Profitable restaurant customer

How much is a profitable restaurant customer worth?

One of the most basic of business measurements, and an important element of your restaurant customer’s lifecycle, is what is known as Lifetime Value or LTV, which is simply how much a profitable restaurant customer is worth to you over the lifetime of his relationship with your business. This is important for two reasons: to know how much you are willing to spend to get the customer and how much you can spend on her once you have her, to continue the relationship.

profitable restaurant customerGoing through the activity of determining lifetime value will show you how much you should be willing to pay (or spend) to “purchase a profitable restaurant customer”. Over the course of a customer’s relationship with you, if she is worth $1,000, how much are you willing to spend to get that customer? $2? $200? $500? In this way you can determine what your restaurant marketing budget should be and then spend that money. You will rightly begin to see restaurant marketing as an investment and not as a cost. You will WANT to spend marketing money, because you know that the more you spend the more you earn. However to do this you must understand a) how much a customer is worth to you and b) what marketing activities are working and how much each of them is costing you.

Calculating lifetime value for a profitable restaurant customer

There are numerous complicated calculations for getting to LTV, including amortization, profit margins, etc. But to benefit from the logic, we can get to a customer’s lifetime value with a rather simplified calculation. Take the average amount that a customer spends with you and multiply it by the number of times he does business with you. Then multiply this by the number of years you think he will be a customer (for prudence sake we would not recommend going past 3 years).

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For example:

LTV for customer John Smith

Average bill                        $50

Number of visits                  x 12

Yearly value                         $600

Over 3 years                         $1,800

As you begin to understand the concept of lifetime value you will want to look into more detail at lifetime value of your customer in terms of profitability as well as gross revenue. You may have some customers who buy large quantities, but have large discounts while other customers buy fewer items, but at a higher price, making them more profitable to you. In this way you may find that your least likely customers are actually your most valuable from a restaurant profit standpoint.

LTV for customer John Smith

Average bill                                                               $50

Number of visits                                                      x 12

Yearly value                                                               $600

Gross profit margin                                                   10%

Gross profit                                                                  $60

Lifetime gross profit over 3 years                            $180

 

Comparing restaurant profitability

In this way you can compare the profitability of different customer groups to determine which you should focus on and how much money you are willing to spend in order to acquire your more valuable customers:

These are best customers because they spend more:

 Best CustomersAverage Customers
Life expectancy3 years2 years
Revenue Year 1$100$50
Revenue Year 2$100$50
Revenue Year 3$100$0
Lifetime Revenue$300$100
Gross Profit Margin10%%10
Lifetime Gross Profit$30$10
Acquisition Cost$5$5
Lifetime Net Profit$25$5

 

But what about customers who spend less, but the profit margin is higher:

 Best CustomersAverage Customers
Life expectancy3 years3 years
Revenue Year 1$50$100
Revenue Year 2$50$100
Revenue Year 3$50$100
Lifetime Revenue$150$300
Gross Profit Margin10%%5
Lifetime Gross Profit$15$15
Acquisition Cost$5$5
Lifetime Net Profit$15$10

 

In this way you see that the customer who buys one thing at full price is often more valuable than the customer who buys a lot on sale. A deep understanding of your customer base will help you not only understand how much you are willing to spend on acquiring and maintaining a customer, but also on how to best use offers such as sales, couponing, etc, as well as how to manage your stock to have higher profit margin articles. Perhaps doing a Groupon activity to attract lots of low margin customers is not a good marketing strategy, but spending more on getting quality leads that will last a long time is a better use of your resources. Understanding that marketing to a couple that orders high margin wine with their meal is a better bet than attracting early bird tea totalers.

Also consider additional factors that affect your bottom line to determine your most profitable restaurant customer:

  • profit per purchase
  • frequency of purchases
  • frequency of friend referrals

You can (and should) also do this for your customer profiles by taking an average of that profile group. Be prepared, you may just find that the least likely group of customers is the most valuable to you.

These calculations will give you a more informed vision of your customers and will allow you to spend your marketing money on the group that is most interesting to you. Using customer lifetime value as a marketing metric will place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing your short-term sales. You can, for example, reward those individuals that are most important for your bottom line with extra ‘goodies’ and special marketing activities, as well as spend more money on targeting the same type of customers and potential customers.

An LTV calculation will allow you to target the most profitable groups and determine how much marketing spend you are willing to put behind a campaign to a specific target.

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