The Direct Marketing industry is prototypical for relationship marketing
and was historically the first to build on a direct customer relationship.
Recency
Frequency
Monetary
Segments
in the
Home List
R4FM
R3FM
R2FM
R1FM
Mechanics of Direct Marketing
Home
List Mailing Lists
Rental Lists
Recency, Frequency and Monetary (RFM) are largely used segmentation criteria
in direct marketing and catalogue sales.
We have suggested several RFM segmentation methodologies from simple
ones based only on purchase history data to more complex ones including
explanatory variables and integrating Survival Analysis.
A recent model of direct marketing has been
adapted by us in order to reflect the mechanics of relationship marketing.
The ideea behind the direct marketing model, that can be generalised
to relationship marketing communications, is that a well qualified customer
database (home list) is an asset that can be profitably managed. Creating
a home list is a costly investment. Companies must buy (from the data base
market) lists (rental lists) of potential customers that usually
have low order response rates, meaning that mailing and communication costs
are higher than returns from orders received. Respondents from rental lists
become customers and are included on the house list. House lists have much
higher response rates than rental lists. Response is stimulated by specific
direct marketing techniques. Recency, Frequency and Monetary (RFM) criteria
are used to obtain segments ordered by their probable response rate. If
a customer does not respond to a mailing campaign his response probability
in future campaigns is assumed to reduce and his recency category is increased.
When the house list becomes big enough it returns enough gains to compensate
the losses generated by the aquisition of rental lists. Aquiring rental
list, although costly, remains important in order to renew the house list
by replacing low return RFM customer segments with new entrants.
