SMART BLAST

Of all resources at your disposal, your own customer database may be the most valuable. And yet so many companies neglect to tap into it, either from disbelief or they simply don’t know how.

Without experience or the right tools, digging into this can be overwhelming. What do you look for? Where do you start?

One of the first things we often recommend doing is segmenting your file. Several methods exist, but an RFM (recency, frequency, monetary) analysis is one of the old workhorses and where you should begin if you haven’t segmented much of your customer file.

So how does it work?

An RFM analysis looks at customer transactions three different ways: by date (most recent to oldest), by number (frequency of transactions) and by monetary value (total spending). It’s based on the idea that the best predictor of future behavior is past behavior.

The most common method involves breaking the data into quintiles (blocks of 20%). Customers in each quintile are coded 1-5 based on where they fall along the scale of activity in that particular measurement.

You can use the resulting segments in different ways. One way is to focus resources on your best customers and spend less money on the bottom 20%. But take this with caution -- marketers have to be careful not to overwhelm their top customers or target those who’ve figured out a way to manipulate the system. Best Buy made headlines in 2004 when they instituted a program to do just that.

Marketers also shouldn’t neglect or ignore the bottom 20%, but instead focus on developing them into better customers.

RFM indexing is just one segmentation tool that can give you a good descriptive start if you’ve never really utilized your customer database. It can be even more effective and valuable if you use it in conjunction with other methods and information.

The key is to start thinking about your house file as a collection of different groups and not a single organism.