Understanding the RFM Calculation

Your customers do not all contribute to your business in the same way. The RFM Analysis helps you understand customer quality by scoring each customer based on three key factors: Recency, Frequency, and Monetary Value.

• Recency (R): How many days have passed since the customer's last purchase

• Frequency (F): How many purchases the customer has placed

• Monetary Value (M): How much net revenue the customer has generated

Together, these factors provide a strong indication of customer behavior and value. Frequency and Monetary Value help identify customers with high lifetime value, while Recency indicates how recently a customer engaged with your brand through a purchase. Let's see how the RFM Analysis is conducted!

Step 1: Calculate the data per customer

First, RetentionX calculates the three RFM factors for each customer: how many days have passed since their last order, how many orders they have placed, and how much net revenue they have generated.

In the example below, we look at twelve customers, C1–C12:

Step 2: Score each customer by factor

Next, each customer is ranked separately for Recency, Frequency, and Monetary Value. For each factor, customers are split into four equally sized groups, also called quartiles. Each customer then receives a score from 1 to 4.

A score of 1 is always the strongest score. For Recency, this means the customer purchased most recently. For Frequency and Monetary Value, it means the customer placed the most orders or generated the highest net revenue.

Let's start with Recency. Customers are sorted by their most recent purchase first. In our example, the top 25% of customers, C7, C2, and C10, receive a recency score of 1. The next 25%, C8, C11, and C1, receive a score of 2, and so on. 

The same logic is then applied to Frequency and Monetary Value. For Frequency, the customers with the most orders, C2, C7, and C4, receive a score of 1. For Monetary Value, the customers with the highest net revenue, C2, C4, and C7, receive a score of 1.

Step 3: Combine the scores into one RFM score

Once each factor has been scored, the three individual scores are combined into one three-digit RFM score. The first digit represents Recency, the second digit represents Frequency, and the third digit represents Monetary Value.

For example, customer C2 receives a recency score of 1, a frequency score of 1, and a monetary value score of 1. Combined, this results in an RFM score of 111.

Lower scores indicate stronger customer quality. A score of 111 represents your most recent, most frequent, and highest-value customers, like C2 and C7 in our example. A score of 444 represents customers who have not purchased in a long time, order rarely, and generate comparatively low revenue.

Since each factor can receive a score from 1 to 4, up to 64 different RFM combinations are possible. RetentionX groups these scores into actionable customer segments, so you can quickly identify which customers to prioritize and how to approach them.

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