E-World is an online electronics retailer. It has a vast group of customers. To understand and segment their customers, they consider using RFM. They pick a sample of 62,500 of their customers, which is a good representation of their whole customer base. They pulled their record of Recency, Frequency and Monetary for the past 100 days, and start the analysis.
Q1: To get you familiar with the RFM approach, we obtain a subset of 1,000 customers with customer Index 1-1000 (in Sheet “Group”). Please use the steps introduced in class to get RFM groups. Then report the customer index for the following groups: 512, 451, 345, 234, and 123.
Note: Instead of using 1 as the best group, we use 5 as the code for the most favorite group and 1 as the least favorite group.
Q2: Using the 62,500 subjects in the pool, E-World marketing specialist summarized different RFM groups’ hit-rate (so called buying rating/response rate) for the new product DIVO (Sheet HitRate), which is sold for $72. To direct-market the product to each consumer, the marketing cost is $5 per person. Product gross margin is 50%.
a) Please sort the data and list the 10 RFM groups with the highest hit rate
b) If the firm decides to market to every of the 62,500 customers, what is the gross profit/loss
c) Using the hit-rate information, please make the recommendation and list the profitable RFM groups.
d) If the firm chose to only market to these profitable groups, what is the gross profit/loss
e) Comment on the effectiveness of RFM