How to identify and restore inactive customers using RFM segmentation
Guess what? Earning a customer is extremely hard, so it’s better to attempt to keep the existing ones around by all means. The moment inactive customers are about to leave you for good is your last chance to get them back. It may not work but it worth a try. But how on earth can you say they are “about to leave”? This is where RFM segmentation comes into play.
Who are your inactive customers
Essentially, inactive customers are those who have not had interactions with your brand for quite some time. This interaction can be a product purchase or clicking your marketing emails. In the e-commerce space, there could be a combination of multiple factors that indicate an inactive customer. For example, a customer who is still around but won’t make purchases might be considered “inactive.” Nevertheless, you must employ a variety of factors to define your inactive customers more accurately.
Why should you care?
In short, it’s much easier to sell to existing customers than new ones. And here are some statistics to prove that: According to Marketing Sherpa, you lose about 22.5% of your subscribers each year. Based on Adobe, 40% of your revenue comes from repeat customers. In fact, as the book Marketing Metrics suggests, businesses have a 60% to 70% chance of selling to an existing customer while the probability of selling to a new prospect is only 5% to 20%.
It certainly requires less effort to turn an inactive customer who has already done business with you than acquiring a new one. However, in spite of all this clear evidence and our own common sense, many businesses continue following the traditional marketing traits that suggest finding new customers is the ultimate goal.
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What is RFM segmentation and how it helps
RFM segmentation is a data-driven tool that groups your customers based on their purchase behaviors. RFM stands for Recency, Frequency, and Monetary values. In general, those customers with the lowest score on all of these metrics are considered inactive customers. However, as the definition of inactive customers varies from business to business, you can prioritize any of those RFM metrics over the others.
For example, from a white goods seller’s perspective, the recency metric is not as important as the monetary metric. Because people don’t buy washing machines every month of the year! However, that is not the case with a cosmetic seller. They may want more repeat purchases over a month than the higher amount of transition per customer.
How to identify the best customers using RFM segmentation
In this article, I use Growmatik as a tool to implement RFM segmentation. It’s free and simple. The cool thing about Growmatik is that it not only detects inactive customers but it also sends targeted emails to re-engage them again.
Step 1: The first of RFM metrics is recency. To sort your customers based on their recency values, open the People page and select All customers from the menu above. Now add a filter for Shopping Activity > Purchase date. Here we want to know when the last purchase was made, so choose Last time on top and then select more than x days ago.
As I explained earlier, you may want to add more filters to increase the accuracy of results. For example, in some businesses, recent site visits or email click rates are better indicators to reveal the user’s engagement. In this case, you can use Site activity > Visit date. Similarly, you can use the Subscription > Email clicked on.
Pick whichever filter works best for your business. Just make sure to select the Last time option for each filter since we are interested in figuring out the user’s latest interaction.
Step 2: To reveal the frequency of purchases, filter for Shopping Activity > Number of orders > less than x.
Just like recency, we can use other filters such as the Number of clicked emails or total visits to add more dimension to our selection.
Step 3: Lastly, you should sort your customers based on their monetary status. Order value is a good metric for this purpose. Choose Shopping Activity > Order value > less than x.
Step 4: Now you have successfully identified your inactive customers. If the number of filtered customers is too small or too big, try to adjust the values until you can reach a reasonable balance. When you are happy with the result, save your segment so that you can use it later.
How to retain inactive customers
Identifying and segmenting inactive customers is the first step towards a successful reactivation campaign. With this data at hand, you can create tailored marketing campaigns and reach out to inactive customers with personalized messages and offers. This article includes some interesting tactics and good practices.
Reach out and ask for feedback
This one is the most straightforward and effective method sometimes. With the list of inactive customers you’ve created with their email addresses, you can send a message asking them what happened and how you can bring them back into the loop again. This direct and honest way of reaching out will catch many people off guard, however many of your customers will appreciate that you took the effort to meet their needs.
Personalized win-back offers
It’s true that everyone likes to be galvanized with a bit of incentive. A small reward could make a difference while we make decisions. As long as your business can afford to, you should offer a discount to reengage with an inactive customer. The discount could boost email open rate and click-throughs – it could even lead to sales from customers you didn’t expect to buy from you. It’s better to use a personalized tone in these messages. Tools like Growmatik, are capable of creating and sending highly personalized emails.
Remind them your values
Keep in mind that a user subscribes to your business because they already like what you have to offer. And you should remind them of this. No matter what type of business you have – providing services, products or content – you’ve already promised a certain value. Inactive customers might have forgotten about that promise, so it’s a great idea to reach out to them again to explain the value you can bring to their lives. Note that it’s important not to be overly pushy and to employ a bit of humor in your message. A short and sweet “miss you” message can even go a long way.
Use FOMO (fear of missing out)
By now, you might have heard of FOMO, or “fear of missing out.” If you haven’t, FOMO is the basic human desire to stay connected and experience what everyone else is experiencing. You can use this to your advantage by stoking a sense of curiosity in your inactive users by talking about the latest news of your business or anything else that might have happened while they were gone. This is a surefire way to capture their attention and boost the chances that they’ll click on the link in your email.
Reward program (Gamification)
Gamification is an excellent way to re-engage your inactive customers. Through using gamification, you can let your customers feel that they are working their way up a rewards program with each visit and purchase. Connect with their inner child and perhaps provide them with a title and to up the stakes, offer a prize for each milestone that they reach. This prize could be coupon or discount or even something else small related to your brand.
The coolest thing about using RFM segmentation in Growmatik to identify your inactive customers is that it never becomes out-dated. Since every customer’s profile data are constantly updated in Growmatik, the changes are reflected on all RFM segments you have created before. This ensures an always-fresh list of inactive customers and if connected to an automated reactivation campaign, you can be sure to lose the minimum number of customers with the least cost and human intervention possible.
Lastly, keep in mind that not every customer churn happens because of the lack of well-planned re-activation campaigns. Sometimes, there are other reasons that are not necessarily related to the way you handle your marketing. Poor customer service, flawed products, troubled business models, etc. can all be the reasons your customers are slipping. The good news, though, is that this can be easily figured out with a healthy feedback loop.