Recenty-Frequency-Monetary (RFM) Analysis

Upscale specialty catalog retailer with a mix of “staple” items and seasonal, trendier items, using accumulated purchase history to increase the effectiveness and efficiency of marketing expenditures.

Recency: how long ago the customer last made a purchase

Frequency: how many purchases the customer has made

Monetary: how much each customer has spent in total

PHASE 1: Business Task

  1. Conduct RFM analysis to assess the effectiveness of a customer targeting performance

  2. Draw cummulative profit, lift, and gains charts

PHASE 2: Prepare

Key tasks

  1. Download data and store it appropriately.
  2. Identify how it’s organized.
  3. Sort and filter the data.

PHASE 3: Process

Key tasks

  1. Calculate total number of customers who receive the catalogs and the number of buyers
  2. Calculate the average response rate
  3. Calculate the response rate, lift, gain, and profit per cell

PHASE 4: Analyze

Key Tasks

  1. What is the profit, lift, and gain if we only target the cells with response rate > 1.94?

  2. Calculate the cumulative lift, gain, and profit per cell in order to evaluate the performance of targeting.

The average response rate if 2.45%, if we only target customers with a response rate of 1.94% and above our response rate increases to 3.35%. Similary If we only target the cells with a reponse rate of 1.94% or higher our profit increases by $12,088.72. The lift for this group as measured by dividing the response rate by the average response rate is 36% and we gain 73 customers.

## # A tibble: 1 x 1
##   count
##   <int>
## 1    69

PHASE 5: Share

Key Tasks:

  1. Determine the best way to share your findings.
  2. Create effective data visualizations.
  3. Present your findings.
  4. Ensure your work is accessible.

Key Takeaways

  • The top 10% of customers make 51% of profits, top 25% make 80% of profits
  • If we target the top 50% of customers we get 75% of the buyers we would get if we target the entire sample (gain)
  • If we target the top 10% of customers by response rate our response rate will be 5.83% and we capture 23% of the buyers (gain) that we would get if we target the entire sample.
  • If we target the top 10% percentile our lift in buyers is 2.37 times the sample.
  • Profit starts to decline at the 50th percentile