Before diving into customer lifetime value (CLV), it’s important to understand the key elements of customer value analysis: recency, frequency, and monetary value (RFM).

RFM is a method used to categorize customers from least to most valuable based on the following factors:

By segmenting customers based on RFM, you can evaluate different customer groups and identify those with the highest CLV.

To apply RFM, gather three pieces of data for each customer: the date of their most recent purchase, the number of purchases they’ve made within a consistent period (such as a year), and their total spending during that period.

For RFM analysis, assign each variable a score. A simple method is using a scale of 1 to 3, with 1 representing the least valuable customers and 3 representing the most valuable.

Assign each customer a score of 1 to 3 for recency, frequency, and monetary value. Think of this as a tier system: 1 for least valuable, 2 for moderately valuable, and 3 for most valuable.

When organizing your data, the bottom third of customers will receive a score of 1, the middle third a 2, and the top third a 3.

To illustrate this process, let’s look at an example spreadsheet.

Now, we’ll add up the score for each customer and list a total under RFM Score.

Sort your chart by RFM score, then group the results into three categories: highest (in yellow), middle (in blue), and lowest (in green). 

The top-scoring group represents your most valuable customer segment. Analyze this data to identify common traits among these customers, which can help you understand why they are more valuable and how to target them more effectively.

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