Why Calculating the Customer Lifetime Value Could Save Your Restaurant

Think about how much it costs to acquire a new customer.

You put up expensive signage inside and outside the restaurant. Your website itself (not to mention the management of it) comes with a monthly cost. You run promotions in-house and offer discounts online to lure customers in. You try to maintain a regular presence on social media. Not to mention the costs of pay-per-click advertising on Google and Facebook.

Oh! And don’t forget about the cost of your marketing team.

Then, of course, there’s the cost to keep your restaurant fully operational in order to make a good impression and provide a great guest experience.

You spend a lot of money in order to attract new clientele. But is it working?

While you may see an increase in foot traffic and online orders from your efforts, have you given any thought to the quality of customers you’ve attracted?

If you’re struggling with low profit margins and high turnover rates, it’s time to do some simple calculations to figure out what has gone wrong.

Calculating the Customer Lifetime Value of Your Restaurant Guests

The customer lifetime value (CLV or, sometimes, just LTV) is a calculation every business must do. And it’s a simple one at that. Basically, it tells you what the monetary return will be on the average guest in your restaurant. If you’re investing all this money in marketing to and bringing in new business, you should know what exactly you’re getting in exchange for your efforts.

Before you do the calculation, you will need to gather some data from the previous year’s sales. Make sure it’s a full year’s worth of data you’re working with.

The formula for customer lifetime value requires a few steps:

1. Total Revenue ÷ Total Number of Orders (over 365 days) = Average Order Value (AOV)
2. Total Number of Orders ÷ Total Number of Unique* Customers (over 365 days) = Purchase Frequency (f)
3. AOV * f = Customer Value (CV)

This is your average customer value for the year. To calculate how much they’re worth over their lifetime, do the following

4. Average Lifespan of Customer (in years) * CV = Customer Lifetime Value (CLV)

This is your average customer lifetime value.

In order to really make this data worth your while, you should segment it based on where your customers are coming from. Is Facebook the greatest lure to your restaurant? Do Yelp reviews have a lot of sway with your guests? Are the discounts you promote on GrubHub bringing in more business than anticipated?

By establishing a CLV for different guest types, you can more effectively tailor your marketing efforts by maximizing where you invest your time and energy. If you can play to your strengths and really invest in attracting good and loyal customers, you can drive up your restaurant’s CLV.

In doing so, this will free you up to spend more time and money on fostering positive relationships with guests rather than chasing new ones that are costing your business too much.

Is CLV Enough?

The customer lifetime value calculation is essential to any business’s success. However, that doesn’t necessarily communicate the whole picture. That’s why you need to factor in one more formula for the customer acquisition cost.

This formula is an easy one to calculate as well:

5. Marketing Costs ÷ Total Customers Acquired (over 365 days) = Customer Acquisition Cost (CAC)

6. (CV-CAC)* Average Lifespan of Customer (in years) = True Customer Lifetime Value

If you want to know what the true customer lifetime value is for your restaurant, you’ll factor in the original costs to market to them. This will tell you what sort of profit you net from them in the end.

If you want to get even more specific, you can calculate your profit margin, too:

7. CLV/CAC = Profit Margin per Customer

Dima Midon of TrafficBox says:

“Most brands aim for an outcome of greater than two in this equation, but every industry has their own challenges.”

JT Benton of WorkBook6 explains why it’s critical to factor in the costs of marketing to your customers:

“When marketers have no choice but to spend beyond a reasonable figure to acquire their next customers and those customers return diminishing lifetime values, it’s a recipe for disaster.”

Of course, don’t just think about the upfront costs of marketing either. Consider the cost of losing customers and what that ultimately does to your CLV.

Conclusion

Bottom line: if you want to future-proof your restaurant, you have to understand what sort of relationship you’ve built with customers and what it’s costing you to do so. If you’re not reaching the right kinds of people or you’re spending beyond your means, these formulas will tell you that.

That said, don’t be afraid to really look inward at your operations, too. A low CLV might not be the result of improper targeting of marketing efforts or spending too much to bring in new business. There could be something disrupting the experience for guests.

As such, it’s important to pay close attention to what your guest feedback is telling you. If there are systematic problems within your restaurant that prevent customers from returning, then you need to address those issues at the source before you do anything else. If you’d like assistance digging into this data to root out operational issues within your restaurant, get in touch with Pedanco today.

Visit us at Pedanco.com and learn more about how you can trial our services for free.

Originally written and published by the Pedanco team at blog.pedanco.com