OBJECTIVE
Estimate
the lifetime value of a customer or group of customers.
DESCRIPTION
This is probably the simplest model
for the estimation of customers’ value. In spite of its simplicity, it is also famous
for its reliability, which is based on three variables:
- - Recency: the more recent the purchase or interaction, the more inclined the client is to accept another interaction;
- - Frequency: the more times a customer purchases, the more valuable he or she is to the company;
- - Monetary value: the total value of a customer also depends on the amount spent in a given period.
Customers’ Value Calculated by an RFM Model
Usually,
these three variables are transformed into comparable indicators (for example into
a “0 to 1” indicator) and summed up to obtain a total value indicator. We can
also define different weights for each indicator.
TEMPLATE
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