very day, restaurant CFOs field numerous requests to spend more money. If they pull the trigger on the wrong expenses, the brand ends up in the ditch.
Just like driving a car, you can end up in a ditch on either side of the road: spending too much on labor, or spending too little. Spending too much on food costs, or too little.
Plus, to make matters worse, what you should spend varies brand to brand — and location to location. Some guests will pay up for better food ingredients, others won't. Some guests will pay for a location that's better for people watching, others won't. These decisions are all shades of gray, and they're endless.
Restaurant CFOs are Faced with Certain Costs and Uncertain Benefits
The reality is that every CFO is guessing about what their guests will pay up for. Over the years, tools have emerged to help CFOs understand what's working and what's not:
- Guest Sentiment — Direct and Online Reviews
- Secret Shops
- Traffic counts
Each is insufficient.
Guest Sentiment: Do the opinions of these people represent our customer in general?
Secret Shops: Even if we deliver our brand standard, does it resonate with guests?
Guest Counts: Are we churning through guests, or are doing a good job retaining guests?
To this day, CFOs are faced with certain costs and uncertain benefits — the balancing of guest experience and cost. Face enough of these decisions, most people will start indexing toward reducing cost — it's the logical thing to do!
In his book Restaurant Man, Joe Bastianich shared that his secret to success in restaurants was "watching costs, while focusing relentlessly on exceeding guest expectations." Restaurant margins are tight; there's no room for error.
Like other complex ecosystems, it's difficult to quantify the effect of forces interacting with each other. (Aside: For an interesting read on ecosystems, I'd recommend Serengeti Rules, written by evolutionary biologist Sean B. Carroll.)
The net of all this: CFOs and the brands they lead sink or swim based on the strength of their judgment (and their luck).
It doesn't have to be that way.
Why Customer Lifetime Value is the Most Critical Customer Health Metric
In other industries, especially ecommerce, brands optimize everything around Customer Lifetime Value (CLV). CLV is the predicted cash flow from a guest, based on their recency, frequency, and monetary spend (aka RFM). You can think of it as a customer-level Discounted Cashflow Analysis.
Prof. Peter Fader of Wharton pioneered the CLV field 20 years ago, and it has since gained traction across industries. In 2016, Fader founded a company called Zodiac, which calculated lifetime value for customers and was later acquired by Nike. Recently, Fader founded another company called Theta Equity Partners, which calculates company valuations based on customer data. Fader's and Theta Equity's work is used in tech, ecommerce, and hedge funds to help leaders fine-tune day to day operations.
The Customer Lifetime Value science applies as much to restaurants as any other business. Archaic POS systems, consumer networks that "own" the guest data, and fragmented SaaS systems are the root problem. It's impossible to know the value of each individual customer when the data resides in disconnected silos.
In three years, harnessing the power of guest data will be table stakes. Today it differentiates — the Roark portfolio, Panera, and few others do it well.
Ecommerce nailed it. Restaurants can take lessons on six fronts: Strategy, Marketing, Operations, Menu, Labor, Real-Estate.
How Restaurants Can Use Customer Lifetime Value
The top 5% of customers drive ~25% of total sales, while the bottom 45% of customers drive ~20% of sales. This is a law for every restaurant business. The entire executive team should understand:
- Who those top customers are (psychographics and behavior most importantly)
- Why they visit (purchase patterns, daypart patterns)
- Why they stop visiting (NPS, feedback)
- How we find them (acquisition channel)
Based on a strong foundation of understanding of the guest, now marketing can drive guest counts. In the future, marketing will be 100x more precise and measurable. Top customers spend 6x the average and 25x the bottom. On the side of customer acquisition, marketing can seek out those guests and justify paying a higher price to acquire each of them. I don't know of a single CFO who would complain about spending $20 to acquire a guest who spends $750 / yr as opposed to $5 to acquire a guest who spends $50 / yr. Knowing the customer teaches you where to fish. Historically, the challenge has been tracking a single customer across visits.
From a frequency perspective, marketing teams can now nudge guests in exactly the right way at exactly the right time. If frequency dips, or it's been a while since they've visited, or they give you poor feedback, then send an automated message (or series of messages) to the guest on the channels where you can reach them. The work here is testing and improving those messages — not sending or measuring campaigns.
Growing up working in restaurants, the CRM was in my brain. I had an anecdotal inventory in mind of who the valuable guests were. I knew their names, what they liked to drink, and their hobbies. I really cared.
Yet, employee turnover kills. Every time you hire a new employee, they have to rebuild that CRM from the ground up. It puts employees in an unfair position, and alienates regulars. No regular loves the "have you dined here before?" question.
Today's restaurant systems ensure that employees know the regulars — whether they're in the building or ordering online. We shouldn't stop at regulars. What about people who had a bad experience last time, or who haven't been back in a while, or might like a new item on the menu?
It may seem like magic, but all this information can be displayed in the host stand system and pushed into the POS in real-time.
If a server (full service) or cashier (limited service) gets guests to return more than the average employee, they should get rewarded. In full service, that means better sections, and in all service types that means more hours. That part is obvious, yet is mostly (completely?) subjective. The simple metric to provide managers is an employees Guest Repeat Rate: the number of customers who come back for another visit divided by the total number of customers they see. Within the first 90 days of hiring a new front-line employee, managers should know an employee's Guest Repeat Rate.
What if you indexed your hourly pay to Guest Repeat Rate? Employees who drive high repeats should get paid more per hour. Guest Repeat Rate is a simple, transparent, fact-based metric to align employee incentives with those of customers and shareholders.
As a thought experiment, how much would you pay a server if they got every guest to visit again?
If you're not making menu decisions based on reorder rates, you're doing your customers a disservice. Let's explore a few theoretical menu items:
- High volume, high repeat = all stars, put these everywhere in your customer acquisition campaigns
- High volume, low repeat = Customers want to love this item, but they don't. These are the worst items of all, because they turn off droves of new customers. Test new recipes here, fast!
- Low Volume, High repeat = May seem like a bummer of an item, but your regulars are the ones who buy it. These kill you when you take them off the menu.
- Low Volume, Low repeat = Not worth the space on the menu, and not the complexity to carry the food costs. Kill these items.
Everyone wants to pick sites that are near where their customers live, work, and play. It follows that we need to know the customers to pick successful sites. But having a list of customers is not enough. The top 20% of customers drive 50-60% of revenue, whereas the bottom 20% will drive 5-6% of revenue. That is not an exaggeration. In other words, you can follow "your customers" all the way to closed locations. Instead, give your real-estate team a spreadsheet with customers and their respective lifetime values. Tell them that we need to pick sites where our best customers live, work, and play.
How to get the restaurant CFO on board with CLV
Today you'll be uniquely good if you embed customer lifetime value into your company. In three years, you'll be uniquely bad if you haven't. CLV is the most critical customer health metric.
For non-finance types, if you're wondering how to convince your CFO to spend more money — prove to her that your project will driving CLV through:
- Acquiring enough new target customers
- Maximizing the "lifetime" of each customer
- Maximizing the transactions customers make over their lifetime
- Maximizing the margin per transaction
Photo by: Hean Prinsloo