Segmentation and RFM Basics

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Segmentation and RFM Basics. Bill Ruppert, ResponseB2B wruppert@responseb2b.com 817-442-0698. Introduction. Who to mail? How often to mail them? Fundamental questions. Basic Tools. The Segment RFM to define segments Some simple reports. Segments.
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Segmentation and RFM BasicsBill Ruppert, ResponseB2Bwruppert@responseb2b.com817-442-0698Introduction
  • Who to mail?
  • How often to mail them?
  • Fundamental questions
  • ResponseB2B - Segmentation and RFM BasicsBasic Tools
  • The Segment
  • RFM to define segments
  • Some simple reports
  • ResponseB2B - Segmentation and RFM BasicsSegments
  • The mail / no mail decision is made at a group level
  • That group is called a segment
  • Every name is mailed or not mailed
  • Pros: simplicity, control, transparency
  • Cons: defining, multiplication
  • ResponseB2B - Segmentation and RFM BasicsDesirable Attributes
  • Similarity - within a segment
  • Distinctiveness - between segments
  • Comparability - over time
  • Size - large enough to have meaning
  • ResponseB2B - Segmentation and RFM BasicsSimilarity
  • The names within a segment have a similar behavior
  • Justifies mailing all or none
  • ResponseB2B - Segmentation and RFM BasicsDistinctiveness
  • The segment behaves differently than other segments
  • Is there really a difference between a 6 time and 7 time buyer?
  • ResponseB2B - Segmentation and RFM BasicsComparability
  • Able to compare the results from a segment over time
  • Requires stability in the RFM definition process
  • In prospecting, requires thought in ordering lists
  • ResponseB2B - Segmentation and RFM BasicsSize
  • The segment should be large enough that the results are statistically valid
  • Cell grouping, described later, helps with this
  • ResponseB2B - Segmentation and RFM BasicsProspecting Segments
  • A Prospecting segment is a particular select from a list
  • 12 month buyers
  • SIC 35xx with 1-4 employees
  • Prospecting lists are often small
  • ResponseB2B - Segmentation and RFM BasicsHouse File Segments
  • RFM = Recency, Frequency, Monetary
  • Easy to implement
  • Easy to understand
  • More then adequate for most B2B direct marketers
  • ResponseB2B - Segmentation and RFM BasicsRFM Values vs. Cells
  • The RFM values are the actual unique value for each customer
  • 138 days; 17 orders; $1,465.27
  • The RFM cells are groupings of values
  • First, define how values are calculated
  • Second, define how the cell are defined
  • ResponseB2B - Segmentation and RFM BasicsRecency Value
  • The date of last order
  • The most powerful predictor of who is likely to order
  • ResponseB2B - Segmentation and RFM BasicsFrequency Value
  • Frequency is the next most powerful predictor of response
  • Do not use the total count of lifetime orders as the definition of frequency
  • Pick a time limit back from the most recent order
  • ResponseB2B - Segmentation and RFM BasicsMonetary Value
  • Monetary is the least powerful
  • Especially useful to avoid mailing very low value customers
  • Total sales directly correlated to order frequency
  • Use the average order size of the orders counted for frequency
  • ResponseB2B - Segmentation and RFM BasicsDefining RFM Cells
  • Compute the values as defined above
  • Define a cell structure - ranges of values for R, F and M
  • Assign each customer to a cell
  • Use cells for reporting, analysis, mailing decisions, etc.
  • ResponseB2B - Segmentation and RFM BasicsNumber of Cells
  • The number of cells you create is important
  • Too few cells reduces the discriminatory power of your segmentation
  • Too many cells is hard (or even impossible!) to work with
  • ResponseB2B - Segmentation and RFM BasicsA Starting RFM Cell Structure
  • A place to start from, but everyone has different needs
  • 108 cells for the first three years of buyers and nine cells for every year after that
  • ResponseB2B - Segmentation and RFM BasicsRecency
  • Quarters for 3 years
  • 0-3 mo, 4-6 mo, 9-12 mo, …., 34-36 mo
  • Some may need more in the first year
  • Others may need less after the first year
  • Year groups after that
  • 37-48 mo, 49-60 mo, ...
  • ResponseB2B - Segmentation and RFM BasicsFrequency
  • A simple 1, 2, 3+ for frequency
  • Recent, 1x buyers are new customers - special treatment
  • If really aggressive, you may want higher frequency cells for mailing more often
  • ResponseB2B - Segmentation and RFM BasicsMonetary
  • Start with 3 groups based on ranges of average order size
  • Low - less then one half AOS
  • Normal - one half to twice AOS
  • High - over twice AOS
  • May need a special “Very Low” for reduced mailings
  • ResponseB2B - Segmentation and RFM BasicsRFM Cell Groups
  • Sometimes you need many RFM cells
  • if short R periods are needed
  • if both higher F and higher M values have strong predictive power
  • The number of cells can multiply quickly
  • Solution - RFM Cell Groups
  • ResponseB2B - Segmentation and RFM BasicsGroup Similar Mailing Patterns
  • Define groups of cells sharing a default mailing pattern
  • The default decisions can be changed at the cell level as needed
  • ResponseB2B - Segmentation and RFM BasicsThe A's, B’s and C’s
  • “A” - the best cells, mailed every time
  • “B”, “C”, “D” - good to not so good
  • “N” - current new buyers
  • “over-mail” in an attempt to convert into multi-buyers
  • “X” - so bad, you’ll never mail
  • slug and test as though a prospecting list
  • ResponseB2B - Segmentation and RFM BasicsSegmentation Enhancements
  • Product History
  • RFM report by Product Groups
  • SIC and Employee Size
  • RFM report by SIC / Employee Size Groups
  • Create special RFM Cells
  • fewer cells
  • ResponseB2B - Segmentation and RFM BasicsExample Reports
  • Forecasting and Sales Reporting
  • Using RFM Cell Groups
  • RFM Dynamics
  • ResponseB2B - Segmentation and RFM BasicsForecasting and Sales ReportingResponseB2B - Segmentation and RFM BasicsUsing RFM Cell GroupsResponseB2B - Segmentation and RFM BasicsRFM DynamicsResponseB2B - Segmentation and RFM BasicsThank You!Thank you for your kind attention!And thanks to MeritDirect for inviting me!
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