The Birth of RFM (Recency, Frequency, Monetary) – I

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The Birth of RFM (Recency, Frequency, Monetary) – I Powered By Docstoc
					The Birth of RFM (Recency, Frequency, Monetary) – I

What RFM simply stands for –

How recent was the last customer visit to the store?

How frequently does she visit the store?

What is the total monetary value of these engagements so far?

The beginning of Mail Order

During the second half of the nineteenth century, America started settling into a nation – the migration
from the cast to the west complete, the Indian and Mexican claims neutralized, and more importantly
the coming of telegraph and railways. There were two Americas then as there were two Americas in
1962 (Why this particular year? – think. J). There was the America of the big metropolitans of New York,
Chicago, Philadelphia and like, and there was the big rural heart of America in the middle.

Till the 1850s, the main retail channel in these remained the general store, though, the general stores in
the cities were larger and carried bigger and different assortment than the ones in rural America.
Moreover, the general store in the villages many a times became central to the restricted community
lives there. Old photographs show young cowboys in Stetsons lounging in the porches of these general
stores pretty similar to the way one sees now kids in low-slung pants and streaked hair lounging hands-
deep-in-the-pocket at malls.

 Two distant revolutions happened at this time. One was the beginning of the great department stores
in the big cities with pioneers like John Wanamaker of Philadelphia, Marshall Field of Chicago, and
Rowland Macy of New York bringing an incredible choice, quality and value to the urban shopper. And
not to forget the very spectacle – think Macy’s of New York! And the other was the birth of mail order
catalog.

General store in rural American town

Mail Order catalogs had two pioneers to thank for. The first was Aaron Montgomery Ward who
produced the first mail-order catalogue for his Montgomery Ward mail order business in 1872. Ward
had been a salesman travelling through the heart of America on a train and had listened to the
complaint of the rural customers that they did not have the same choice, quality and prices as their
urban counterparts because there were too many monopolists and middlemen and transport was
prohibitively expensive. He had a brain-wave, a new technique of selling to this vast untapped market
writhing for a retailer to fulfill their needs: he would sell them directly via mail. Thus he would eliminate
the intermediaries and by buying in bulk and using the railways to break this bulk across the country, he
would be far within the pockets of these customers. And so came the first catalog in 1872, an 8 by 12 in.
single-sheet price list, showing 163 articles for sale with ordering instructions.

Why would customers trust a faceless retailer absent from their immediate proximity? Think about what
Flipkart is trying to do with its ads these days – breaking prejudices about online retail. (Actually Flipkart,
Amazon, Ebay, and all the rest are modern versions of mail-order catalogs where instead of delivering
the catalog to the customers via mail, the retailers use online channel). In the same way, Ward’s
breakthrough in establishing trust in the already-weary rural customers was his “Satisfaction guaranteed
or your money back” which he started using since 1875.

By 1904, it was printing some three million catalogs, carrying about 300 pages and weighing 4 pounds
each, and directly mailing to its customers!

 Soon, Montgomery had its first credible competitor in the name of Richard Warren Sears, railroad
station agent who set a business selling watches through mail order catalogs at the ripe old age of 22.
Sears came from the heart of rural America and could think like them. It is significant that in his job, he
was in the middle of two great revolutions of transport (railways) and communication (telegraph) which
he used as essential enablers of his business model. The world was going to change and young Sears was
right in the middle of it. Think about Steve Jobs and Bill Gates in the 70s.

With an intimate understanding of his rural American customers and abundant talent for writing
promotional copy, Sears published his first catalog in 1893 and offered only watches. By 1897, the
catalog had swollen to 500 pages and offered other items such as men’s and ladies clothing, plows,
silverware, bicycles and athletic equipment, and was being sent to 300,000 homes. Such was the trust
capital he built with his customers that he started selling them mail-order homes, ready-to-assemble kit
houses, of which he sold 70,000!

The tremendous growth these businesses witnessed meant that they had tapped into a scattered
market which together had a huge potential.

But there were costs of printing these 500-paged catalogues and shipping them across America. As the
size and volumes of these catalogs, it became more and more important that the hit-rate of these mails,
the number of respondents, be big enough to justify the high costs. And this is where the genesis of RFM
lay.

				
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Description: During the second half of the nineteenth century, America started settling into a nation – the migration from the cast to the west complete, the Indian and Mexican claims neutralized, and more importantly the coming of telegraph and railways.