).

● Let's talk about how we can use these RFM scores to formulate strategies for
the various customer profiles.
● We know in this specific used case we rate R,F & M from 1-5. 1 being lowest
and 5 being highest.
● If we want to target high-spending new purchasers - what RFM scores would
we be looking for?
● For eg: High-spending new purchasers (514, 5 for recency, 1 for frequency and
4 for monetary value) -
○ Recency (High) - Since they are new purchasers
○ Frequency (Low) - Since they are new purchasers so they have just
started purchasing
○ Monetary (High) - Since they are high spending
 ● Can’t lose them: This is the customer class that should not be lost, who has not
shopped for a long time despite shopping very often before.
● Hibernating / At Risk: The class of customers who shop relatively often but
have not shopped for a long time.
● About to sleep: This is the customer class who has not shopped frequently and
has passed a certain amount of time since their shopping.
● Need attention: It is the customer class in the middle of the RF graph, and if it is
not emphasized, it moves towards the risky group.
● Price Sensitive / New customers: It is the customer class who has not made
frequent purchases (perhaps once) and has passed a short time since their
purchase.
● Promising: They are customers who do not shop frequently, and a little time has
passed since their shopping.
● Potential loyalists: Customers who shop at medium frequency and have not
spent a long time since their last purchase.
● Loyal customers: Customers who shop frequently and whose last purchase has
been a short while.
● Champions: They are our apple of the eye! They are customers who shop
frequently and have made their last purchases in a very short time.

Focusing marketing efforts & strategy based on RFM segmentation:

● RFM segmentation is useful for sales, marketing and customer teams needing to
focus their limited time and money on those customers for whom a change in
behavior would significantly impact revenue.
● Converting lapsed customers to active or first time shoppers to repeat shoppers
etc.
● If our marketing efforts were on acquiring more customers - which segment
do you think we will focus on?
● For example, by focusing retention efforts on customers who used to be
frequent, loyal and high-value purchasers (RFM segment 355) the revenue
upside is obviously much greater than if they managed to retain customers who
were previously infrequent low-value purchasers (RFM segment 132).
 ● Similarly, there’s little point in incentivising customers who are already your
most loyal, frequent and high-spending customers (RFM segment 555) when
spending those incentives on customers who’ve just made their first purchase
and have the potential to also become loyal and valuable repeat customers
(RFM segment 514, for example).

Use Case of RFM in context of an Ecommerce website (ex: Amazon)

1. High-RFM Customers:
a. These are Amazon's most valuable customers. They have made a
purchase within the last 30 days, place orders very frequently, and have
spent a significant amount.
b. Amazon should provide them with the most personalized and exclusive
offers:
i. Personalized Recommendations: Amazon's recommendation
engine can offer these customers highly personalized product
recommendations based on their previous purchases and browsing
history.
ii. Exclusive Access: Offer early access to new product releases or
limited-time, high-demand items.
iii. Premium Loyalty: Invite them to join premium loyalty programs like
Amazon Prime with additional benefits, such as faster shipping
and exclusive content access.

2. Moderate-High-RFM Customers:
a. These customers are also valuable but might need slightly less
aggressive marketing.
b. Amazon can consider the following strategies:
i. Personalized Product Recommendations: Provide tailored product
recommendations based on their purchase history, but perhaps
with slightly fewer promotional emails.
ii. Loyalty Rewards: Offer loyalty rewards, like Amazon gift cards or
discounts, as incentives for continued engagement.
 iii. Early Access: Provide early access to certain deals or promotions
to maintain their engagement.

3. Moderate-RFM Customers:
a. These customers are engaged but may need encouragement to increase
their frequency and spending.
b. Amazon can target them with relevant promotions and engagement
campaigns:
i. Product Bundles: Create product bundles or kits to encourage
additional purchases.
ii. Time-Limited Promotions: Offer time-limited promotions, such as
"buy one, get one at a discount" or "spend a certain amount and
receive a gift."
iii. Re-engagement Emails: Send personalized emails that remind
customers of their past shopping experiences and provide
incentives to make another purchase.

4. Moderate-Low-RFM Customers:
a. These customers are at risk of becoming inactive.
b. Amazon can implement win-back campaigns and special incentives to
keep them engaged:
i. Win-Back Campaigns: Send targeted emails with attractive
discounts or special offers to encourage them to return to the
platform.
ii. Abandoned Cart Reminders: Use reminders for items left in the
cart to prompt them to complete their purchase.
iii. Personalized Suggestions: Suggest products or categories they
have shown interest in previously.

5. Low-RFM Customers:
a. These are the most challenging groups, but they still have potential.
b. Amazon can use targeted re-engagement efforts:
 i. Customer Surveys: Send surveys to gather feedback on their
shopping experiences and preferences. Use this feedback to make
improvements and offer more personalized product suggestions.
ii. Special Promotions: Provide compelling promotions or incentives
to entice them back to Amazon, such as discounts on their next
purchase or free shipping on a minimum order amount.

By applying the RFM framework to different customer segments, Amazon can

effectively tailor its marketing and engagement strategies to maximize customer
retention, reactivation, and overall customer lifetime value.