How to Calculate Your Restaurant Customer Lifetime Value
Continually calculating and improving customer lifetime value is an investment in your restaurant’s present and future.
Customer Lifetime Value, or “CLV,” is one of the most important, yet difficult metrics for restaurant owners to track, understand, and utilize.
Why? Restaurant customer lifetime value depends on predicting customer behavior and hinges on a variety of factors restaurant owners should seek to improve, including building out a robust restaurant marketing strategy.
Repeat loyal customers generate 10x more revenue in their lifetime than new customers. Wouldn’t it be nice to have hundreds, even thousands, of this kind of customer increasing your bottom line?
In this article, we will define customer lifetime value, explain the equation, provide tips to increase CLV, and helping you understand why this metric is so imperative to running a successful restaurant.
What is Restaurant Customer Lifetime Value?
Customer lifetime value is the projected amount of revenue a customer will generate over their lifetime at your business.
Recently, we covered how to calculate restaurant customer acquisition cost — CLV is how much money you'll get back after that acquisition investment.
Tricky thing is, because restaurants are not gyms and don’t require their customers to sign 12-month contracts, CLV does require some predictive work for a restaurant.
Unlike other restaurant metrics, like cost of goods for example, CLV cannot be directly maximized. Instead it’s driven by a series of approximations – average ticket size, party size, order frequency, etc. – all rolled into one final figure.
Because CLV encompasses so many important business factors, focusing on this metric not only has a dramatic effect on your restaurant’s financial health but offers a unique perspective on ways to drive success that aren’t solely related to revenue or cost breakdowns.
How to Calculate Restaurant Customer Lifetime Value
There are numerous factors that contribute to CLV that should be considered before plugging numbers into your restaurant's CLV equation.
- Average ticket size
- Average visits per year
- Average party size
- Restaurant profit margin
The formula for calculating a restaurant customer lifetime value is as follows:
Restaurant CLV = Avg. Spend Per Month / Monthly Customer Churn Rate
Churn, in a marketing sense, is the number of customers that stop engaging with your restaurant during a specific time period. If a customer never comes back, they’ve churned.
So, if the average spend per person each month is $10, and the percentage of customers that do not return is 20%, then the CLV is $50.
Restaurant CLV = Avg. Spend Per Month / Monthly Customer Churn Rate
Restaurant CLV = $10 / 0.2
Restaurant CLV = $50
Sounds pretty straightforward, but as we mentioned before, some of these numbers aren't always as accessible as you'd like.
Here are some ways you can determine your Average Spend Per Month and Monthly Customer Churn Rate.
Average Spend Per Month
Average Spend Per Month is simply total revenue divided by number for unique guests. If your restaurant fed a total of 1,000 unique individuals in the month of March and total sales were $20,000, this means Average Spend Per Month is $20 ($20,000 / 1,000 guests).
Without the proper technology, it's nearly impossible to look at all your orders at the end of the month and determine which of those were from customers who made multiple visits in the same month. To counter that, we recommend leveraging a restaurant POS with a customer relationship management component as these numbers can easily be pulled from the CRM.
Monthly Customer Churn Rate
The most basic churn rate equation is number of churned customers divided by total number of customers (in a given period). Because we can’t know for sure how every customer will behave, calculating customer churn is not an exact science. After all, one customer could come back six days after their visit, while others return for their second time after six years.
That said, using the aforementioned CRM system in your POS can help you determine the average visits per month or per year of your customers. Perhaps your typical customer visits your restaurant six times a year, or every two months on average. With that in mind, maybe you decide to give a little leeway, and if a customer doesn't come back after four months, they're considered to be churned. Again – this section is quite subjective for restaurants, so sit down and work our a criteria that works best for your business.
How to Increase Restaurant Customer Lifetime Value
A higher CLV number means that your restaurant is financially healthy and enjoys a satisfied customer base.
To achieve this, restaurants should investigate ways to increase spend per month and foster repeat customers to reduce monthly churn rate.
To increase CLV, try the following:
1. Meet Guests Where They Are
Convenience is never a bad thing. In fact, the more a restaurant can provide to its customers, the more willing those customers are to make yours a regular stop in their restaurant rotation. To that end, use whatever strategies available to be a place that meets customers halfway.
With contactless service beginning to become the norm for many restaurants, any opportunity to provide buyers with curbside pickup or online ordering will go a long way toward demonstrating value to customers and improving long-term CLV.
The Toast Online Ordering platform can be a valuable resource to provide that convenience, especially when considering that 82% of guests order online from a restaurant’s website, app, or a third-party platform like DoorDash or GrubHub. Toast's easy-to-use solution seamlessly integrates with your restaurant’s website and sends orders from the site back to the kitchen in an instant.
On top of providing a simple user experience, Toast’s online integration is a reasonably priced system that operates on a monthly subscription with no commission. By our calculations, restaurants that deploy the Toast Online Ordering solution spend $36,000 less a year, savings which can be reallocated into other avenues that help bolster CLV.
2. Collect Customer Info By Integrating a CRM Platform Into Your Point-of-Sale Solution
The restaurant customer experience isn’t just limited to dine-in or takeout transactions. With so many customer touchpoints and so much customer information available, restaurants should provide a customer experience informed by every piece of information available.
A customer relationship management platform (CRM) can easily drop into whatever point-of-sale system your company uses. A CRM stores all relevant information about your customers, such as order history, dietary preferences/restrictions, contact information (e.g., phone number, email, social handles), birthdays, etc. These allow your restaurant to quicken service, delight your guests by remembering their needs, and keep them in the know about discounts, targeted promotions, and other relevant news concerning your restaurant.
The Toast Go 2™ is a handheld, contactless POS tool that can also queue up all the aforementioned information. Staff can take the portable tool right to the customer and recall past orders and noted preferences and turn the touchpoint from a question-and-answer session to more of a consultation where they suggest dishes and bring information to light to help customers make faster and better dining decisions.
Being a resource at every step of the buying journey gives customers the comfort to become a regular visitor of yours and the confidence to bring bigger business your way — like birthdays and anniversaries — and boost restaurant CLV.
3. Prioritize Feedback and Use It to Solve Problems
Issues might arise for visitors when they visit your restaurant, but there’s no need to let those problems fester and ruin your customer experience. Not addressing feedback can eat away at your cumulative CLV, but acting on feedback is a great way to turn a dissatisfied customer into a regular.
That’s why your restaurant either needs to institute or revisit its customer feedback policy. Your customers will feel better about spending time and money with your restaurant if they feel like their needs and critiques are being heard. Toast Guest Feedback takes a 360-degree view at feedback and puts staff in the best position to confront it, analyze it, and turn it into solutions.
The platform measures guest feedback, breaks it down into digestible and coachable insights, then looks at how it contributes to how individual staff members and whole teams can progress. It seamlessly integrates into Toast Go 2™, Toast Online Ordering ™, and Toast Kiosk™ and grabs immediate customer feedback and funnels it to the restaurant staff. From there, restaurants can use the findings to improve the overall experience and make a concerted effort toward building profitable relationships with customers. Feedback, be it positive or negative, is an opportunity to grow. Approach customer feedback as a way to spike CLV and secure long-term advocacy.
4. Put a Loyalty Program In Place
New customers don’t come cheap. In fact, it can cost anywhere from $400 to $5,000 to bring them in, while further studies find that existing customers outspend new ones by 67%. Instead of starting from the beginning every time, put systems in place to recognize and reward your most loyal visitors.
Toast Loyalty is an intuitive and flexible integration that works in conjunction with your POS system, which will give the customer a chance to opt into a restaurant’s loyalty program when they've swiped their credit card. If they choose to enroll, the visitor’s name is entered into the system and loyalty points are applied to their account after every purchase.
Loyalty monitors order history and alerts your restaurant when a customer is close to unlocking a point-based reward. The presence of the solution can be a conversation starter for a restaurant and help better inform specific outreach messaging.
Say a customer is close to unlocking a “buy one, get one free” deal or some type of appetizer special. Toast Loyalty tracks all of that, then works in conjunction with a system like Toast Go 2™ to notify staff that they can encourage the customer to spend a little more to reach that reward. And when restaurants reward their loyal guests, the more willing they are to come back — and the higher their CLV potential climbs.
5. Stay In Touch With Your Customers
Your restaurant should stay top of mind with its customers as much as possible. When they have a hankering for a great breakfast, lunch, or dinner, or have a special event coming up, you want to be the first spot that pops into their heads. CLV only stands to increase if customers love your product and your service, and if your restaurant becomes a part of their "treat yourself" routine
Create better awareness with customers and improve potential CLV by staying in touch with your customer base. A tool like Toast Marketing™ can help you to engage with your customers on multiple platforms. Toast Marketing™ is an element of your restaurant POS that automates outreach and builds a targeted engagement strategy that reaches the intended group in a strategic manner. Toast Marketing™ takes the wealth of customer information that comes in, and uses it to craft informative and valuable email outreach informed by purchase and order history.
An asset like Toast Marketing™ optimizes customer engagement like never before, keeping customers in the pipeline and maximizing your CLV.
6. Bundle Your Menu Offerings
Customers love getting bang for their buck. If you can find a way to combine dishes, include discounts, and generally have customers feel like you over-delivered, it can go a long way toward establishing value.
The pandemic has popularized the offering of combo packs that provide customers with feasts at a lower combined price. This indicates that your restaurant is sensitive to cash-strapped customers, plus it can boost check size while not forcing customers to spend an arm and a leg. It’s this kind of value that positively influences CLV and makes your restaurant a go-to for any situation.
Put a Premium on CLV
CLV is a boon to your restaurant’s lifetime value. The larger your base of dedicated and knowledgeable customers is, the more solid your bottom line is and the more resources you have to continue to improve the customer experience.
Are you interested in exploring the host of Toast solutions available to improve that experience and spark CLV? Click below to schedule a demo.
DISCLAIMER: This information is provided for general informational purposes only, and publication does not constitute an endorsement. Toast does not warrant the accuracy or completeness of any information, text, graphics, links, or other items contained within this content. Toast does not guarantee you will achieve any specific results if you follow any advice herein. It may be advisable for you to consult with a professional such as a lawyer, accountant, or business advisor for advice specific to your situation.