Goal is here to create RFM customer segments and find CLTV for existing customer.
The RFM model is a customer segmentation technique. RFM stands for Recency, Frequency, and Monetary value, each corresponding to some key customer trait. These RFM metrics are important indicators of a customer's behavior because frequency and monetary value affects a customer's lifetime value, and recency affects retention, a measure of engagement.
Customer lifetime value (CLV), a term sometimes used interchangeably with customer lifetime value, is the prediction of a company's net profit contributed to its overall future relationship with a customer.
Firms use many techniques and methods to make these critical decisions. Customer lifetime value (also called CLV or CLTV ) is one of the technique which is rapidly gaining acceptance as a metric to acquire, grow, and retain the “right” customers in customer relationship management (CRM). y Lifetime value is a critical metric because it represents the maximum amount that customers may be expected to spend in order to acquire new ones. As a result, it's crucial in determining the payback of marketing expenses used in marketing mix modeling.
CLTV = ( (Customer_Value(CV) )/Churn_Rate) x Profit_margin
Customer_Value(CV) = Average_Order_Value * Purchase_Frequency,
Average_Order_Value = Total_Revenue / Total_Number_of_Orders,
Purchase_Frequency = Total_Number_of_Orders / Total_Number_of_Customers,
Churn_Rate= 1-Repeat Rate,
Repeat Rate = the ratio of the number of customers with more than one order to the number of unique customers