Segmenting Customers
You have a wide variety of different types of customers in a shoe store. Breaking them into types helps you understand how to work toward a goal of optimizing the value of building your clientele.
Segmenting Customers: The RFM Model
To understand what percentage of customers can be considered loyal versus occasional, retailers can use the RFM model:
1. Recency (R): How recently a customer made a purchase.
2. Frequency (F): How often a customer makes a purchase.
3. Monetary Value (M): How much money a customer spends on purchases.
Implementation of the RFM Model
1. Data Collection: Gather data on customer transactions, including purchase dates, frequency of purchases, and the monetary value of each transaction.
2. Scoring: Assign scores to each customer for recency, frequency, and monetary value. For example, score each customer on a scale of 1 to 5 (where 5 is the best score).
Segmentation: Combine these scores to categorize customers into segments. For instance:
o Champions: High scores in recency, frequency, and monetary value. These are your most loyal and valuable customers.
o Loyal Customers: High frequency and monetary value but may not be the most recent buyers.
o Potential Loyalists: Recent and frequent buyers but lower spending.
o Occasional Customers: Moderate scores across all three dimensions, making occasional purchases.
o At-Risk Customers: Customers who haven't bought in a while and whose frequency and monetary scores are moderate to low.
o Lost Customers: Low scores in recency, frequency, and monetary value.
Benefits of RFM Segmentation
· Targeted Marketing: Tailor marketing efforts based on customer segments. For example, offer special promotions to at-risk customers to win them back or provide exclusive offers to loyal customers to maintain their loyalty.
· Resource Allocation: Allocate resources effectively by focusing on high-value customer segments.
· Customer Retention: Develop strategies to improve retention rates for valuable customer segments.
So, let me be clear here… the goal is to create as many loyal customers as possible. Focusing on keeping your At-Risk Customers is one step. Turning occasional customers into Loyal Customers is another. Making Loyal Customers into Champions is the ultimate goal.