How much is a returning guest worth to your restaurant? Do you spend more or less than that amount to attract them to your restaurant in the first place?
Acquiring new customers versus retaining existing ones is an ongoing debate across all industries, and restaurants are no different.
In fact, they might be among the industries that focus on retention more than any other: you’re not just selling food, but also experience and new memories.
Diners that walk out of your restaurant with a positive experience will probably want to come back and tell their friends and loved ones about it.
After all, 61% of adults say they would rather spend money on an experience, such as a restaurant or other activity, compared to purchasing an item from a store.
Data tells us that acquiring a new customer can be anywhere from 5 to 25 times more expensive than retaining an existing one. You don’t have to spend your resources to attract new guests—you just have to keep the ones already coming to you happy. Makes sense, right?
Furthermore, increasing customer retention rates by even just 5% increases profits by 25% to 95%.
The verdict is clear: yes, you need to attract new diners to your restaurant, but your work doesn’t end once you do. You’ll see the biggest return if you nurture the relationship you have with them and build long-term loyalty.
This approach is best accompanied with your customer lifetime value (LTV), which will in turn help you grow your restaurant’s profitability and fuel its long-term healthy growth.
Have Your Restaurant’s Numbers in Order
Before we jump into customer lifetime value, let’s first break down some key restaurant numbers you should be tracking and measuring.
The total sales your restaurant makes in any given period is among the main numbers to consistently track and keep an eye on.
The revenue you made in a day, month, and a year makes an impact on your expansion plans, hiring, menu choices and specials, the seating arrangement in your restaurant, opening hours, and much more.
Even though it’s not always the most comfortable number to look at, don’t skimp on diligently tracking your revenue so that all the other metrics bring you the benefits they are supposed to.
2. Cost of goods sold (COGS)
This metric refers to the cost you incur when creating each of the food and beverage items you sell to your guests in a given period of time.
It’s important to track COGS because it’s among the largest expenses for a restaurant. It directly impacts your gross profit and by decreasing COGS, you can increase your margins.
COGS is a representation of your inventory in a certain timeframe. Therefore, the formula to calculate COGS is:
Beginning Inventory + Purchased Inventory – Final Inventory = Cost of Goods Sold (COGS)
3. Prime cost
Prime cost of a restaurant is the sum of all the labor costs (hourly wages, salaried labor, benefits, payroll tax) and the COGS. Prime cost makes about 60% of a restaurant’s total sales.
Since it represents the majority of its controllable expenses, it’s one of the main areas a restaurant owner can optimize to reduce costs and increase margins and profit.
The formula to calculate prime cost is:
Labor + COGS = Prime Cost
4. Gross profit
Restaurant’s gross profit is simply the amount a restaurant has from its total revenue after deducting the cost of goods sold.
This gross profit is then used for paying off fixed expenses and profit.
The simple formula for gross profit is:
Total Sales – COGS = Gross Profit
5. Food cost percentage
The food cost percentage is calculated from the ratio of the cost you incur to create a menu item and the price you charge for it.
This number will depend on many variables unique to you, but a profitable restaurant typically generates a 28% to 35% food cost.
The best way you can benefit from knowing your food cost percentage is by knowing it for each of your menu items, which then helps you arrange your marketing and in-restaurant promotions to sell the most profitable items.
The formula to calculate your food cost percentage:
Food Cost / Total Sales = Food Cost Percentage
6. Overhead rate
Do you know how much it costs you to run your restaurant on an hourly or a daily basis?
It’s a helpful metric to know because it helps you compare the cost per hour or day with the revenue and gross profit made.
The formula of overhead rate is:
Total Indirect (Fixed) Costs / Total Amount of Hours Open = Overhead Rate
The Importance of Customer Lifetime Value in Restaurants + How to Calculate it
Lifetime value of a restaurant guest is a metric dependent on consumer behavior.
Consumer behavior can be a result of circumstances completely out of your control, like the person moving out of town or changing their dietary or money-spending preferences.
At the same time, there is a lot you can do as a restaurant owner to entice a diner to return to your restaurant and, ideally, do so many times over the coming months and years.
But before we get to that, how does customer lifetime value even work?
Customer lifetime value (LTV) is the projected amount of revenue a guest will generate over their lifetime at your restaurant.
There are three metrics that go into the calculation of your customer LTV:
- Your average customer spend per visit (per person)
- Your average customer number of visits per year.
- Your average party size (the number of people that comprise a typical visit)
From these metrics, you can reach a customer value per year. If you add a cycle based on a number of years, you will end up with an approximate lifetime value.
This is best demonstrated with an example:
Your average customer spend per visit (per person): $25
Your average customer number of visits per year: 6
Your average party size (the number of people that comprise a typical visit): 2
This customer brings you:
- Yearly: $300
- In their lifetime: $2,100 (based on a 7-year cycle)
- In their lifetime: $1,500 (based on a 5-year cycle)
In other words, if your average diner eats $25 worth of menu items, visits every two months, and typically brings one person along with them, their value to your restaurant per year is $300.
The value to your restaurant in their lifetime will depend on a cycle you decide to use—this part depends entirely on you. The NextRestaurants customer LTV calculator uses a 7-year cycle, but you can increase or decrease this number as necessary.
Therefore, the formula for your restaurant’s customer lifetime value is:
Average Customer Spend Per Visit X Average Visits Per Year X Average Party Size X Years In A Lifetime Cycle = Customer Lifetime Value
When you play around with numbers that you feel are correct for your restaurant, how do you feel? Is the result higher or lower than you expected?
If you need more input on some of these metrics, data shows that:
- Restaurants can expect a loyal guest to buy 1.7 times per month
- The average number of years a loyal guest will visit a restaurant is 2.7 years
- A typical dissatisfied guest will tell 8-10 people, and those people will tell 5 more people, meaning that up to 60 people could be affected by just 1 guest’s bad experience
Knowing the customer LTV for your restaurant will keep paying off in the long term when it comes to marketing your restaurant and optimizing diner experience.
Furthermore, you will be confident about the benefits you’ll see if they keep returning to your restaurant time and time again.
How to Attract Repeat Diners to Drive More Revenue
When you consider marketing in general, you might think that it’s easier to market to those people who know of you or have visited your restaurant in the past.
And you’d be completely correct.
Online ads that are retargeted to audiences who have interacted with the business before see a 10 times higher click-through rate.
As consumers, we like seeing companies we know—and we like buying from them.
Restaurants are no different.
What are some strategies you can use to encourage your guests to dine in your restaurant again?
Offer a loyalty program
Restaurant guests have reported that loyalty programs would increase their visitation frequency to a specific restaurant by an average of 35%.
On top of that, they also spend 46% more with businesses that have loyalty programs.
Loyalty programs that offer meaningful rewards work well because people want access to exclusive opportunities and rewards, so do your best to make them happen.
Re-engage potential and previous guests through Facebook Ads
You can use Facebook Ads targeting to display ads to those who have spent certain amount of time on your website or specific pages, subscribed to your email list, or left an email when they completed their online or in-restaurant order.
You’re up to 70% more likely to convert those potential guests who have expressed their specific interest in you by doing this!
The Challenge of Brick and Mortar Businesses and LTV
Tracking the spend, frequency of visits, and party size would be a whole lot easier if you were Amazon, or any other online store for that matter, right?
It’s a lot easier for them, as well as for folks that only serve their food through online ordering and delivery.
They require their customers and diners to log in with an email address, which makes tracking order value and other metrics much more possible.
Brick and mortar businesses, however, most often face a devastating reality: they have zero information about the people who ate at their tables and paid for the food.
They may never walk back in.
Or they may keep coming every single week without you noticing.
Unless you keep track of these visits through a loyalty program or a digital system that enables it, you’re missing out on a range of possibilities to grow your restaurant’s profits.
Measure LTV Using jumper and Building Audience Profiles
Everything we do in jumper is focused on a simple, frictionless checkout process no matter where the customer or diner came from.
And this remains the same for food and drinks orders. It’s a win-win situation: your guest can order quickly and easily with all of the options at their fingertips, and in turn, you can build their profile and order history inside jumper.
Because with jumper, they are no longer a guest that’s passing by. You can now keep track of how frequently they visit and the typical value of their order. This works for dining in, pickup, and delivery, too!
Setting up in jumper is easy. After you create your free account, there are only a few areas to focus on before you can start taking orders.
First one is connecting with the desired channel, such as social media, website, or even creating your custom domain:
The second step requires you to connect a payment method, such as Stripe and Paypal, to be able to receive funds for your orders:
You will also set up your business information such as address, opening hours, delivery radius, average order preparation time, and more.
Next, you will be adding and managing your menu:
You can create multiple categories and fill each of them will multiple menu items. Each of your menu items can also have various selections, add ons, and a list of ingredients.
One final step is testing out your automated bot checkout.
When customers start ordering from you, you will start seeing their order history in your dashboard and implement the customer lifetime value insights from this guide.
Make the Most Out of Customer Lifetime Value
Your customer lifetime value is the fastest way to stop worrying about your competitors and their budgets and start focusing on one of the most important elements of a sustainable restaurant business: happy customers who not only gladly return to your restaurant, but also recommend it to their friends and family.
Start by working out your revenue and other key metrics along with your current approximate customer LTV.