This blog post explores using a popular measure, RFM (explained below), as a modeling tool. There is some debate about its use in modeling major gifts, and so I share my thoughts here. If you have used RFM to measure your prospect giving behaviors, let us know at email@example.com.
Recency, frequency, and monetary value is a collection of measurements used by data mining firms to asses a customer’s potential. Called RFM, this tool looks for a company’s highest value clients.
Recency refers to how recent the prospect’s latest gift arrived. Frequency refers to how many gifts or pledges have been given by the prospect over a period of time, usually five years. Monetary value if the total value of each gift or pledge.
Put together as a 3-number score, RFM shows the pattern of donor behavior. All of the values for each of these 3 segments are sorted into 5 bins, resulting in scores that range from 111 (lowest of all 3 scores) to 555. The resulting segments are often used to sort prospects into the annual giving, planned giving, and major gift programs.
Using RFM: How Nonprofits Differ from For-Profit Firms
In fundraising, we have to remember that our prices, unlike, say, Coca Cola, are widely varied. To buy a Coke, I might pay $1.00 for a 12-ounce can, or as much as $10.00 for a case (my Coke purchase prices may be way out of date, my apologies). In fund-raising, however, our price varies from a $25 starting annual fund gift to a $500 million top level campaign gift. We can not measure donor behavior in the same way that Coke measures our purchases.
The other concept to keep in mind is that major gifts prospects make pledges rather than give cash gifts and through multi-year pledges. The old adage that major gifts come from assets and annual fund gifts come from the checkbook/credit card still holds for most gifts.
Managing the Interval Problem
Given their nature, major gifts show a gap in the recency and frequency measurements, if the downloaded gift data shows pledges and outright gifts only. If the gift data, instead, shows pledge payments and outright gifts, then the recency and frequency scores would improve.
Annual fund donors, however, can give by credit card every month. That leaves their recency and frequency scores much higher than major gifts donors who are making annual pledge payments with occasional annual fund or special purpose gifts.
Using RFM in Development
One method I would suggest for using this tool is to both measure it against single pledge payments and outright gifts, making sure that the payment dates are included. This way, one can tell if a higher RFM means an annual fund gift or a major gift.
I would also encourage the analyst to look at each score separately. Would a higher frequency score mean a lower level gift? My studies on this question always resulted in a yes. I have also seen the effect of giveaways (a la public television and radio), where the recency and frequency scores were high for donors up to the highest reward giveaway level, and then drifted off after that.
Does It Work? RFM has its place but is not a panacea for prospecting major gifts prospects. Unless the highest monetary value bin includes major gift-level amounts, RFM is better used to understand annual giving segments. Also, consistent, recent giving by lower-level donors may be indicators of planned giving prospects.
This measurement is certainly one of many of those that we use to try to understand giving. Is an RFM score very different for a radio station membership campaign than for the United Way? I would be curious to know. If you have thoughts on this, please tweet us @Staupell, email us at firstname.lastname@example.org, or leave a comment below.