The New RFM
# 36: 8/2003
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention,
Get the Drilling Down Book!
Also available online through
Amazon and Barnes & Noble
- but it's a lot more expensive at those places than at Booklocker!
In This Issue:
# Topics Overview
# New RFM Metrics: Take 10 on Retention
# Best of the Best Customer Marketing Links
# Question - New RFM: Snapshot or Movie?
# Question - New RFM: Academics Approve
Hi again folks, Jim Novo here.
This month every article and question has to do with the "New RFM" approach being used to evaluate the potential value of customers
and visitors to a web site. RFM is a grand old offline predictive model that is simple to understand and use - and works even better online, with a few modifications.
In 2000 I begged people to track all the way through to conversion to get at ROI.
In 2001 I stumped for tracking of visitor and customer sources to
reduce acquisition costs, knowing that source
significantly influenced the conversion of a visitor. Both of these
ideas have now become mainstream, and people are really starting to drive down
costs and increase the profitability of their web sites.
Am I some kind of a genius or futurist? No. I've just been
through all this before, and I know what works. And I'm telling you now
the next step is to tag your visitors with their potential value to you over time
if you really want to start printing money, and the New RFM is the
biggest bang for the buck tool you will find for doing it.
Are we together? Let's do some Drillin'!
Overview of the New RFM
If you would like to know more about how to use the new RFM metrics to improve your profitability on the web, check out the free "Take 10 on Retention"
package I wrote. It includes a 10 minute presentation on the strategy and
reporting behind increasing web customer ROI using simple predictive
Here's the idea in a nutshell: when you make investments, you
expect the value of them to rise in the future. You have web
investment choices to make - ad design, media, building out content,
etc. Retention metrics tell you which of these investments are
the most likely to generate increased profits in the future.
Click here for the Take 10 on Retention
Best Customer Retention Articles
This section usually flags "must read" articles about to move into the paid archives
of major trade magazines before the next newsletter is
delivered. I highlight them here so you can catch them free
before you would have to pay the fee. This cycle there were no
great articles from these particular magazines, but there were a
couple of great articles from other magazines. So check 'em out!
Note to web
site visitors: These links may
have expired by the time you read
can get these "must read" links e-mailed to
every 2 weeks before they expire by subscribing to the newsletter.
Long Time Gone
No Expiration Direct Magazine
This is a really fascinating study on the use of LifeTime
Value metrics - apparently, those companies that use LTV are more bullish on
the future, report better financial results, and are more likely to increase
their marketing budgets in 2004. Geesh, not a bad crowd to be running
with...would you like to join them?
customers Are Worth Keeping and Which Aren't? Managerial Uses of CLV
No Expiration Knowledge@Wharton
This is a great academic article, and useful from a strategic
position. Show it to your boss or CEO. And then tell them business
is "messy," and rarely conforms to academic ideals, but you have a
solution. Tell them you can use some very
simple techniques to accomplish the same objectives, and you can start right
away if you can buy
If you are in SEO and the client isn't converting the additional
visitors you generate, you can help them make it happen - click here.
Questions from Fellow Drillers
If you don't know what RFM is or how it can be used to drive customer profitability in just about any business,
New RFM: Snapshots versus movies
Q: Thanks so much for your reply. I should have
clarified that I am in catalog circulation. We currently use RFM
to segment the file and then roll the RFM cells into more manageable
segments (this is a new technique to me, I am new to this company, in
my former company we mailed by RFM segment).
A: Hmm...this sounds like a "dumbing down"
approach to it, but hey, if it works, why not. Sometimes this is
done because the customer base is not really large enough to support
125 segments, and the differences between the segments can become
unstable and less predictive unless they are aggregated.
Q: Because we are in a niche market and we saturate it
pretty well, I would like to see which customers are on the edge or
falling off (the Latency stuff)
and which ones we can "reward" for being the best. I
do not think the RFM analysis shows me that amount of detail.
A: Well, it can, and that is essentially what the
Drilling Down book is about. RFM as it is traditionally used -
as a "snapshot" of behavior - is pretty dumb compared to how
it can be used. If you start looking at scores over time,
you have a much more robust kind of tool - a "movie" of the Customer
LifeCycle. In this scenario, you aren't as concerned with
the score at any one time, but what happens to it over time.
Falling score indicates a move towards defection, rising score is an
acceleration in loyalty.
Since you seem to be familiar with this area and are likely to
understand this statement, the final part of the book, "Customer
Scoring Grids," is where you really see the Customer LifeCycle
emerge. Grids are a combination of Latency and RF(M) that
produces a visual "map" of customer retention and defection.
Q: Your explanations about your books were great!
I could have used the E-Metrics
one in my last job.
A: At least you have a job!
Q: One other question for you. We operate our
computers here at work on a shared network (where we do not have boxes
at our desks). This means that I would not easily be able to
load up any software that I could either download or get by disk.
In my mind this simply means that I buy the book for my own personal
use and use the customer scoring software
at home -- are the "results" I might find easily e-mailable?
A: Sure, as long as you can e-mail an Access .mdb
file, you can mail it to work. One thing to note, the software
produces RF scores, which may or may not be what you want. They
are more "sensitive" than RFM scores when predicting
behavioral change, which is really what the book is about. If
you are mailing a catalog, RFM may be more important because of the
cost involved. You might use them together, as in perhaps RFM
says you don't mail to a certain segment, but within that segment RF
has identified customers who appear to be accelerating and they should
be mailed. You'd have to test it.
Q: Thanks so much! I have turned my friend (in
the tennis ball machine business) on to you and we have had some great
conversations based on your e-mailed chapters!
A: Well, thanks for that, and have fun Drilling!
If you are a consultant, agency, or software developer with clients
needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click
New RFM: The academics approve
Q: What do you make of the following article published
by The Wharton School of Business? They seem to be far less
confident in the use of RFM and the other techniques you promote.
I'm interested in your take.
Jim's Note: The article is called "Which Customers Are Worth Keeping and Which Ones Arenít?
Managerial Uses of CLV." Yes, the same one promoted as
"must read" above. If you didn't already read it, click
here to do so.
A: That's interesting, I viewed it as validation and
proof my system works from a 3rd party academic source. In fact,
I linked to it with an
explanation on my web site!
The key paragraph is this one:
"simple statistics such as Frequency
and Recency can in fact
offer valid estimates of future lifetime values, i.e. "that a
limited amount of summarized transaction data, when viewed the
right way (emphasis mine), can yield CLV forecasts that are just
as accurate as those generated from the entire highly-detailed
purchase history. The challenge for practitioners is knowing
which summary statistics to use, and how to use them correctly.
"Many common 'rules of thumb' don't lead to very effective
managerial policies," he says.
The Drilling Down book explains how to "view it the right
way" based on 20 years worth of experience. The fact people
abuse RFM by using it like they did in the 50's ("common rules of
thumb") is really not an issue for me; people are forever doing
stupid things with customer data.
Fader et all never say "less confident," in fact, they
state the opposite. In an earlier study (1999, I think) based on
Amazon and CD Now data they proved the most esoteric part of the
Drilling Down method, that is, rate of change is the most accurate
predictor of future behavior in interactive environments.
This idea is really beyond the scope of the book but it is hinted at
quite a few times in the book and is really what is going on behind
"customer scoring grids" / "customer retention
mapping," the centerpiece of the Drilling Down method.
Am I misreading your question? Have you read
That's it for this month's edition of the Drilling Down newsletter.
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Any comments on the newsletter (it's too long, too short, topic
suggestions, etc.) please send them right along to me, along with any
other questions on customer Valuation, Retention, Loyalty, and
'Til next time, keep Drilling Down!
- Jim Novo
Copyright 2003, The Drilling Down Project by Jim Novo. All
rights reserved. You are free to use material from this
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