RFM Turned Upside Down
For many years, the recency/frequency/monetary value (RFM) formula has been the cornerstone of catalog circulation plan segmentation. But what if this is no longer true? What if recent customers actually respond to your catalog mailings at a lower rate than older customers, frequent customers at an even lower rate, and higher spending customers even lower? No, I’m not kidding. This is happening right now and you may not be aware of it.
A brief review of the age-old formula is in order. First, recency. It’s been the most powerful predictor of the likelihood of a customer placing another order. For example, for one typical mailer with whom we work, mailing customers who’ve placed at least one order over the past 12 months yields a response rate that is two or more times greater than mailing customers who last placed orders between 13 months and 24 months in the past.
Similarly, customers who’ve made three past purchases respond approximately 1.7 times more than first-time buyers. Customers whose past average order values are more than $150 respond about 2.5 times more than customers with average order values below $50. By segmenting past buyers into groups combining all three attributes and tracking past results, you can predict future response rates and decide which segments to mail.
What’s changed over the past several years? It seems almost every catalog company has opened a “store” that’s open 24/7. I’m talking about Web sites, of course. For many years, catalog companies that also operated retail store chains were aware that direct response rates from customers living near a store were lower than from customers who lived farther out.
For one multichannel retailer we studied, response from customers living within five miles of a store were half the response rate of those living more than 20 miles from a store. Predictably, the company’s catalog management maintained that the missing response was occurring in the store, and it should be given credit. After all, they could prove that many of the customers showing up in the store had received a catalog. Conversely, the store management maintained that the customers would have come to the store anyway and that mailing the catalog was a waste of money.