- Category: September 2011
RFM is a method used for analyzing customer behavior and defining market segments and stands for:
- Recency - How recently has a customer purchased?
- Frequency - How often does he purchase?
- Monetary Value - How much does she spend?
To create a RFM analysis, categories for each attribute have to be created - for instance, the Recency attribute might be broken into three categories: customers with purchases within the last 90 days; between 91 and 365 days; and longer than 365 days. Once each of the attributes has appropriate categories defined, segments are created from the intersection of the values. If there were three categories for each attribute, then the resulting matrix would have twenty-seven possible combinations (one well-known commercial approach uses five bins per attribute, which yields 125 segments).
Companies may also decide to collapse certain sub-segments, if the gradations appear too small to be useful. The resulting segments can be ordered from most valuable (highest recency, frequency, and value) to least valuable (lowest recency, frequency, and value).
Identifying the most valuable RFM segments can capitalize on chance relationships in the data used for this analysis. For this reason, it is highly recommended that another set of data be used to validate the results of the RFM segmentation process.
Advocates of this technique point out that it has the virtue of simplicity: no specialized statistical software is required, and the results are readily understood by business people. In the absence of other targeting techniques, it can provide a lift in response rates for promotions.
Critics take issue on several points:
- First, the method is descriptive only and does not provide a mechanism to forecast behavior as a predictive model might.
- Second, when used to target customers for promotion, it assumes that customers are likely to continue behaving in the same manner and does not take into account the impact of life stage or life cycle transitions on likelihood of response.
- Finally, when used as the primary targeting method, it may lead to over-marketing to the most attractive RFM segments and to neglect those that would be profitable if developed properly.
Handshaking
Handshaking is a technique of communication between two entities that makes it possible to connect relatively heterogeneous systems or equipment over a communication channel without the need for human intervention to set parameters. One classic example of handshaking is that of modems, which typically negotiate communication parameters for a brief period when a connection is first established, and thereafter use those parameters to provide optimal information transfer over the channel as a function of its quality and capacity. The "squealing" (which is actually a sound that changes in pitch 100 times every second) noises made by some modems with speaker output immediately after a connection is established are in fact the sounds of modems at both ends engaging in a handshaking procedure; once the procedure is completed, the speaker might be silenced, depending on the settings of the operating system or the application controlling the modem.
In information technology, telecommunications, and related fields, handshaking can be used to negotiate parameters that are acceptable to equipment and systems at both ends of the communication channel, including, but not limited to, information transfer rate, coding alphabet, parity, interrupt procedure, and other protocol or hardware features. When a computer is about to communicate with another device like a modem, printer, or network server, it simply needs a handshake first before establishing a connection and starting the communication.
Source: Wikipedia
