The RFM Principle - Lifetime Customer Value
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The RFM principle stands for Recency, Frequency, and Monetary Value. Using these three principles you can develop your customer lifetime value, or simply, how important the purchase patterns of each customer are to your business. This is achieved by monitoring their purchases over time and selecting a weighting factor for each of these areas.
By using the RFM principle you can clearly see which customers are the most important to your business, based on the relevance that you select. Many businesses just concentrate on the big money customers, and their focus is on the purchasers of volume products.
Whilst this is a reasonable approach, the facts are that these are by far the most vulnerable group of customers to your business. Some of these customers may buy big and not very often, which means they could be ripe pickings for your competitors, when time is right, and when you least expect it!
The RFM principle helps you focus on those customers that have purchased Recently, Frequently, and by the Monetary Value of the purchase. You set your own parameters for the monitoring of the purchasing patterns of your customers and then you can clearly see the true lifetime value of each of these customers.