E-World is an online electronics retailer. It has a vast group of customers. To understand and segment their customers, they consider using RFM. They pick a sample of 62,500 of their customers, which is a good representation of their whole customer base. They pulled their record of Recency, Frequency, and Monetary for the past 100 days, and start the analysis.

Q1: To get you familiar with the RFM approach, we obtain a subset of 1,000 customers with customer Index 1-1000 (in Sheet “Group”). Please use the steps introduced in class to get RFM groups. Then report the customer index for the following groups: 512, 451, 345, 234, and 123. Note: Instead of using 1 as the best group, we use 5 as the code for the most favorite group and 1 as the least favorite group.

Q2: Using the 62,500 subjects in the pool, the E-World marketing specialist summarized different RFM groups’ hit rates (so-called buying rating/response rate) for the new product DIVO (Sheet HitRate), which is sold for $72. To direct-market the product to each consumer, the marketing cost is $5 per person. The product gross margin is 50%.

a) Please sort the data and list the 10 RFM groups with the highest hit rate

b) If the firm decides to market to every of the 62,500 customers, what is the gross profit/loss

c) Using the hit-rate information, please make the recommendation and list the profitable RFM groups.

d) If the firm chose to only market to these profitable groups, what is the gross profit/loss

e) Comment on the effectiveness of RFM

RFM Group	Hit Rate
555	0.268
554	0.255
553	0.245
552	0.235
551	0.222
545	0.262
544	0.243
543	0.247
542	0.236
541	0.180
535	0.244
534	0.230
533	0.199
532	0.200
531	0.151
525	0.229
524	0.220
523	0.212
522	0.175
521	0.166
515	0.206
514	0.207
513	0.191
512	0.173
511	0.135
455	0.236
454	0.235
453	0.215
452	0.200
451	0.187
445	0.243
444	0.213
443	0.224
442	0.169
441	0.199
435	0.226
434	0.191
433	0.167
432	0.163
431	0.158
425	0.188
424	0.174
423	0.150
422	0.141
421	0.159
415	0.190
414	0.163
413	0.154
412	0.140
411	0.114
355	0.237
354	0.216
353	0.229
352	0.210
351	0.178
345	0.185
344	0.230
343	0.181
342	0.184
341	0.156
335	0.209
334	0.166
333	0.150
332	0.186
331	0.144
325	0.200
324	0.167
323	0.138
322	0.127
321	0.129
315	0.171
314	0.146
313	0.130
312	0.123
311	0.147
255	0.204
254	0.200
253	0.199
252	0.170
251	0.166
245	0.203
244	0.194
243	0.180
242	0.159
241	0.143
235	0.188
234	0.185
233	0.151
232	0.143
231	0.119
225	0.171
224	0.132
223	0.138
222	0.125
221	0.109
215	0.130
214	0.126
213	0.128
212	0.096
211	0.085
155	0.195
154	0.170
153	0.149
152	0.149
151	0.121
145	0.192
144	0.151
143	0.135
142	0.137
141	0.137
135	0.168
134	0.160
133	0.121
132	0.107
131	0.085
125	0.149
124	0.129
123	0.117
122	0.070
121	0.061
115	0.115
114	0.105
113	0.099
112	0.081
111	0.086