RFM (recency, frequency, monetary) analysis is a marketing technique used to determine quantitatively which customers are the best ones by examining how recently a customer has purchased (recency), how often they purchase (frequency), and how much the customer spends (monetary).  RFM analysis is based on the marketing axiom that "80% of your business comes from 20% of your customers." For more than 30 years, direct mailing marketers for nonprofit organizations have used an informal RFM analysis to target their mailings to customers most likely to make donations.  The reasoning behind RFM was simple: people who donated once were more likely to donate again.  With the advent of email marketing campaigns and customer relationship management software, RFM ratings have become an important tool.  Using RFM analysis, customers are assigned a ranking number of 1,2,3,4, or 5 (with 5 being highest) for each RFM parameter. The three scores together are referred to as an RFM "cell."  The database is sorted to determine which customers were "the best customers" in the past, with a cell ranking of "555" being ideal. Although RFM analysis is a useful tool, it does have its limitations.  A company must be careful not to over-solicit customers with the highest rankings.  Experts also caution marketers to remember that customers with low cell rankings should not be neglected, but instead should be cultivated to become better customers. Click here for a sample RFM analysis report The Pareto Principle, or the 80/20 rule, is attributed to Vilfredo Pareto, an Italian economist who observed in 1906 that twenty percent of the Italian people owned eighty percent of their country's accumulated wealth. The 80/20 rule has found numerous business applications and constantly reminds us that the relationship between effort and return is not balanced.  Understanding that a large percentage of a company's business usually comes from a smaller percentage of its customers has significant implications on a company’s marketing strategy. What are some common examples of this imbalance in everyday marketing and sales? 80% of the revenues are generated by 20% of customers 80% of the profits are yielded by 20% of customers 80% of customer complaints are about the same 20% of products and services 80% of organization growth comes from 20% of products 80% of Web site traffic comes from 20% of pages 80% of advertising results come from 20% of a campaign. 80% of sales time is spent on 20% of the customers [who may not be the profitable 20%] How can we apply the Pareto Principle in marketing? Customer insights.  An analysis of the customers by revenue and profit contribution reveals that quite often these two groups don’t overlap.  The Pareto analysis gives us valuable inputs on not just who the biggest customers are, but also who are the most profitable ones, how they make decisions, what products they buy, what prices they are willing to pay, and more.  This can be the basis of successful customer loyalty and retention programs. Segmentation.  Markets are segmented on demographics, psychographics, geography, etc.  An 80/20 evaluation of market segments is a useful predictive tool to narrow down the most profitable markets, optimal product mix, product launch, pricing, and channel strategies. Sales.  Applying the Pareto Principle in sales can mean concentrating on those markets, accounts, and customers that have the highest potential to produce sales revenues.  Customer face time is based on a sliding scale of sales payoffs.   The best sales talent is utilized to work and closer deals with major customer, and average salespersons for lesser accounts. Marketing campaigns.  When a company can combine the data of its largest and most profitable customers with the most effective marketing tools, it can tailor the marketing programs that are on target, drive customers to action, and bring  measurable results. Web site optimization.  Analysis of site traffic in B2B and B2C sites reveals that a majority of visitors only hit 20% of the pages.  It is obvious that these pages are critical to the decision-making process and should be the focus of the Web efforts. Companies should optimize the navigation, content and design of those pages that directly support the conversion process of a site visitor to a buyer or user. CRM initiatives.  CRM programs are based on two very simple principles – the first, the Pareto principle, which says that 80% of the revenue is generated by 20% of the customers; and the second that customer retention is many times cheaper than customer acquisition.  Once these principles are ingrained in the company, CRM systems can be used very effectively to drive marketing, sales, and customer service programs. Click here for a sample Pareto Analysis Report