The Basics of RFM Segmentation - RFM Cells and Cell Groups
Having defined RFM values, we can create some RFM cells.
Steps in Creating and Using RFM Cells
Now that you know exactly what you are going to use for RFM values, you need to compute the values for each customer. An RFM Cell structure must be defined by setting a series of value ranges for each dimension of recency, frequency, and monetary. The RFM values are than used to place each customer into an RFM cell which are use for reporting, analysis and mailing decisions.
The total number of RFM Cells is the product of the number of ranges for each dimension of RFM. The number of cells you create is important. Having too few cells reduces the discriminatory power of your segmentation. Having too many cells is unwieldy and inefficient.
Of more practical importance than the number of total cells is the number of cells for each recency group. This is where you spend a lot of time deciding what to do for the various types of buyers.
A Starting RFM Cell Structure
Let's define a reasonable RFM structure as a concrete example. It is a place to start, but everyone has different needs. We'll end up with 108 cells for the first three years plus nine cells for every year after that. I have found this scheme to be very workable.
The most recent names are the best names, so you will mail them more often. You'll want to be able to make fine distinctions among the hottest names. This calls for having shorter time periods at the start of recency, growing to longer time periods I suggest a recency cell for each quarter in the first three years, followed by year groups. At some old age, three year groups may be fine.
Some mailers will need even more cells in the first quarter or year so that the hottest names can be mailed weekly. Others may not need as much detail after the first year.
Start with a simple one time (1x), 2x, 3+x for frequency. This captures the most important buyer types while keeping the number of cells from multiplying out of control.
Each frequency value is handled differently. Recent one time buyers are your new customers. They need special treatment to get them to buy a second time. Old one time buyers are failed conversions - don't spend much money on them. If you can get a two time buyer to order again, you have them hooked for life! And the three plus buyers are your bread and butter. Mail them deep and often.
If you are really aggressive you may want to create higher frequency cells for more mailings. But it usually gets pretty hard to tell a 6x buyer from a 7x buyer.
Since every catalog is different, I can't suggest valid monetary ranges. When I start working with a new mailer my first cut is based on their average order size (AOS). Start with three groups: less than half of AOS; half to 1½ times AOS; and more than 1½ times AOS.
For example, if your average order is $300 then use ranges of $0-150, $150-450, and $450+. Send the middle group a normal number of mailings and reduce mailings to the lower value group and mail more to the higher value group. This will increase the efficiency of your mailings.
You may also need a very low value group such as "Under $10" to eliminate special offer buyers.
RFM Cell Structure Summary
Three groups based on your average order size. You may need a special "Very Low" group for reduced mailings.
RFM Cell Groups
Sometimes it makes sense to have many more RFM cells than described above. This would be true if the higher frequency and monetary values have strong predictive power, requiring more ranges for each. You may require monthly recency cells in the first quarter or two if you mail very frequently to your hottest names.
The number of cells can multiply quickly. The much larger number can be dealt with by placing cells that you plan to mail in the same way into groups.
The "A" group has all of the best performing cells that will be mailed every time. The "B" group has the next best set of cells, and so on down the line. A special group is the "N" group made of current new buyers who will be mailed more to convert them into multi-buyers. The "X" group has cells that you plan to never mail. No more than eight to ten groups should be needed.
The high level group planning establishes the default mailing activity for each cell in the group. These default decisions are reviewed at the cell level to ensure that they make sense, and are overridden as needed. This is time consuming, but looking for exceptions is faster than making a mail/no-mail decision for each of many hundreds of cells.
While your RFM Cell structure needs to remain stable to maintain reporting consistency, your groups can vary. You can always re-group stable cells in new ways for reporting purposes.
Next section: RFM Enhancements