How to Calculate Your Restaurant’s Customer Lifetime Value (CLV)
Knowing your numbers is imperative when running any successful business. And for all restaurants, one of the metrics you need to track is your customer lifetime time (CLV), which is also often one of the most difficult metrics to calculate, track and use.
Why is CLV so difficult? Because it relies on your skills of predicting customer behavior as well as other varying factors that all restaurateurs desire to improve. For example, while new customers are important, loyal patrons that continue to bring business to your doors are more valuable over their “lifetime” of patronage. The more loyal customers you can create, the more your bottom line will improve.
In this article, we are going to define your customer’s lifetime value, explain how it is calculated and we will also give you ideas on how to increase CLV. You will also be able to understand why CLVis necessary for a business to grow and thrive.
Customer Lifetime Value Defined
Customer lifetime value (CLV) is the amount of revenue a customer is projected to generate throughout their lifetime of patronage of your business. Put another way, CLV is the amount of money you will get from any particular customer after your investment in acquiring that customer (e.g., through advertising, promotions, discounts or specials). Yet as there are no regularly recurring contractual payments or subscription fees as a prerequisite for people to access your restaurant, it is very difficult to estimate how much money each individual customer will ultimately bring to your establishment over your relationship’s lifetime.
CLV is a metric that is not maximized directly as it is driven by approximations such as the size of the party, average ticket size, how frequently customers order, etc. All of the approximations you make about your establishments are rolled into one final number. This final number is very important, so take time to go through everything as thoughtfully and thoroughly as possible.
With so many important business factors incorporated into your CLV, you are creating a new foundation upon which to make decisions that could have a dramatic effect on your finances. You will also start to notice ways to improve revenue generation for your establishment that might not have otherwise been obvious.
How to Best Calculate CLV
Before calculating your individual CLV, you need to carefully consider a number of factors.
First and foremost, make sure you have accurate and reliable data from your operations as to the following:
Average visit frequency
Average party size
Average ticket size
The formula to use when calculating your CLV is: CLV = Average spend per month divided by monthly customer churn rate.
While this seems like a pretty simple way to calculate your CLV, it may be challenging to compile all the necessary components of these figures. Be prepared to speak with your accountant to fully understand the numbers affecting your CLV, as it is far better to be accurate than to guestimate.
How to Increase Your Restaurant’s Customer Lifetime Value
The higher your CLV, the healthier your restaurant will be financially. This is reflected not only in raw revenue generation, but also in overall business stability as compared to restaurants with a lower CLV.
The goal is to reduce churn rate and increase the number of loyal customers your establishment enjoys. This is often accomplished by increasing restaurant spend per month to foster loyal patrons.
THIS IS NOT AN EASY TASK. Restaurants big and small all deal with issues relating to customer retention. When people do not experience consistency, hospitality and other important elements of a visit they will not feel compelled to visit often, or ever again.
The key to developing a loyal customer base is getting them to come back a second time. Once customers return, it is much easier to get them to return constantly, so visiting your establishment because part of their routine.
Here are some things that you can do to ensure that your restaurant’s CLV is improved upon.
1. Ease of Access
If you do not make it easy to access your products and services, people are going somewhere else. It’s that simple. Many people today are become less tolerant of many parts of human interaction when it comes to ordering food and waiting for service. Case and point, Starbuck mobile app / loyalty platform is used by a record setting 48%(!) of its customer base, driven by its effortless advance ordering and payment features.
It is clear that making it easy to order and receive products and services, regardless if done with online ordering or curbside pick up, can drive repeat customers and a strong increase in CLV. Also, always improve on how you can individually identify your customers (and best customers!) when they contact you. Using a caller ID that matches a customer profile is a great way to make the customer experience quicker and easier for the customer and build loyalty.
2. Upsell in the Store
When your customers come to dine, they may not have full knowledge of their options and what they want to order. If you provide recommendations of cocktail and wine pairings, popular appetizers that compliment certain entrees and specials of the day, and other helpful upsells, this allows for a great experience without any effort on the part of your customers. And perhaps most interestingly, most if not all of this functionality can be accomplished through mobile devices, digital menus and robotic service allowing your wait staff to operate at optimal efficiency and only on those tasks where human effort is required..
3. Listen to Feedback
You may have noticed that more and more restaurants are asking for feedback. Whether they are rewarding the customer for feedback or if they are simply asking for free input, big-box restaurants down to small mom-and-pop establishments know it is important to pay attention to their customers.
When you pay attention to customer feedback, your patrons are more likely to take ownership in your establishment and promote it to their friends and family. They will, in fact, have become part of the experience, and in validating their suggestions, you could very well earn their loyalty for life.
Calculating and increasing your CLV is critical to the financial health of your business. Always measure and re-measure this metric as your business continues to grow and evolve, but getting started now is the most important part. If you do not know where you today, you will not be able to move forward to achieve your goals in the next three to five years.