RFM vs. Modeling

The basic tool for circulation planning has traditionally been a classification based on three basic factors: Recency-Frequency-Monetary. Future customer revenue is predicted by recent or frequent purchases, and dollar amounts spent. Circulation planning is based on summarizing a previous promotion and targeting the groups with acceptable revenue.

Effective modeling starts with this effective approach and refines it. In addition to the recency of a purchase, modeling also factors in the type of a purchase and its affinity to the targeted offer. This process treats the frequency and dollar amount of each purchase in a similar manner - in contrast to a single count, modeling develops a multidimensional picture of the customer over time.

The season of each purchase is very important in many businesses, especially for companies that are substantially involved in selling holiday gifts. When customers order products, it creates specific parameters that can provide elements to add to the model. For instance, a company may want to look at whether a product was ordered as a gift in order to learn about its customers' purchasing inclinations in the future.

The ability of modeling to incorporate large numbers of predictors allows us to build on this foundation with additional variables such as demographics or geographic location. Location is particularly important for retailers, since the convenience of a store is always a strong predictor.

By distilling all of this data into a single prediction of revenue, the model assigns a value to each customer record, and creates a tool that planners can use to reduce advertising costs and increase revenue.

David Katz Consulting 1.800.601.0689 info@davidkatzconsulting.com