Using Rfm Data to Optimize Direct Marketing Campaigns: A Linear Programming Approach

By Asllani, Arben; Halstead, Diane | Academy of Marketing Studies Journal, July 1, 2011 | Go to article overview

Using Rfm Data to Optimize Direct Marketing Campaigns: A Linear Programming Approach


Asllani, Arben, Halstead, Diane, Academy of Marketing Studies Journal


ABSTRACT

The direct marketing framework that incorporates the recency, frequency, and monetary value (RFM) of customers' previous purchases is a useful analytical tool for companies that want to fine-tune their market segmentation strategies, design more effective database programs, improve customer relationship management, and allocate marketing resources more efficiently. The current research offers an optimization model that helps determine whether a company should continue or curtail its marketing spending on select customer segments given various budget constraints. The proposed linear programming model identifies the customer segments (based on RFM profile) that should be targeted in order to maximize profitability. At the same time, the method helps identify those RFM segments which are not worthy of pursuing either due to unprofitability or due to an insufficient campaign budget. The model is illustrated with a numerical example.

Keywords: RFM; direct marketing; linear programming; customer lifetime value

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

An organization's long-term viability requires a focus on the profitability of each customer within that organization (Forbes, 2007). Customer lifetime value (CLV), the net present value of cash flows expected during a customer's tenure with a firm, can therefore be a valuable marketing metric to evaluate (Blattberg, Malthouse, & Neslin, 2009; Pfeifer & Carraway, 2000; Venkatesan, Kumar, & Bohling 2007). CLV is also often used as the basis of customer relationship management (CRM) decisions, including service level delivery (Zeithaml, Bitner, & Gremler, 2009; Zeithaml, Rust, & Lemon, 2001; Jackson, 2007). For example, customer profitability might be used to determine whether a service policy exception is made for a key account or whether a credit card customer's credit limit or interest rates are increased (Aeron, Bhaskar, Sundararajan, Kumar, & Moorthy, 2008). At its core, CLV guides a firm's acquisition and retention strategies (Blattberg et al., 2009).

Estimating CLV accurately can be difficult, however, and is sometimes beyond the ability of many firms (Stahl, Matzler, & Hinterhuber, 2003; Vogel, Evanschitzky, & Ramaseshan, 2008). Even the predictions of the winning model from a recent CLV modeling competition were inaccurate by more than 500 percent, for example (Blattberg et al., 2009). An approach is needed, therefore, that allows fairly simple prediction of a customer's long-term profitability potential while simultaneously providing marketers with effective CRM decision input.

One variant of the CLV estimation models is the RFM framework used in direct marketing in which the probability of customers' future purchases is based on the recency (R), frequency (F), and monetary value (M) of their previous transactions. These RFM probabilities are then used to categorize customers according to their profit potential. Customers with the highest profit potential would then be the possible targets of a company's direct marketing campaign. The RFM approach offers a potential solution to the problems associated with predicting CLV and gives direct marketers input on customer profitability and relationship management issues.

The research presented here offers a linear programming (LP) approach that combines data provided by RFM analysis alongside budgeting data for a given campaign. The model can help direct marketers determine whether to continue or curtail their relationship with a given RFM customer segment. A novel characteristic of this model is the budget constraints. Theoretically, when a company has an unlimited marketing budget, managers can afford to reach all their customers, even those who have low RFM scores. This approach would minimize Type I error, which occurs when a company does not contact a customer who could have potentially provided additional revenue and profits. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Using Rfm Data to Optimize Direct Marketing Campaigns: A Linear Programming Approach
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.