We know that one of your key challenges is generating sales and profits. And towards this, you have a good idea of who your customers are and what they like to order. But do you know what they are worth? Further, which groups of customers are worth more to your business? In this post, we will show you how finding out your restaurant customer lifetime value is the answer.
Loyal customers are significantly more profitable for your restaurant business than new customers. But what if you could see exactly how much?
Tracking your restaurant customer’s lifetime value (or CLTV) is your answer. You can use CLTV to:
- Identify your most profitable customer segments.
- Figure out if you are retaining your most profitable customers.
- Identify which customer acquisition channels are working best.
- Determine how much revenue you are likely to make over a period of time.
- Figure out the amount of time it takes to recover the cost of acquiring a new customer
- Determine the sustainability of your restaurant business model and make adjustments
- Gain insight into your customer satisfaction.
There are many available formulas, variables and scary looking approaches to this. This is how Starbucks calculates their Customer Lifetime Value. You also need to track a few other metrics before you can begin to track this valuable information.
But don’t worry.
We have broken this down for you so that you can start using it at your restaurant business, easily.
Still wondering if you need to to know this? Enjoy a fact – according to Oracle, the probability of getting a sale from a first time customer is 5-20%. And the probability of making an additional sale to your loyal customers is 60-70%.
What is Restaurant Customer Lifetime Value?
Restaurant Customer Lifetime Value, is the amount of money your customers will spend at your restaurant over their lifetime. I.e how much profit your customers are expected to bring to your business.
Note: Calculate this for a group of customers (Customer segment) and use some estimation. You would need other metrics like basket (order) size, frequency of orders and churn rate.
Think of it as a directional metric for running a profitable restaurant business. (Read more: The 5 marketing metrics every restaurant should check)
How to calculate Restaurant CLTV
Here’s the equation:
CLTV = ((Average basket size per month x frequency of monthly orders)/Churn Rate) x Profit margin.
Think of it in two parts – Customer value and Customer lifetime. I.e Customer Lifetime Value = Customer value x Customer Lifetime.
To calculate customer value, you will first need:
Average basket size per month (Average order value per month)
This is the total revenue per month divided by the number of unique customers that month. Example: If you generated $1000 in sales by serving a 100 customers, your average basket size is $1000/100=$10.
Frequency of monthly orders
This is the number of times the average customer orders from you in a month. So, the total number of orders in a given month divided by the number of unique customers that month. Example: If you received 300 orders from 100 unique customers then your monthly order frequency for that group of customers is 3.
(Note: We recommend you calculate these metrics monthly. That way you could run loyalty programmes to retain your most profitable customer groups. You can choose to calculate this on any other time frame, depending on the type of restaurant you operate – QSR, delivery or Dine-in. Basically, whatever you think is the standard buying cycle for your kind of restaurant business. Typically restaurants calculate their CLTV for 15, 30, 60 and 90 day periods).
Defining “Churn” and measuring Customer lifetime
Now ideally, the customer lifetime is the period of time the customer or group of customers has been ordering from you and will continue to. But as you can imagine, this gets tricky to find out for a group of customers.
So you use something called Churn Rate. I.e the percentage of customers that do not order from you again or return to your restaurant.
Note: It is also important to define what you consider a churned customer. This will depend on the average number of times a customer orders from your restaurant in a week, month or year. Example: You may find that a customer orders from you 3 times a month or visits your restaurant 4 times a year on average. Knowing this will help you define who you consider a lost customer. Example: if you know (from your CRM) that a customer visits you 4 times a year, this must mean he/she visits you every 3 months. If you find that customer hasn’t visited you in say 6 months, you could consider that customer lost or churned.
Measuring Restaurant Customer Lifetime Value
Customer value = Average basket size per month x frequency of monthly orders
Customer lifetime = 1/Churn rate
CLV = (Average basket size per month x frequency of monthly orders)/Churn Rate
This gives you the revenue that this group of customers generates for you. Example: If a customer’s average basket size is $100, they order an average of 3 times a month and monthly churn rate is 30%, your CLTV is $100 x 3 = 300, divided by 0.3 = $1000
To get a sense of how much you earn i.e factoring in the costs, multiply with your profit margin.
CLV = ((Average basket size per month x frequency of monthly orders)/Churn Rate) x Profit margin.
Now you know how much a group of customers are worth to your restaurant business. Done.
What to do when you cannot calculate churn rate
You could use Repeat Customer rate as well, if that is what you have access to. For repeat customer rate, you need to divide the number of customers with more than one visits, by the number of unique customers. Example: If you serve 10 customers in a month out of who 3 come back, your repeat customer rate is 30%.
Customer lifetime = 1/1-Repeat rate
CLTV = Average basket size per month x frequency of monthly purchase x (1/(1-repeat rate))
There you have it. Easy as that.
What to keep in mind when measuring Restaurant CLTV
You will need technology and automation
It can be complicated to figure out your unique customers. I.e customers who have not ordered from or eaten at your establishment before. Trying to sort repeat customers manually, is something nobody should have time for.
Restaurant type and location matters
The type of restaurant you operate and the location of your business, could impact your Customer Lifetime Value. If you are in a shopping mall or near a tourist place, you are likely to get a lot of first time (unique) customers. But look at this as an opportunity to keep that many more customers. A seamless engagement and loyalty system, can improve your sales and margins.
You’re are on your way!
Now that you know how to calculate this mother-of-all metrics, you can focus on retaining your most profitable customers. Go on and crush those sales and profitability targets. 📈💪💰
(Want us to cover any other topics that you think might help you run your restaurant better? Let us know in the comments below).