Add Channel to RFM Segmentation to Boost ROI
Dear Dr. pROfIt: I segment my customers using a version of recency, frequency and monetary (RFM) value. With my typical RFM breaks, I like to overlay channel information, which I call “C.” I usually use the source of acquisition as my channel. For example, if I acquire a customer from paid search, I code the customer as a “P”; if I acquire a customer from catalog marketing, I code the customer as a “C.” I recently read that what a customer did in their last purchase is more important than how they were acquired. What's the right way for me to maximize return on investment?
Dr. pROfIt: I don’t think there's a right or wrong answer to this question. What's most important is what your customers tell you via their performance.
When you acquire a customer, you have very little information about that customer. You only know where you acquired them, their purchase amount, the number of items in their order, the merchandise divisions they purchased from, whether their purchase was for sale or full-price items, whether they paid for expedited shipping, their tender type and so on. So for one-time buyers, the source of acquisition becomes an important attribute to add to any RFM segmentation system.
Once a customer purchases for a third time, the game changes. After three purchases, the customer offers a veritable plethora of valid information about what they like and don’t like, what they're likely to do next. It's entirely possible that your existing RFM segmentation system cannot capture enough valid information about your customers. The fact that a customer was acquired via catalog may be irrelevant if their last two orders came online — one following an email campaign, the other after an online search.
For me, this is where things really get interesting. You have opportunities to craft merchandise-based RFM strategies to better target customers via email marketing. You have opportunities to withhold catalog mailings (this sounds contrary) if customers strongly prefer purchasing online. There's a lot of profit to be had once a customer purchases for a third time!