RFM (recency, frequency, monetary) analysis is a marketing technique used to determine quantitatively which customers are the best ones by examining how recently a customer has purchased (recency), how often they purchase (frequency), and how much the customer spends (monetary). RFM analysis is based on the marketing axiom that “80% of your business comes from 20% of your customers.” The resulting customer segments are neatly ordered from most valuable to least valuable. This makes it straightforward to identify best customers. The first step in RFM Customer Segmentation is to define the three basic attributes. The model allows for certain flexibility with definitions and you can adjust them to the specifics of your business.
The three attributes are:
1. Recency which represents the “freshness” of customer activity. Naturally, we would like to identify active and inactive customers. The basic definition for this attribute is the number of days since last order or interaction.
2. Frequency captures how often the customer buys. By default this could be the total number of orders in the last year or during the whole of customer’s lifetime.
3. Monetary value indicates how much the customer is spending. In many cases this is just the sum of all order values.
Please find attached the visual representation of best customers on a banking transaction data.