Kevin Hillstrom wrote a great piece on the impact of purchase price on lifetime value, and I thought I'd pick up on that thread. Direct marketers know that most sophisticated "scoring" systems for ranking the value of customers are based on "RFM" modeling. Studying data carefully for the last, oh 50 years, has taught the direct mailers that likelihood to purchase is best predicted by three variables:
- Recency: The more recent the customer's last purchase the more likely they are to purchase again. This is a bit counter-intuitive at first blush; one might naturally assume that someone who just made a purchase is less likely to return than someone who hasn't bought in a while, but the data says otherwise. The underlying reason likely relates to some combination of the following:
- the recent customer feels relatively flush with cash at that time or they wouldn't have made the last purchase
- the recent customer just had a good experience with your brand (hopefully) so you are top of mind with them in that category at the moment; and
- the recent customer is less likely to have loss a job, their life, or found a competitor of yours that they prefer.
- Frequency: the number of times the customer bought from you in the past. The more frequent, the more valuable.
- Money spent: how much did they spend on their most recent purchase? Customers who spend little on the first purchase tend to always spend less and vice versa. The big spenders are the most valuable.
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