RFM: The New Old Kid on the E-mail Block

Marketing executives are repeatedly challenged to get the best possible results from their e-mail campaigns. The challenge is all the more urgent during times of economic belt tightening, which is what we're currently experiencing. There are many analytic approaches that are touted as the latest and greatest at wringing out results. So, faced with the "analytic du jour," how's a marketer to choose?

One very effective way is to use an approach that has a long track record of success in offline marketing, and that's proven to be even more effective online: recency, frequency and monetary value analysis.

RFM analysis is based on the measurement of three factors that have proven to be the most significant indicators of the potential value of a customer to a business. The measures are:

* R - Recency of last customer purchase or e-mail interaction;
* F - Frequency of purchase or e-mail interaction in the past year; and
* M - Monetary value (aggregate) of customer — typically revenue — in the past year.

The beauty of RFM analysis for e-mail marketers is that accurate, complete and up-to-date information is readily available about these crucial customer characteristics. It's then possible to easily sort customers according to their RFM scores. Customers with the highest RFM scores are those that are most highly engaged with the business and therefore highly likely to respond to an offer. Conversely, customers with lower RFM scores are much less likely to respond.

RFM enables companies to:

• lower opt-outs and increase revenue by mailing more often to more engaged customers;
• decrease costs by reducing the number of e-mails sent per campaign; and
• increase the level of engagement of less engaged customers by targeting them less frequently with promotions with very strong offers.

In one case, a business used RFM analysis to determine that 34 percent of responses to its e-mails came from just 4 percent of its customers — those with the highest RFM rankings — and 57 percent came from the 33 percent of customers with the next highest rankings. That left 63 percent of the customer list generating a mere 9 percent of responses.

E-mailing more frequently to the top-ranked 37 percent resulted in significant improvement in the results of e-mail marketing campaigns. Profits from e-mail marketing campaigns increased 21 percent, and e-mail-driven demand went up 23 percent. Since the recipients were engaged and interested in information from the business, the percentage of e-mails viewed increased by 65 percent, while opt-outs decreased by 14 percent. Next, the company will devise targeted programs to re-engage the lapsed customers.

Needless to say, the business is delighted with the bottom-line results from its RFM analysis. And because RFM can be fully automated online, it only takes the business five minutes per day to set up a new, targeted campaign using RFM. Give it a try — you'll likely find it the most effective five minutes you spend each day.

Craig Kerr is the vice president of marketing at iPost, a Novato, Calif.-based provider of direct e-mail marketing services for opt-in e-mail campaigns. Reach Craig at ckerr@ipost.com.

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