The Marketing Executives Group International

By: Rudy Picchietti http:linkedin.com/in/rudypicchietti

Today’s article covers good database techniques and the heart of Customer segmentation and one of the most powerful database marketing technique used by all good direct marketers, RFM segmenting. RFM stands for Recency (when the customer placed the last order), Frequency (how many orders the customer placed in a period of time) and Monetary (how much money the customer spent).. There have been books written on RFM modeling and if you are interested check with the DMA (Direct Marketing Association) for a recommendation.

 Data and your database.  For direct marketers, there is nothing more important.   What makes direct marketing different than other forms of advertising is database marketing, both online and off.  Marketers that are able to successfully measure, segment and analyze the thousands of customer transactions in optimal ways will realize a significant competitive advantage.

Even though direct marketers can’t operate without one, many marketing databases are surprisingly incomplete.  Here is a sneak peak of a good B2B marketing database:

1) Customer Information – In addition to a unique permanent ID, you must define your customer.  For B2B it can be an individual, a department within an organization, an organization anywhere or, most commonly, an organization at a unique location.  For one customer ID, you might have several buyers or influencers that need to be maintained.  Ideally, you would maintain information on each individual with whom you’ve had contact to better direct messages.  Make sure you have ample, spacious fields for address fields.  Allow two phone numbers, one fax number and two e-mail addresses.

2) Customer Demographics – Keep separate do-not-mail, e-mail and rent fields, do-not-fax or call fields and a customer status field.  Code customers you don’t want to mail or email such as credit risks, return or service problems.  In B2B, company size and SIC are easily obtained from in-house or outside appending services.  Also, consider job level, years in business, or number of employees.

3) Transaction Detail – Capture transaction type, date, amount, items, order placement, payment methods and source code. Keep merchandise and shipping revenue separate.  Also, capture cost of goods purchased.  These details yield accurate lifetime value estimates and insight into the relationship between sales and customer buying habits.

4) Life-to-Date Detail – Build from the transaction detail 1st date on file, 1st order date, amount and product purchased, last order date and amount, life to date inquiries, orders, dollars, returns and items bought.  Storing these summary details makes it easier to execute file counts and pulls.

5) Promotion History – This is a key to developing a Lifetime Value Model.  Capture the date, code and cost of each marketing contact –mail, email, fax and outbound call.  If the data gets too large, roll the detail into annual or semi-annual buckets for periods beyond two years.

6) Other Data - While not a complete list, some key data to capture include Product category of purchases, channel of purchase (phone, website, retail store etc., key account sales rep code, residential vs. business address, job title (B2B).

Accurate data is invaluable not only for list segmentation and selection, but also for optimal targeting flexibility, customer messaging, LTV and behavior tracking. Building, maintaining and using data in your business should be high priority, if done properly this small investment will pay off big in profit returns.

Now to RFM…

RFMsimply stands for (Recency, Frequency & Monetary).  RFM scoring allows you to segment your customer base in ways to target, score customers and measure results to determine where you should spend your marketing dollars and how often you should contact different segments of your customer database.  The reasoning is somewhat based on the Paretto 80-20 rule but takes it to a more refined level of measurement.  The term also lists the attributes in their order of importance.

Recencyis when a customer last purchased.  By itself, it is arguably the most important indicator of the three: recency, frequency and monetary value.  A simple excel spreadsheet listing the customers last order date can be sorted by this date.  The customers that fall in your 0-12 months segment will be those that can be mailed more often.  Every mailer needs to determine how deep they can mail in their customer base before deciding how much prospecting they should do.  Usually, you can mail back to 36 months and have those older segments still be more profitable than cold prospecting.

Frequencyis how many times a customer buys.  It is an indication of usage and satisfaction and the primary measurement of demand.  Frequency is influenced by product and usage rate.  I recommend viewing customers not only by how many times they order in a given time period like a year or two years, but also by the channel in which they order.  Example is a web buyer who only orders once a year can be considered a low demand customer and would not justify mailing as often as say a customer who orders by phone, web and at your retail store and orders 8 times a year.

Monetary valueis how much a customer spends.  In total aggregate of all customers, it is expressed as average order value and sales.  Some argue that it is the most forceful indicator of the three.  This indicator is necessary to determine if a customer spends enough to be profitable.  Measuring money spent over time is also critical, I prefer looking at money spent over the lifetime of a customer.

The latest trend in direct marketing involves expanding on the RFM model to create an “Optimized RFM” or RFM on steroids.  This involves overlaying other optimizing elements to create a sort of RFMx.  Whether x is employee size, gender, product category, SIC code or any other attribute, the point is it allows you to better pinpoint where the gold nuggets are in your customer file.  The most efficient way to get this level of segmentation is through a co-op database like Merit Direct or others that provide this service to their mailer clients.

Once again the beauty or magic in Direct Marketing is that it is measurable and therefore you can calculate your return on your investment and make future decisions based on the measurements.  Consider outsourcing your database and circulation efforts and find the power how customer segmentation can improve your profits.

 By: Rudy Picchietti http:linkedin.com/in/rudypicchietti