As a small business owner running a restaurant, you know attracting new customers is essential for growth. However, repeat customers are important too! Usually, they are the ones that will spend more at your venue. To find out the value that customers bring to your business over time, you need to learn how to calculate restaurant customer lifetime value (CLV).
In this article, you will learn what CLV is, why it’s crucial for your restaurant, and how to calculate it. Let’s dive in!
Why Learning How To Calculate Restaurant Customer Lifetime Value Is Important
Before discussing how to calculate restaurant customer lifetime value, it is important to define the CLV concept clearly.
Customer lifetime value (CLV) Indicates the total value a customer brings to a business over the entirety of its relationship with the company. If you run a restaurant, CLV is the amount of money a customer will spend at your venue over time. This includes every type of purchase.
There are many reasons why this metric is important for your business and why you should learn how to calculate restaurant customer lifetime value.
Generally speaking, it provides valuable insights into your customer base and can help you make decisions that affect your business results.
When you understand the average value that customers bring to your business, you can:
- Identify your most valuable customers
- Develop marketing campaigns to attract new customers who are likely to have a high CLV
- Adjust your seasonal pricing strategy to increase your revenue
- Understand what elements are more decisive to your business results
- Evaluate the cost of customer acquisition and other marketing initiatives
CLV is the starting point to get better business results and optimize your operations to grow your returns.
The Formula To Calculate Restaurant Customer Lifetime Value
If you want to calculate restaurant customer lifetime value, the formula is simple. However, you first need to gather data about the following:
- Average Order Value: The average amount a customer spends when visiting your restaurant
- Number of Visits: You need to establish a period for the calculation. Usually, this period is a year. However, you can take a longer or shorter period.
- Customer Lifespan: This metric indicates how long a customer will keep doing business with you. It can be one year, three months, or a decade. It depends on your type of restaurant and what kind of clients you attract.
When you have these data, the CLV formula is as follows:
CLV = Average Order Value x Number of Visits x Customer Lifespan
Let’s now discover how you can calculate restaurant customer lifetime value.
Methods To Calculate Restaurant Customer Lifetime Value
When it comes to calculating restaurant customer lifetime value, there are two methods that business owners use. One is using software specialized in calculating CLV and other relevant metrics. The alternative is to do it manually, with the help of an excel spreadsheet.
Following, you will find the benefits of each method and how to implement them in your business.
Method #1 To Calculate Restaurant Customer Lifetime Value: Use a CRM
The first method to calculate restaurant customer lifetime value is to use a Customer Relationship Management (CRM) system). Hundreds of CRM are out there, and most embed this type of calculation.
Some popular options for restaurants include Hubspot, Zoho, and Salesforce.
A CRM stores all the data useful for calculating CLV (customer purchase history, transaction frequency, average purchase value, etc.).
The advantage of this method is that you don’t waste your time. However, CRM is not free. Moreover, not all of them provide this metric.
Therefore, before getting a CRM to calculate CLV for your restaurant, ensure that the provider offers the feature.
Method #2 How To Calculate Customer Lifetime Value in Excel
If you do not have a CRM or yours do not include this kind of analytics, here is the process on how to calculate customer lifetime value in Excel.
First, you need to gather the necessary information. Collect data on customer spending over a period of time as well as visits to your venue.
Then, you need to create a new worksheet with a few columns:
- Customer Name
- Total Amount Spent
- Number of Transactions
- Average Time Between Transactions
- Customer Lifespan
At this point, you have to input the relevant data and apply basic excel functions to calculate the CLV. Therefore, you’ll need to:
Find the average order value. You can get the number by dividing the total amount spent by the number of transactions.
Calculate the average time between transactions. You can find it by dividing the average customer lifespan by the number of transactions.
Calculate Customer Lifetime Value. To obtain it, you must multiply the average order value, the number of transactions per year (365 divided by the average time between transactions), and the average customer lifespan.
The advantage of this method is that you can reuse the spreadsheet as much as you want, and it will be free. However, it is hard to gather precise data. Moreover, if you have a large number of customers, this process can take a lot of time.
Challenges and Limitations When Trying To Calculate Restaurant Customer Lifetime Value
Before learning how to calculate restaurant customer lifetime value, it is essential to understand the limitations of this metric and the problems you might encounter along the way.
One of the main challenges is gathering accurate data. You may not have access to sophisticated data collection tools. Moreover, tracking customer spending with precision can be tricky without software.
Moreover, CLV calculations typically consider historical data. Therefore, you need to consider the period of time and footfall coherent all year round.
Another challenge is the complexity of calculating restaurant customer lifetime value. Although the methods above work fine, you might lack the technical expertise to set them up.
Lastly, CLV is a number and does not consider other factors impacting customer relationships and business success, such as customer loyalty, brand reputation, or market competition.
Calculating Customer Lifetime Value Example
Let’s make an example of calculating customer lifetime value to make things easier.
Let’s imagine that you run a restaurant with 200 seats. After gathering historical data, you discover that the average order value at your restaurant is $25. You also discover that your average customer visits twice a month and has a lifespan of three years.
By applying the formula above, you can discover your restaurant’s customers CLV:
$25 x 2 x 36 = $1,800
At this point, you can consider how to increase the metric. You can implement a loyalty program to increase the visits or review your pricing strategy. You can also check what is affecting the marketing churn rate of your business.
When you have the CLV, you can start investigating what is affecting it and how to improve your results.
Conclusion on How To Calculate Restaurant Customer Lifetime Value
Now you know everything you need to calculate restaurant customer lifetime value. This metric will provide a starting point to improve your business results. However, consider its limit and its actual value.
As a business owner, there are other metrics that you need to evaluate to have a clear picture of your business and the results.
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