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RFM analysis and Customer Lifetime Value (CLV) are two important analytical approaches used by retailers to understand customers, evaluate their importance, and develop effective marketing strategies. Both models use customer data, but they differ in their purpose, measurement methods, time perspective, and applications. RFM analysis mainly evaluates customers on the basis of their past purchasing behaviour, whereas CLV estimates the total economic value that a customer is expected to generate for the retailer throughout the entire relationship. RFM stands for Recency, Frequency, and Monetary value. Recency refers to how recently a customer made a purchase. A customer who purchased something very recently is generally considered more engaged than a customer who has not purchased for a long period. Frequency measures how often a customer purchases from the retailer during a particular period. A customer who purchases frequently is usually more valuable and loyal than someone who purchases only occasionally. Monetary value measures how much money a customer has spent. Customers with higher total or average spending are generally given higher monetary scores. In RFM analysis, retailers assign scores to customers for each of the three dimensions. For example, customers may be ranked from 1 to 5 for recency, frequency, and monetary value. A customer with a score of 5 in all three categories would be considered a highly active and valuable customer. Customers can then be divided into groups such as best ___ ____ ___ ___ _______ _________ ______ _____ ____.
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