RFM Analysis
RFM is a traditional approach to analyzing customer behavior in the retailing industry; the initials stand for recency, frequency, and monetary analysis. This type of analysis divides customers into groups, based on how recently they have made a purchase, how frequently they make purchases, and how much money they have spent. RFM analysis has its roots in techniques going back to the 1960s and 1970s—when retailers and cataloguers first had access to digital computers.
The purpose of discussing RFM is not to encourage its use, because there are many ways of modeling customers for marketing efforts. RFM is worthwhile for other reasons. First, it is based on simple ideas that are applicable to many different industries and situations. Second, it is an opportunity to see how these ideas can be translated into useful technical measures that, in turn, can be calculated using SQL and Excel. Third, RFM introduces the idea of scoring customers by placing them in RFM cells,...