How much does a repeat customer mean to your restaurant? Do you spend more or less to lure them to your restaurant? The conflict between acquiring new customers vs. retaining old ones exists across many businesses, and restaurants are no exception. You're not only selling food, but you're also selling an experience and a new memory, and that's what makes the industry unique. Diners who have a pleasant experience at your restaurant are likely to return and tell their family and friends about it.
Loyal customers significantly outperform new customers in terms of profitability for your restaurant. However, what if you could see the precise amount? The answer is to track your restaurant's client lifetime value (or CLTV).
What is Restaurant Customer Lifetime Value?
The Customer Lifetime Value of a Restaurant is the total amount of money spent by a customer at your business over their lifetime. This number is critical because it helps you decide how much money to invest in gaining new clients and keeping those you already have.
First Watch is one company that has had significant success prioritizing CLV. The restaurant business initially sought to ascertain the reason for frequent visits by loyal clients. First, Watch answered these and other concerns by gathering customer data, evaluating preferences and behaviors, and improving customer experiences. By optimizing CLV, First Watch got a complete picture of its client base, which influenced crucial strategic choices, such as new store location selection, menu design, and off-premise operations.
How to Calculate Restaurant Customer Lifetime Value
Numerous variables affect CLV. Before inputting values into your restaurant's CLV equation, you should consider these variables.
• Average visits per year
• Average ticket size
• Restaurant profit margin
• Average party size
Formula Used to Calculate the Lifetime Value of a Restaurant's Customer
The following formula is used to determine the lifetime value of a restaurant's customer:
CLV of a restaurant = Average Monthly Spend / Monthly Customer Churn Rate.
In marketing terms, churn refers to the number of consumers who cease associating with your restaurant during a specified period. If a customer does not return, they have churned.
Therefore, if the average monthly expenditure per person is $10 and the churn rate is 20%, the CLV for your restaurant will be $50.
CLV of a restaurant = The Average Spend per month / Monthly Customer Churn Rate.
CLV of a restaurant = $10 / 0.2
Hence the CLV of a restaurant is $50.
While this sounds quite basic, some of these figures are not always as readily available as you'd expect.
How to determine Your Average spend per month
The average spend per month is calculated by dividing total income by unique guests. If your restaurant served 1,000 unique guests in March and made $20,000 in sales, the average monthly spend is $20 ($20,000 / 1,000 guests).
How to Calculate your Monthly Client Churn Rate
The most straightforward churn rate equation is dividing the number of customers you lost within a month by the number of customers you had at the start of the month. Since we cannot predict the behavior of every client, predicting customer churn rate is an approximate science. After all, one consumer may return six days after their initial visit, while another may return after six years later.
What to do if you are unable to calculate the churn rate
If you have access to a repeat customer rate, you could use that instead. To calculate the repeat customer rate, divide the total number of consumers who have made multiple visits by the total number of customers. For instance, if 3 out of the ten customers you've served in a month are return customers, your repeat customer rate is 30%.
What to consider when calculating Restaurant CLV
Technology and automation
Identifying your unique clients can be challenging. Categorizing repeat clients is a time-consuming task that no one should handle manually. Instead, consider using automated systems to ease the process.
The type and location of the restaurant
Your Customer Lifetime Value may be affected by your restaurant type and location. If your business is located in a shopping mall or next to a tourist attraction, you will likely get many first-time (unique) consumers. However, it may seem challenging to retain customers in such a location.
How to Increase Your Restaurants CLV
A higher customer lifetime value for a restaurant indicates that the establishment is financially secure and has a satisfied client base. To do this, restaurant operators should place a higher premium on increasing profitability and nurturing repeat customers to reduce churn. These suggestions will help you improve your restaurant's CLV.
- Increase Restaurant Accessibility
Customers expect your business to be accessible in every way possible, from a convenient location to an online presence. Choosing the right site for your restaurant is essential, and you must ensure that it is conveniently accessible and has enough parking.
- Enhance Communication
Developing a good relationship with consumers will help you grow sales over time. Communication will result in brand loyalty and increase your restaurant's CLV. It all begins with satisfying your consumers' needs and expectations.
- Ask for Feedback from Customers
Seeking input from your clients will help you better understand their needs and preferences. You can collect consumer feedback effortlessly by utilizing a feedback app. Obtaining feedback enables you to ascertain what your customers expect from you and how you can meet those expectations.
- Develop Loyalty Programs
To keep your consumers coming back for more, you need to show them that you appreciate them by rewarding them. You can increase the lifetime value of your clients by rewarding them for their loyalty.
- Remain Consistent
Most of your clients come back because they enjoy the food and service at your restaurant. As a result, it is critical to maintaining consistency in service delivery at all times. Customers place a high premium on details. If consumers have a terrible experience with your food or service, they are unlikely to return.
Customer lifetime value is a critical indicator for restaurants since it enables you to identify whether consumers love your food and services and analyze your marketing initiatives. Studies show that returning clients spend 67% more than new clients, thus the need to improve your customer retention rate. This statistic is crucial because it tells you how much more effort or money is needed to get long-term clients.