Increasing Ad targeting effectiveness: RFM Segmentation

At universities, marketing studies and engineering departments are usually quite far apart. The combination of the two however is what creates powerful tools which are at the heart of billion dollar advertising companies like Google and Facebook. This article gives an introduction into quantitative and effective marketing which you can apply yourself using Shopify apps like Facebook Custom Audience Sync.

“How can I get the most result out of my ad budget?” is the key question in marketing. If you want to get ahead of competition, an often given advice is “focus on your strength”. In the context of advertising, this translates to “focus on your strongest customers”. With RFM segmentation we are looking to find a way to quantify this question of what defines a “strong” customer:

What is RFM segmentation?

The acronym RFM in marketing stands for Recency, Frequency and Monetary value of a customers purchase. These three customer metrics are collected by even the most basic CRM as they are the very basis of book keeping and inventory management:

  • R: Recency: how recent is the last purchase of a customer. More recent means higher value of R.
  • F: Frequency: how many times has the purchaser ordered at our shop
  • M: Monetary value: how much has the customer spent altogether

These three metrics are combined using some “secret formula” into a combined RFM-Score (S). One example would for example be the following:

Here R, F and M are our customer specific values which are normalised with the maximum values (R_max, …) over all customers. With this the total score can be between 0 for the worst customer and 3 for the strongest possible customer.

Once we have the RFM-Score for each customer, we decide how many customers we would like to target. For example we have 200 customers and we could decide to send postcards to the 100 customers with the highest RFM-Score (Top 50%). Since these are our strongest customers, they are much more likely to respond to our Ads and spend more than with targeting the bottom 50%.

How can you use RFM marketing segmentation yourself?

If you use Shopify and Facebook Ads, you can use Facebook Custom Audience Sync for RFM Segmentation and targeting.

If you enjoy this article or have any question feel free to leave a comment.

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