How to Increase Your Restaurant’s Customer Lifetime Value
There are a number of factors that contribute to the health of your customer lifetime value.
That’s why it’s important to run your restaurant through the CLV formula at least a couple times a year. As things change, the formula will tell you how significantly your business has been affected as well as help you recover from any setbacks that have occurred as a result.
In order to understand how this formula can aid you in your efforts to improve business and the customer experience in the process, let’s walk through an example you’re already familiar with.
How to Use the CLV to Detect the High Cost of Lost Customers
In order to truly understand how the CLV works to assess your restaurant’s profits and losses, we’re going to use the example of Chipotle from 2015 — around the time of their massive food contamination crisis.
When all was said and done, the outbreak led to the sickening of 55 customers from around the United States. That’s barely a drop in the bucket in terms of Chipotle’s total customer base. Nevertheless, it wasn’t just the people that got sick that responded to Chipotle after the incident.
According to a Google search for “chipotle food contamination”, over 1,550 websites covered the story. CNBC, Business Insider, and the Washington Post currently hold the top search results for those related stories. How many other high-authority and high-traffic websites do you think covered this story in the turbulent months proceeding it?
It’s not just the news outlets you have to think about either. Consider how many people read those stories in their newspapers, on the web, through social media, or even heard about it from friends, family, and colleagues. This wasn’t just a case for local word-of-mouth putting a damper on things for a tiny restaurant. This was a major national crisis that resulted in huge losses for Chipotle.
The breakdown below uses hypothetical (and some actual) numbers for Chipotle’s business.
- The column on the left shows you the part of the CLV formula we’re calculating.
- The column in the middle shows you these numbers from the fourth quarter of 2014 (the year before the outbreak).
- The column on the right shows you these numbers from the fourth quarter of 2015 (the period of the outbreak).
The point of this example is not to speculate on the validity of these numbers; it’s to watch how the CLV changes as something catastrophic — and not very well handled — disrupts the flow within a restaurant.
Let’s take a closer look at this formula in action:
Chipotle reported a 7% drop in sales revenue in Q4 of 2015 when compared to the same time period the previous year. These numbers assume that the total number of orders shifted accordingly, so the AOV wasn’t affected.
Let’s assume that, ordinarily, Chipotle has a pretty high return rate of customers. But let’s say that, when all hell broke loose during the outbreak, customers were less likely to return. As a result, the purchase frequency dropped in 2015.
As you can see, even if Chipotle were feeling okay with the total revenue and number of orders holding about the same, just the slightest change in the number of customers can alter how much they’re worth to the restaurant.
They say that businesses should generally plan to spend 2% of their sales income on marketing. Let’s assume that’s what Chipotle did in 2014.
In 2015, however, when Chipotle had to revamp its internal processes and issue mea culpa after mea culpa to the public, let’s estimate it used 9% of its income to cover the costs of marketing. Even then, the new customers they acquired likely couldn’t match previous years’ customers due to the loss of loyalty and trust.
If we were to assume that, pre-outbreak, customers had an average lifespan of 5 years (or 20 quarters), Chipotle was looking to make a good amount of money off of that loyalty. Even with all those apologies and free burritos they gave out after the outbreak, Chipotle might not have been able to recover its costs for the quarter.
And, in fact, that’s what happened.
In Q1 of 2016, Chipotle reported its first quarterly loss, to the tune of $26.4 million. For the sake of comparison, that same timeframe in 2015 netted Chipotle $122.6 million in the black.
Can you guess what Chipotle connected the loss to?
- Fewer purchases from customers (AOV + f)
- Discounts and free burritos they gave out to respond to the incident (CAC)
Obviously, these numbers are (mostly) made up, but you can see how quickly the situation can devolve when you lose the trust and loyalty of your customers. It’s not just about how much your revenue takes a dip. It’s about the ramifications of what happened inside your restaurant and the ripple effect it causes.
How to Use the CLV to Recover Your Business
Maybe you’re thinking, “Our restaurant doesn’t come close to Chipotle’s levels of traffic, revenue, or reach.”
Honestly, that doesn’t matter.
Think about the bad press that smaller and non-chain restaurants have gotten in the press, on social media, and by word-of-mouth. Recently, there was the delivery debacle from La Porchetta. A couple years back, it was the Marcy’s Diner owner who screamed at a child that was being disruptive. And then there were the rats caught running through Burger King buns in Delaware.
It doesn’t matter where your restaurant is located or what kind of incident happens, it all affects your CLV. That’s why you need this formula.
As you plug in the numbers from your own business, you can figure out where something has gone wrong. For instance, if your purchase frequency has dropped from year to year, there’s likely something amiss in your customer loyalty and retainment strategy.
Or how about customer acquisition costs? If your marketing spend outweighs how much your customers spend over their lifetime, or if the margin is too low in general, which part of the equation needs fixing? Are you not spending enough to market to the right customers? Or are guests not satisfied with the experience you’re providing?
You have to break this formula down bit by bit in order to truly understand what’s going on. Then, check the channels that provide you with valuable information about what’s happening in your restaurant.
Whether you collect feedback in-house on comment cards, online through your website, or you track it on public channels like social media and Yelp, you can usually sniff out problems there (if they’re not otherwise evident). Of course, you don’t just want to sniff out those issues. You gather feedback — positive and negative — from these channels in order to take action.
Your guests are giving you a chance to recover their business and, consequently, prevent your CLV from dropping. Take it.
A Note About Positive Interactions and CLV
Don’t think that the CLV is only valuable for dealing with negative events that take place in or with your business. The same is true even if everything goes great.
Let’s say that spend is up and marketing is down, but you want to see more progress. You know the possibility is there, you just don’t know how to capitalize on it.
This is where segmentation of your data comes in handy.
Your data should allow you to track where a good portion of your business comes from. For instance, your Facebook page might be a huge lure not only to your restaurant, but to sign up for your loyalty program. If you can identify a strength like this, you can dedicate more of your time and money to profitable channels that draw in a better quality of customer and improve your CLV in the process.
Wrapping Up
If the example formula from Chipotle above has taught you anything, let it be this:
Every guest’s satisfaction counts.
Look at what happened when just 55 customers became ill from dining with Chipotle. The company didn’t just lose those customers, it lost the respect and trust of the public at large, along with a significant portion of its revenue.
If you have a way to actively monitor and listen to your guests — no matter how big or small the problem may be — you can prevent the spread of bad news on a massive scale. You can also earn yourself a reputation for being a business worth remaining loyal to, which will help drive up your CLV overall.
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