Customer Lifetime Value

The RFM Principle

The RFM principle stands for Recency, Frequency and Monetary Value. Using these three principles you can develop your customer lifetime value, or simply, how important the purchase patterns of each customer is to your business. This is achieved by monitoring their purchases over time and selecting a weighting factor for each of the areas of;

1.Recency:
2.Frequency:
3.Monetary Value:

You then apply a factor to each area, for example,

For Recency:

20 Points if within last 3 months 10 Points if within last 6 months 5 Points if within last 9 months 3 Points if within last 12 months 1 Points if within last 24 months

For Frequency:

Number of Purchases within 24 months x 4 points each (Maximum = 20 points)

For Monetary Value:

Dollar value of purchases within 24 months x 10% (Maximum = 20 points)

The weighting factors are for a total of 10, and are usually applied as 2, 3 and 5. For example if Frequency (of purchase) was the most important factor for your business right now, then you would weight this as 5. This might be followed by Recency (of purchase) set at 3, then Monetary Value (of the purchase) set at 2. The good thing about this process is that you can alter these factors based on the relevance to your business at any given time.

See How to Use the RFM Principle



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