“A restaurant is not just a place that sells food; it also sells new memories and experiences. ” - Adrienne Yu, Co-Founder EatUp
Many businesses are conflicted between customer retention and acquiring new ones, and restaurants also face a similar challenge. Many restaurant owners do not know how much time and money is needed to retain repeat customers.
One of the important KPIs a restaurant should track is repeated business since it signifies customer loyalty, which helps you know a customer's lifetime value. A restaurant is not just a place that sells food; it also sells new memories and experiences. This makes diners happy, prompting them to tell their family and friends about your restaurant.
Loyal customers are worth investing in because they bring more revenues than new customers. Oracle suggests interesting data on loyal customers, showing that a business has a 5-20% probability of making sales to a first-time customer. On the other hand, a business has a 60-70% chance of making additional sales to their loyal customers.
Calculating the real value of customer retention can help you put things in the right perspective. What can help your restaurant track this figure? The answer is in knowing your client’s lifetime value (CLTV). Let’s begin this discussion by defining this unique term.
Restaurant Customer Lifetime Value- What is it?
Your restaurant's customer lifetime value is a metric that measures net profit from a customer over time. It estimates the total amount of money a customer spends at your restaurant over their lifetime.
This metric helps you know the value of a customer to your restaurant, thus, influencing the amount you can invest in keeping them and gaining new clients. If you are calculating CLTV for a group of customers, you may need metrics like order frequency, order size, and churn rate.
Prioritizing CLTV will help a restaurant know why their loyal customers keep coming to the restaurant. The study will also help gather relevant consumer data and evaluate consumer behavior and preference to improve customer experiences.
Optimizing CLTV gives you a complete picture of your client base, thus influencing important strategic decisions, such as menu design, new store locations, and off-premise operations.
Like other metrics, the customer lifetime value of a restaurant requires a series of approximations since it cannot be maximized directly. You will need to approximate your customers’ average lifetime value to predict the future by knowing the loyalty levels of your customers.
Calculating Restaurant Customer Lifetime Value
Every business would love to track their customer's lifetime value to keep competition at bay. This metric is even more important in the restaurant business, often characterized by cut-throat competition. Customer loyalty is vital for your restaurant's survival, and positive word of mouth is what you need to stay in the game.
If you have been ignoring customer lifetime value, it is time you take this metric seriously and use it in making informed business and marketing decisions. You could use popular sites like nextrestaurant.com with a convenient calculator to help you determine your restaurant’s lifetime value for free.
You can do this anonymously and even save your initial search results and track any significant changes over time to see if your efforts are paying off.
Alternatively, you can use approximation and averages to calculate your restaurant customer lifetime value manually. Since CLTV is affected by numerous variables, you want to consider those variables before keying them into your restaurant’s CLTV equation. The variables include:
Average customer visit per year
Average party size
Average ticket size
Your restaurant profit margin
The formula for calculating your restaurant’s customer lifetime value.
The equation is as follows:
A restaurant’s CLTV = (Average monthly basket size x the frequency of monthly orders)/churn rate) x profit margin.
Maybe you think that this formula looks complicated. It does not have to. You can divide it into two parts: customer lifetime and customer value.
Customer Lifetime Value = customer lifetime x customer value.
To get the figures for customer value, you will need to know the following:
Average monthly basket size- the average value of monthly orders. It is often calculated by dividing your restaurant's total monthly revenue by several loyal customers that month. For instance, if your restaurant generated $1200 in sales from 100 customers, your average order value size is $1200 ÷ 100 = $12.
Another variable is the frequency of your monthly orders.
As the name suggests, it measures the number of times your loyal customer orders monthly. It is calculated by dividing your restaurant’s total number of orders by unique customer orders in a given month. For instance, if your restaurant received 400 orders from 100 unique clients during a particular month, the order frequency for the group is 400 ÷ 100 = 4.
It is important to run these metrics monthly through your loyalty programs to help you keep your profitable customer groups. Other restaurants calculate their CLTV at different times, such as half a month, end month, and every two or three months.
What is the churn rate in measuring customer lifetime?
Generally, the customer lifetime is the duration a customer or a group of customers has been buying from your restaurant and intend to continue doing so. The truth is, this figure is tricky to get for a group of customers, hence the need to use the Churn Rate.
The churn rate is a portion of consumers that fail to return to your restaurant. This rate is calculated by dividing the number of lost customers in a month by your restaurant's total number of customers.
You can get this data from your POS or CRM system. It is also important to clearly define churned customers depending on the number of times a customer is expected to order in your restaurant weekly, monthly, or yearly.
For example, a customer may order 4 times from your restaurant in a month or visit you 6 times in a year. Having this knowledge will help you know who constitutes lost customers. For instance, if a customer visits your restaurant 6 times a year, they are visiting after every two months. If they haven't visited your restaurant in four or five months, you may consider them churned customers.
How to measure your restaurant’s customer lifetime value.
We have already established that CLV = ((Average basket size per month x frequency of monthly orders)/Churn Rate) x Profit margin.
The value from this equation gives you the revenue from your loyal customers. For instance, if the average basket size for a particular customer or group of customers is $120 and they order 4 times monthly with a churn rate of 30%, your CLTC = (120 x 4)/0.3 = $1600.
You can factor in cost by multiplying with the profit margin to help you get a sense of how much this group of customers brings you.
What if you cannot calculate the Churn rate?
If you have a challenge calculating the churn rate, you can also use the Repeat Customer rate. You can calculate the repeat customer rate by dividing the number of customers who visited your restaurant more than once by the number of unique customers. For instance, if you served 20 customers in a certain month and out of these 5 come back, your restaurant’s repeat customer rate is 25%.
Customer lifetime = 1/ (1-repeat rate)
If you do not have a churn rate, you can replace this value with the earlier formula to get your CLTV value.
Why track your restaurant customer lifetime value?
Knowing your restaurant’s customer lifetime value performs several functions, including:
It provides valuable information to your business.
This information helps you accurately predict your customer behavior, thus helping with staffing and inventory decisions. It will also help you improve your restaurant service and convert your loyal customers into brand evangelists.
It helps with marketing decisions.
Knowing your customers’ lifetime value will inform your marketing spending on sensible programs and initiatives. Though there are many ways to market your restaurant, your restaurant marketing strategy should prioritize deepening your relationship with existing customers and recruiting new customers.
It guides your loyalty program.
You can easily craft an effective loyalty program once you know your customer's lifetime value. You can convert regular customers into your brand ambassadors with an excellent loyalty program.
How can you enhance your restaurant customer lifetime value?
A restaurant with a higher customer lifetime value is financially stable with a happy and satisfied customer base. As a restaurant owner, you can increase the customer lifetime value by encouraging repeat customers, increasing profit margins, and decreasing churn rates. Here are some tips that can help accomplish this goal.
Improve your restaurant’s accessibility.
If you are renting a space, choose a building accessible by modern means of transport with ample parking space. You should also ensure you have a good online presence so that customers can order food online.
The current customer cherishes convenience where they can place an order wherever they are; therefore, you want to offer them an online ordering opportunity.
You cannot build customer loyalty with poor communication. You want to cultivate a strong relationship with your clients to help you increase sales over time. Regular communication with your customers will give them a sense of belonging, thus leading to brand loyalty and increased customer lifetime value.
You can enhance communication with your customers by sending them personalized SMS or emails. The messages could be on discounts or special offers on birthdays or anniversaries.
Additionally, you can improve your customer service, ensuring that your staff promptly addresses your customer's complaints to deliver a fantastic customer experience. If you want to deliver a stellar customer experience that increases customer lifetime value, you can do the following:
Engage your customers on various social media pages and listen to their suggestions
Recognize your mistake and take responsibility
Respond to your customers’ complaints and requests promptly
Proactively communicate with your customers
Go out of your way to deliver a stellar food experience
Request for customer feedback.
Seeking feedback from your customers helps you to understand what they love. Nowadays, it is easy to solicit customer feedback using a feedback app without a sweat. Feedback improves your knowledge of what your customers expect from you and how to match their expectations.
Ensure you meet the objective of collecting feedback by addressing your customers’ concerns. Addressing your customers’ concerns promptly leads to better reviews and positive publicity. Make it a habit to go through your online reviews and acknowledge them.
Run a loyalty program.
One way you can increase customer lifetime value is by acknowledging and rewarding your frequent customers so that they can keep coming back. Why not offer loyalty perks to your regular customers to keep them hooked to your brand? Use your customers’ names, email addresses, and phone numbers in the POS system to help them benefit from loyalty points.
Your customers return to your restaurant because they are confident they will get quality food and services. Therefore, maintain quality food and services; otherwise, your customers will lose confidence in your restaurant. You cannot compromise on the quality of food and services because even one bad experience is enough to send your customers away.
Consistency means going the extra mile to ensure you get the details right. You do not want to overlook small things like presentation; they go a long way in the restaurant business.
The Bottom Line
Customer lifetime value is a key performance indicator for any restaurant since it helps the owners to know if customers love their services and food or not. CLTV helps restaurants to analyze their marketing strategies and change accordingly. Since returning customers are more likely to contribute more to your profit margin, it is important to improve your customer lifetime value. Understanding customer lifetime value should move a restaurant owner to spring to action and address consumer concerns. The data gathered from POS or CRM systems should help make sound marketing decisions.
Here's a comprehensive step-by-step checklist for understanding and calculating Restaurant Customer Lifetime Value:
Understand the Concept of Customer Lifetime Value (CLTV): Grasp the idea that CLTV measures the net profit a restaurant earns from a customer over a period of time, considering factors like order frequency, order size, and churn rate.
Recognize the Importance of CLTV: Understand how it helps in identifying loyal customers, collecting relevant consumer data, and making strategic decisions about menu design, store locations, etc.
Access Necessary Tools: Use websites like nextrestaurant.com to calculate your restaurant’s CLTV, or prepare to do the calculation manually.
Identify Key Variables for Calculation: Recognize important variables such as average customer visit per year, average party size, average ticket size, and your restaurant's profit margin.
Learn the CLTV Formula: Familiarize yourself with the formula, which is: CLTV = (Average monthly basket size x frequency of monthly orders) / churn rate x profit margin.
Break Down the Formula: Understand that it can be divided into two parts: customer lifetime and customer value.
Collect Data: Gather data on average monthly basket size, frequency of monthly orders, churn rate, and profit margin.
Calculate CLTV: Use the data collected to calculate the CLTV using the formula. Remember that the result gives the revenue from your loyal customers.
Understand Alternatives: If you cannot calculate the churn rate, learn how to use the Repeat Customer Rate instead.
Track CLTV: Use your calculated CLTV to inform business decisions, guide marketing efforts, and craft effective loyalty programs.
Implement Strategies to Enhance CLTV: Improve your restaurant’s accessibility, encourage communication, request customer feedback, run a loyalty program, and maintain consistent quality.
Remember, the ultimate goal of tracking and enhancing CLTV is to increase customer loyalty and satisfaction, resulting in improved financial stability for your restaurant.