- Recency = How recent has the customer purchased
- Frequency = How often did the purchase take place
- Monetary= How much was the spend / purchase made of
In a RFM model there is lot of permutation and combination that could take place. For instance you can slice / segregate the Recency factor into:
- Customers who have purchased in the last 90 days
- Customers who have purchased between the last 91 and 120 days
- Customers who have purchased between the last 121 days and 365 days
- And so on
RFM can have its deviations to suite your type of category. For instance if you have too many products, variants and sub-variants then you can add a P to the RFM which makes it RFMP. Need more deviation? You can change M to D. Wherein D = Duration.
To analyze the RFM:
You can do this with high end software or you can do this manually on excel sheet. However, your back end data collection is required to be strong. You need to have a method and a system in place, wherein the data gets populated when purchase is made. Only then you can do your analysis.
The above is just a glimpse and short synopsis of what RFM is and how you can put it to use.
Let's consider the Social Media Community that we have. Let's look at Facebook Business Page as an example. We have a list of people connected to our Page. You may need to physically put them onto your excel sheet, or build a software that patches this process. The main problem that you may have to overcome is the name of the person on Facebook needs to match the name of the person who is purchasing. People may have a different identity on Social Sites. You may have to connect with each and share with them the relevance of them giving their true name so that you can match the identity on Facebook and in real life. Usually people share as there is always a possibility of receiving a reward in this, they would be given something more due their good standing in the RFM scenario. Once you have this in place [it is an ongoing process] then you can have your regular analysis as shared above.
- CLV / CLTV= Customer Lifetime Value
- LCV = Lifetime Customer Value
- LTV = Lifetime Value
- CV = Customer Value
Once you know the customer value you can estimate and put a price to that customer as to how much you want to spend on the customer. To measure the customer on lifetime value you need to have the below parameters:
- Churn Rate = This is the percentage of your customers who move / end their relationship with your company in a given period
- Discount Rate = Herein you are to check on the capital cost that is put into a particular customer set
- Retention Costs = This is amount of monies that your company spends on a particular customer set in a given period to enable retention
- Period / Duration = This is the critical measure. The period of time that you designate to the above calculations. Minimum advisable would be 3years as your data would not be robust till then for you to derive concrete idea.
ROI = The most debated, questioned and doubted attribute in Social Media. Call it by any name you are referring to the bottom line.
- ROR = Rate Of Return
- ROI = Return On Investment
- RP = Rate Of Profit
In Social Media let's look at Facebook:
You know what all creative you have done, viral videos, wall papers, any technology, Social Media person's monthly cost and so on. Break this into capital and variables. Then calculate based on the re-actions that you have pre-decided. The re-action could be purchase for instance.
Need not be ROI each time:
You may want to not look at ROI each time. Value of a Community person is in their interactions on your Brand / Business Page, their sharing with their network and so on. Not every-time you may want to calculate in terms of figures. In real life how would you calculate word of mouth? Well if you have a loyalty programme then don't you ask who referred you? Just the way we have member get member programmes you can have on the Social Site as well the member get member programmes and so on. Have mutual benefits: let the person who brings in the new customer also benefit and let the new person also gain.
How do we know if the customer has come via Social Media Site?
This is answered by the age old method of tracking. When you want to know if a direct mail has worked or nor don't we give a code in the mail that customer would carry to do their purchase and redeem it to avail discounts. Similarly your Social Media can share codes which can be brought to the purchase counter. It could be a QR Code, MCoupon, On Social Site coupon and so on.
Social Media is an amazing space. You can do mass broadcast and direct connect. The space is such that it enables both. You can do CRM as well. Your choice, your business and marketing and branding decision.