How do RFM and LTV fit together?
RFM is an analysis and segmentation technique that’s gaining a lot of momentum…but what does it have to do with LTV? Are they related? How can you use one to predict or improve the other? Let’s find out.
A common tool for eCommerce brands is the Recency, Frequency, and Monetary (RFM) score. But how can we link this customer score to profitability? If we have a Lifetime Value (LTV) score, we can take a look at what factors and categories of the RFM model are strongly correlated with LTV.
Key to all of this is a robust LTV model. How are you calculating your LTV today? Is that information used in your advertising targeting?
Example for a highly seasonal brand
We analyzed each customer’s orders over the past year for a highly seasonal memorabilia brand.
- Recency score was calculated based on when each customer’s last purchase was
- Frequency score was equal to the amount of purchases each customer made (capping out at a score of 5)
- Monetary score was calculated based on the customer’s average order value (AOV)
The goal of this exercise was to understand which buckets of customers were associated with higher LTVs, to provide insight on how to boost overall profitability.
AOV is king for this brand
For this particular brand’s LTV, Monetary score (i.e., AOV) is the most indicative factor of the three. In fact, more than 2x higher than the Frequency score. Why so high? Because over 90% of customers here are one-time buyers. If they only ever purchase once, it makes sense that the current most important factor is how big that single order is.
So how much does purchase frequency matter?
In this brand’s current world, it’s overshadowed by AOV because so few people buy twice. But yes, the small subset of customers who do come back are extremely valuable relative to the rest. Retaining these customers is critical, and finding ways to target lookalikes will significantly boost profitability growth.
Why doesn’t recency tell us much?
Recency can be a big factor, but since we’re running this at the start of the year, it’s mostly just a proxy for who bought during the holiday season. If the majority of your customers are gifting during the holidays, a “recent” purchase likely just indicates a once-a-year spree—so it doesn’t necessarily point to a loyal, high-LTV customer. In other words, the calendar has more influence here than their ongoing relationship with the brand.
Knowing this, what should we do about it?
- Focus on AOV: Since most buyers won’t come back after the first purchase, any strategy that boosts the basket size is essential. Think tailored upsells, premium bundles, or free shipping thresholds that encourage a bigger spend. A high shipping cost in particular was one of the biggest barriers to repeat purchases for this brand, so a strategy to reduce that while boosting AOV could be highly valuable. Be cautious of blanket discount percentages on an entire order. These will dilute the overall AOV.
- Target High-Value Seasonal Buyers: The data reveals a large group of one-and-done shoppers. Those who drop a lot of cash on a single order drive a big piece of the bottom line, even if they don’t return. The key is to know who to prioritize marketing efforts towards during seasonal periods. It requires some upfront analysis, but we’ve used historical purchase data and first-party data to understand what predicts a high-value customer. And then we need to make sure the ad platforms are getting that information.
- De-Prioritize Low-Value One-Timers: Similar to the prior point, we want to deprioritize these in our targeting funnel. Inevitably we will still get many, but if someone is a seasonal shopper and spends a small amount on a category that is not indicative of repeat purchase, it is likely not worth expensive acquisition efforts to bring them back. Promotional dollars are better spent on different segments.
- High-Value Second Purchase Referrals for High Spenders: Offer a referral bonus to a new customer that makes a high-value purchase. They receive a discount off their next purchase if that promotion code is redeemed. This can encourage them to generate word of mouth advertising with other high-value potential customers, and make a repeat purchase themselves.
- Smart Promotions: Instead of blanket “10% off first purchase” campaigns, consider promotions that specifically boost AOV. For example, “Buy one, get $5 off your next item” encourages people to add more to their cart.
- Retention for High AOV Shoppers: With only 10% of customers buying more than once, loyalty is a precious commodity. Double down on retention efforts for that small group of repeat customers—especially the ones with a high AOV or first-time buyers who have shown interest in categories tied to repeat purchases.
- Identify Repeat-Friendly Products: Some product categories in this portfolio are tied to complementary products. Offer strategic discounts only on these items to encourage repeat business, while keeping margins higher on items that may remain one-off purchases. For this brand, diluting the AOV should only be done for high-likelihood repeat buyers.
- Diversify Beyond One-Time Purchases: Long-term, explore cross-sells or subscriptions to cushion the “holiday-only” effect.
The Bottom Line
For this brand, LTV hinges most heavily on order size—because in most cases, there won’t be a second purchase. By recognizing that “Monetary” truly rules the roost in this seasonal environment, you can craft marketing tactics that drive bigger baskets, nurture the few who come back, and boost overall profit without wasting effort and margin on low-value seasonal buyers.
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