Transcript Segmentation and RFM Basics (Bill Ruppert)

Segmentation
and
RFM Basics
Bill Ruppert, ResponseB2B
[email protected]
817-442-0698
Introduction
• Who to mail?
• How often to mail them?
• Fundamental questions
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Basic Tools
• The Segment
• RFM to define segments
• Some simple reports
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Segments
• 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
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Desirable Attributes
 Similarity - within a segment
 Distinctiveness - between segments
 Comparability - over time
 Size - large enough to have meaning
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Similarity
 The names within a segment have a
similar behavior
 Justifies mailing all or none
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Distinctiveness
 The segment behaves differently than
other segments
 Is there really a difference between a 6
time and 7 time buyer?
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Comparability
 Able to compare the results from a
segment over time
 Requires stability in the RFM definition
process
 In prospecting, requires thought in
ordering lists
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Size
 The segment should be large enough
that the results are statistically valid
 Cell grouping, described later, helps
with this
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Prospecting 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
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House File Segments
• RFM = Recency, Frequency, Monetary
• Easy to implement
• Easy to understand
• More then adequate for most B2B direct
marketers
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RFM 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
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Recency Value
• The date of last order
• The most powerful predictor of who is
likely to order
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Frequency 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
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Monetary 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
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Defining 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.
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Number 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
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A 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
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Recency
• 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, ...
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Frequency
• 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
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Monetary
• 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
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RFM 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
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Group Similar Mailing Patterns
• Define groups of cells sharing a default
mailing pattern
• The default decisions can be changed
at the cell level as needed
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The 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
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Segmentation 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
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Example Reports
• Forecasting and Sales Reporting
• Using RFM Cell Groups
• RFM Dynamics
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Forecasting and Sales Reporting
Total
Rec Freq Mon
Key
Code
Mail
Qty. Orders
Sales
%Pull
Avg.
Order
Sales/
Piece
Cost/
1,000
Contribution
Total at
Per
38.0%
Piece
Per
Order
0-3
0-3
0-3
3+
3+
3+
201+ PG0101
50-200 PG0102
0-50
PG0103
3,058
2,706
1,717
474
276
122
$130,350
$34,500
$3,904
15.5% $275.00
10.2% $125.00
7.1% $32.00
$42.63
$12.75
$2.27
$645
$645
$645
$47,513
$11,352
$375
$15.54
$4.20
$0.22
$100.24
$41.13
$3.07
0-3
3+
Sub
7,481
872
$168,754
11.7% $193.53
$22.56
$645
$59,239
$7.92
$67.94
0-3
0-3
0-3
2
2
2
201+ PG0104
50-200 PG0105
0-50
PG0106
2,752
2,435
1,545
341
199
82
$93,775
$24,875
$2,624
12.4% $275.00
8.2% $125.00
5.3% $32.00
$34.07
$10.21
$1.70
$645
$645
$645
$33,825
$7,873
($1)
$12.29
$3.23
($0.00)
$99.19
$39.56
($0.01)
0-3
2
Sub
6,733
622
$121,274
9.2% $194.97
$18.01
$645
$41,697
$6.19
$67.04
0-3
0-3
0-3
1
1
1
201+ PG0107
50-200 PG0108
0-50
PG0109
1,651
1,461
927
106
60
22
$29,150
$7,500
$704
6.4% $275.00
4.1% $125.00
2.4% $32.00
$17.65
$5.13
$0.76
$645
$645
$645
$10,001
$1,905
($331)
0-3
1
Sub
4,040
188
$37,354
4.7% $198.69
$9.25
$645
$11,575
$2.87
$61.57
0-3
Sub
6,428
270
$45,558
4.2% $168.73
$7.09
$645
$13,149
$2.05
$48.70
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$6.06
$94.35
$1.30
$31.75
($0.36) ($15.03)
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Using RFM Cell Groups
RFM Group
Cust
Count
A
B
C
D
N1
N2
X
Z
14,328
15,953
20,913
4,768
8,706
6,879
46,414
31,843
Top Tier
Second Tier
Other Good
React Potential
12mo New
24mo New
0-60mo Low Value
61+mo
Totals
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149,804
01/06/03 02/10/03
100%
100%
Mini
Mini
Mini
Mini
Mini
Reo
Reo
React
React
Reo
64,668
62,841
Mail Date
03/17/03 04/21/03 05/19/03
100%
100%
100%
BB
BB
BB
BB
BB
BB
BB
117,961
Mini 2
Mini 2
Mini 2
BB
BB
06/23/03
100%
Pieces
Mailed
Reo
85,968
79,765
104,565
14,304
26,118
13,758
46,414
0
React
Reo
51,194
30,281
43,947
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370,892
Total
Cost
Cost/
Cust
$ 95,998
$ 100,185
$ 90,972
$ 16,116
$ 28,904
$ 19,468
$ 109,073
$
-
$
$
$
$
$
$
$
$
$ 460,714
$ 3.08
28
6.70
6.28
4.35
3.38
3.32
2.83
2.35
-
RFM Dynamics
Recency
Freq
Monetary
(Avg Ord)
New Customers
1. 0-12 mo
2001
%
Custs Retn
17,692
4,041
15,176
2002
Sales
(000)
Custs
%
Retn
2003
Sales
(000)
3,677
11,318
2,751
Custs
1. $201+
2. $51-200
3. $0-50
6,880
16,831
3,299
57% 4,062
55% 4,357
37%
209
7,337
16,295
3,376
60%
55%
37%
4,884
4,198
235
7,936
15,959
3,191
58% 4,915
54% 3,992
34%
224
7,604
14,875
2,901
1. 2+x
Total
27,010
53% 8,628
27,008
54%
9,317
27,086
53%
9,132
25,380
2. 1x
1. $201+
2. $51-200
3. $0-50
2. 1x
Total
Total
2. 13-24 mo
1. 2+x
1. $201+
2. $51-200
3. $0-50
1. 2+x
Total
2. 1x
1. $201+
2. $51-200
3. $0-50
2. 1x
Total
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Sales
(000)
1. 2+x
1. 0-12 mo
2. 13-24 mo
2000
%
Custs Retn
Total
3,259
7,701
6,718
20%
16%
12%
356
331
165
2,899
6,054
5,683
25%
19%
14%
343
332
166
2,686
5,800
5,033
22%
17%
13%
250
219
133
2,354
4,726
3,757
17,678
15%
853
14,636
19%
841
13,519
17%
602
10,837
44,688
38% 9,481
41,644
41% 10,158
40,605
41%
9,734
36,217
2,401
6,078
1,931
28%
28%
20%
382
473
78
2,978
7,609
2,062
29%
28%
18%
455
598
76
2,960
7,387
2,109
25%
26%
20%
363
542
73
3,356
7,286
2,117
10,410
27%
933
12,649
27%
1,128
12,456
25%
979
12,759
2,844
7,543
6,562
14%
11%
10%
166
203
105
2,596
6,439
5,905
12%
10%
8%
129
162
91
2,174
4,882
4,866
13%
11%
9%
106
136
66
2,087
4,820
4,370
16,949
11%
474
14,940
10%
383
11,922
10%
308
11,277
27,359
17% 1,407
27,589
18%
1,511
24,378
18%
1,287
24,036
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Thank You!
Thank you for your kind attention!
And thanks to MeritDirect for inviting me!