Carol did everything perfectly, except one — targeting. A price sensitive customer will grab a discount offer, but someone who regularly buys from you may get excited only about a new product launch. Not understanding our customer is like harakiri - except there is no honor. What if we understood our customers a little better and sent them more relevant campaigns? All marketing campaigns should pick up a target segment first, then create promotional material that will resonate with that audience, and then put the pedal to the metal.
RFM considers recency, frequency and monetary values for each customer. Combines them, and then groups them into different customer segments for easy recall and campaign targeting. RFM analysis is super useful in understanding responsiveness of your customers and for segmentation driven database marketing. RFM has a track record of decades. People who spent once are more likely to spend again. People who make big ticket purchases are more likely to repeat them.
Pareto Principle is at the core of RFM model. Focusing your efforts on critical segments of customers is likely to give you much higher return on investment! It was used effectively by catalog marketers to minimize their printing and shipping costs while maximizing returns. Rising popularity of computerization made it even easier to perform RFM studies because customer and purchase records were digitized. An extensive study by Blattberg et al.
Numerous other academic studies have also approved that RFM reduces marketing costs and increases returns. Windsor circle reported significant success using RFM for their retail customers:. Once we have RFM values from the purchase history, we assign a score from one to five to recency, frequency and monetary values individually for each customer.
Look at the table below. To calculate score, we first sort values in descending order from highest to lowest. Since we have 15 customers and five scores, we assign a score of five to first three records, four to next three and so on. The most recent purchases are considered better and hence assigned higher score. Thus, customers who purchased recently, are frequent buyers and spend a lot are assigned score of — Recency R — 5, Frequency F — 5, Monetary M — 5.
They are your best customers. Alexander Diesel in this case, not Ammar Fahad — the highest spender. On the other extreme are customers spending the lowest, making hardly any purchase and that too a long time ago — a score of Andy Smith in this case.
But here are two most common methods. If someone bought within last 24 hours, assign them 5. In last 3 days, score them 4. Assign 3 if they bought within current month, 2 for last six months and 1 for everyone else. Range thresholds are based on the nature of business. This scoring method depends on the individual businesses — since they decide what range they consider ideal for recency, frequency and monetary values.
If you have a recurring payment business, but with different payment terms — monthly, annual etc — the calculations go wrong. Recall your school days. Percentile is simply the percentage of values that fall at or below a certain observation. Quintiles are like percentile, but instead of dividing the data in parts, we divide it in 5 equal parts. If we make five equal ranges of percentile, a percentile score of 18 will fall in the range, which would be 1st quintile.
A percentile value 81 will fall in the range, and hence 5th quintile. This method involves slightly complicated math, but solves a lot of problems in fixed range method. Quintiles work with any industry since ranges are picked from data itself, they distribute customers evenly and does not have cross overs.
Quintiles is our recommended method to calculate RFM score. We use quintiles for creating RFM segmentations in Putler — our business analytics and marketing insight solution for online merchants.
Take your customer data, give a score from to R, F and M values. Using quintiles works best since it works for all businesses and adjusts according to your data. Three dimensions of R, F and M can be best plotted on a 3D chart. But working with 3D charts on paper or a computer screen is not going to work. We need something in two dimensions, something easier to depict and understand. This reduces possible combinations from to Combining F and M into one makes sense because both are related to how much the customer is buying.
R on the other axis gives us quick peek into re-engagement levels with customer. Consider a subscription business for example. The customer is equally important in both cases. And our approach of combining frequency and monetary scores gives them equal importance in our RFM analysis. Understanding 50 elements can still be tedious. So we can summarize our analysis into 11 segments to understand our customers better. Giving a distinct color to each segment will allow easier recall.
And if we select colors for wisely, our pictorial representation of RFM will be much easier to share and understand. With increasing focus on customer relationship management CRM , RFM has become an integral part of marketing and business analytics.
They also have a sample Excel file that you can use. But this note is from and may need updates. R and Python are popular for statistical and business analytics. If you have your own data science team, it would be best to create a custom RFM model for your business using your existing tools. RetentionGrid is a software service specialized in RFM analysis.
Putler provides comprehensive RFM analysis, and gives you many other business analytics and reporting tools. Putler also gives you detailed reports on a whole lot of other things — sales, products and visitors.
RFM analysis in Putler is available in the customer dashboard. Putler offers a free 14 days trial. You can connect different data sources to Putler and get complete RFM segmentation done for free! Many people have extended the RFM segmentation model and created variations. You can perform RFM for your entire customer base, or just a subset. For example, you may first segment customers based on geographical area or other demographics, and then by RFM for historical, transaction based behaviour segments.
Marketers have used RFM based segmentation to optimize their return on investment on marketing campaigns for years. This is typically done by sending targeted messages to those 11 segments we discussed earlier — or any other custom segmentation that situation demands.
The big brands have this down to a T, and the little guys are just waking up to the power behind having a laser-focused strategy — laser-focused on user segmentation.
Neil Patel on how user segmentation works in content marketing. Then run an automatic drip campaign on each segment. If possible, automate moving people between segmented lists as they move from one RFM segment to another.
You can further segment based on open and click rates, and products purchased. This gives you laser focused, highly relevant market segments. This strategy drastically improves results. Invert sugar and sugar syrups, for example, are marketed to food manufacturers where they are used in the production of conserves, chocolate, and baked goods.
Sugars marketed to consumers appeal to different usage segments — refined sugar is primarily for use on the table, while caster sugar and icing sugar are primarily designed for use in home-baked goods. A number of factors are likely to affect a company's segmentation strategy: The process of segmenting the market is deceptively simple.
Seven basic steps describe the entire process including segmentation, targeting, and positioning. In practice, however, the task can be very laborious since it involves poring overloads of data, and requires a great deal of skill in analysis, interpretation and some judgment.
Targeting comprises an evaluation of each segment's attractiveness and selection of the segments to be targeted. Positioning comprises the identification of optimal position and development of the marketing program. The market for a given product or service known as the market potential or the total addressable market TAM.
Given that this is the market to be segmented, the market analyst should begin by identifying the size of the potential market. For existing products and services, estimating the size and value of the market potential is relatively straightforward. However, estimating the market potential can be very challenging when a product or service is totally new to the market and no historical data on which to base forecasts exists. A basic approach is to first assess the size of the broad population, then estimate the percentage likely to use the product or service and finally to estimate the revenue potential.
Another approach is to use historical analogy. To support this type of analysis, data for household penetration of TV, Radio, PCs, and other communications technologies is readily available from government statistics departments.
Finding useful analogies can be challenging because every market is unique. However, analogous product adoption and growth rates can provide the analyst with benchmark estimates, and can be used to cross-validate other methods that might be used to forecast sales or market size.
A more robust technique for estimating the market potential is known as the Bass diffusion model , the equation for which follows: The major challenge with the Bass model is estimating the parameters for p and q. However, the Bass model has been so widely used in empirical studies that the values of p and q for more than 50 consumer and industrial categories have been determined and are widely published in tables.
A major step in the segmentation process is the selection of a suitable base. In this step, marketers are looking for a means of achieving internal homogeneity similarity within the segments , and external heterogeneity differences between segments. In addition, the segmentation approach must yield segments that are meaningful for the specific marketing problem or situation. For example, a person's hair color may be a relevant base for a shampoo manufacturer, but it would not be relevant for a seller of financial services.
Selecting the right base requires a good deal of thought and a basic understanding of the market to be segmented. In reality, marketers can segment the market using any base or variable provided that it is identifiable, substantial, responsive, actionable and stable.
For example, although dress size is not a standard base for segmenting a market, some fashion houses have successfully segmented the market using women's dress size as a variable. Marketers normally select a single base for the segmentation analysis, although, some bases can be combined into a single segmentation with care.
For example, geographics and demographics are often combined, but other bases are rarely combined. Given that psychographics includes demographic variables such as age, gender, and income as well as attitudinal and behavioural variables, it makes little logical sense to combine psychographics with demographics or other bases.
Any attempt to use combined bases needs careful consideration and a logical foundation. Based on Wikiversity, Marketing [E-Book], c. The following sections provide a detailed description of the most common forms of consumer market segmentation. Geographic segmentation divides markets according to geographic criteria.
In practice, markets can be segmented as broadly as continents and as narrowly as neighborhoods or postal codes. The geo-cluster approach also called geodemographic segmentation combines demographic data with geographic data to create richer, more detailed profiles.
They classify residential regions or postcodes on the basis of census and lifestyle characteristics obtained from a wide range of sources. This allows the segmentation of a population into smaller groups defined by individual characteristics such as demographic, socio-economic or other shared socio-demographic characteristics.
Geographic segmentation may be considered the first step in international marketing, where marketers must decide whether to adapt their existing products and marketing programs for the unique needs of distinct geographic markets. Tourism Marketing Boards often segment international visitors based on their country of origin.
A number of proprietary geo-demographic packages are available for commercial use. Geographic segmentation is widely used in direct marketing campaigns to identify areas which are potential candidates for personal selling, letter-box distribution or direct mail. Geo-cluster segmentation is widely used by Governments and public sector departments such as urban planning, health authorities, police, criminal justice departments, telecommunications and public utility organisations such as water boards.
Segmentation according to demography is based on consumer- demographic variables such as age, income, family size, socio-economic status, etc. Typical demographic variables and their descriptors are as follows:. The use of multiple segmentation variables normally requires analysis of databases using sophisticated statistical techniques such as cluster analysis or principal components analysis.
It should be noted that these types of analysis require very large sample sizes. However, data-collection is expensive for individual firms. For this reason, many companies purchase data from commercial market research firms, many of whom develop proprietary software to interrogate the data.
The labels applied to some of the more popular demographic segments began to enter the popular lexicon in the s. Psychographic segmentation, which is sometimes called psychometric or lifestyle segmentation, is measured by studying the activities, interests, and opinions AIOs of customers. It considers how people spend their leisure,  and which external influences they are most responsive to and influenced by.
Psychographics is a very widely used basis for segmentation, because it enables marketers to identify tightly defined market segments and better understand consumer motivations for product or brand choice. While many of these proprietary psychographic segmentation analyses are well-known, the majority of studies based on psychographics are custom designed.
That is, the segments are developed for individual products at a specific time. One common thread among psychographic segmentation studies is that they use quirky names to describe the segments. Behavioural segmentation divides consumers into groups according to their observed behaviours.
Many marketers believe that behavioural variables are superior to demographics and geographics for building market segments  and some analysts have suggested that behavioural segmentation is killing off demographics.
Note that these descriptors are merely commonly used examples. Marketers customise the variable and descriptors for both local conditions and for specific applications. For example, in the health industry, planners often segment broad markets according to 'health consciousness' and identify low, moderate and highly health conscious segments.
This is an applied example of behavioural segmentation, using attitude to product or service as a key descriptor or variable which has been customised for the specific application. Purchase or usage occasion segmentation focuses on analyzing occasions when consumers might purchase or consume a product.
Unlike traditional segmentation models, this approach assigns more than one segment to each unique customer, depending on the current circumstances they are under. The benefits sought by purchasers sometimes called needs-based segmentation divides markets into distinct needs, perceived value, benefits sought or advantage that accrues from the purchase of a product or service.
Marketers using benefit-sought segmentation might develop products with different quality levels, performance, customer service, special features or any other meaningful benefit and pitch different products at each of the segments identified. Benefit segmentation is one of the more commonly used approaches to segmentation and is widely used in many consumer markets including motor vehicles, fashion and clothing, furniture, consumer electronics, and holiday-makers.
Loker and Purdue, for example, used benefit segmentation to segment the pleasure holiday travel market. The segments identified in this study were the naturalists, pure excitement seekers, escapists.
Attitudinal segmentation provides insight into the mindset of customers, especially the attitudes and beliefs that drive consumer decision-making and behaviour.
An example of attitudinal segmentation comes from the UK's Department of Environment which segmented the British population into six segments, based on attitudes that drive behaviour relating to environmental protection: In addition to geographics, demographics, psychographics and behavioural bases, marketers occasionally turn to other means of segmenting the market, or to develop segment profiles. A generation is defined as "a cohort of people born within a similar span of time 15 years at the upper end who share a comparable age and life stage and who were shaped by a particular span of time events, trends, and developments.
Generational segmentation assumes that people's values and attitudes are shaped by the key events that occurred during their lives and that these attitudes translate into product and brand preferences.
Demographers, studying population change, disagree about precise dates for each generation. For example, in Australia the post-war population boom peaked in ,  while the peak occurred somewhat later in the USA and Europe,  with most estimates converging on Accordingly, Australian Boomers are normally defined as those born between —; while American and European Boomers are normally defined as those born between — Thus, the generational segments and their dates discussed here must be taken as approximations only.
The primary generational segments identified by marketers are: Cultural segmentation is used to classify markets according to cultural origin.
Culture is a major dimension of consumer behaviour and can be used to enhance customer insight and as a component of predictive models. Cultural segmentation enables appropriate communications to be crafted to particular cultural communities.
Cultural segmentation can be applied to existing customer data to measure market penetration in key cultural segments by product, brand, channel as well as traditional measures of recency, frequency, and monetary value.
These benchmarks form an important evidence-base to guide strategic direction and tactical campaign activity, allowing engagement trends to be monitored over time. Cultural segmentation can also be mapped according to state, region, suburb, and neighborhood. This provides a geographical market view of population proportions and may be of benefit in selecting appropriately located premises, determining territory boundaries and local marketing activities.
Census data is a valuable source of cultural data but cannot meaningfully be applied to individuals. Name analysis onomastics is the most reliable and efficient means of describing the cultural origin of individuals.
The extent of name data coverage means a user will code a minimum of 99 percent of individuals with their most likely ancestral origin. Online market segmentation is similar to the traditional approaches in that the segments should be identifiable, substantial, accessible, stable, differentiable and actionable.
The segments differ regarding four customers' behaviours, namely: For example, Simplifiers make over 50 percent of all online transactions.
Their main characteristic is that they need easy one-click access to information and products as well as easy and quickly available service regarding products. They also 'dislike unsolicited e-mail, uninviting chat rooms, pop-up windows intended to encourage impulse buys, and other features that complicate their on- and off-line experience'.
Surfers like to spend a lot of time online, thus companies must have a variety of products to offer and constant update, Bargainers are looking for the best price, Connectors like to relate to others, Routiners want content and Sportsters like sport and entertainment sites. Another major decision in developing the segmentation strategy is the selection of market segments that will become the focus of special attention known as target markets.
The marketer faces a number of important decisions:. When a marketer enters more than one market, the segments are often labeled the primary target market , secondary target market. The primary market is the target market selected as the main focus of marketing activities. The secondary target market is likely to be a segment that is not as large as the primary market, but has growth potential.
Alternatively, the secondary target group might consist of a small number of purchasers that account for a relatively high proportion of sales volume perhaps due to purchase value or purchase frequency. In terms of evaluating markets, three core considerations are essential: There are no formulas for evaluating the attractiveness of market segments and a good deal of judgment must be exercised.
The following lists a series of questions that can be asked. When the segments have been determined and separate offers developed for each of the core segments, the marketer's next task is to design a marketing program also known as the marketing mix that will resonate with the target market or markets.
Developing the marketing program requires a deep knowledge of key market segment's purchasing habits, their preferred retail outlet, their media habits and their price sensitivity. The marketing program for each brand or product should be based on the understanding of the target market or target markets revealed in the market profile.
Positioning refers to decisions about how to present the offer in a way that resonates with the target market. During the research and analysis that forms the central part of segmentation and targeting, the marketer will have gained insights into what motivates consumers to purchase a product or brand. These insights will form part of the positioning strategy. The goal is to locate the brand in the minds of consumers to maximise the potential benefit to the firm. The technique known as perceptual mapping is often used to understand consumers' mental representations of brands within a given category.
Traditionally two variables often, but not necessarily, price and quality are used to construct the map.
Market Segmentation. The division of a market into different homogeneous groups of consumers is known as market segmentation.. Rather than offer the same marketing mix to vastly different customers, market segmentation makes it possible for firms to tailor the marketing mix for specific target markets, thus better satisfying customer needs. Not all elements of the marketing .
Marketing > Segmentation. Market Segmentation. Market segmentation is the identification of portions of the market that are different from one another. Segmentation allows the firm to better satisfy the needs of its potential customers.
Market segmentation assumes that different market segments require different marketing programs – that is, different offers, prices, promotion, distribution or some combination of marketing variables. Customer Segmentation is the subdivision of a market into discrete customer groups that share similar characteristics. Customer Segmentation can be a powerful means to identify unmet customer needs. Companies that identify underserved segments can then outperform the competition by developing.
Customer segmentation is the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing, such as age, gender, interests and spending habits. Customer segmentation, also called consumer segmentation or client segmentation, procedures. Customer segmentation enables businesses to create messages that will resonate deeply with particular audiences by dividing consumers into niche groups.