Every day, restaurant CFOs field numerous requests to spend more money. If they approve the wrong expenses, the brand ends up in a ditch. Spending too much on labor or spending too little. Spending too much on food costs or too little. The same is true in every department.
To make matters worse, what you should spend varies from 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 offers a unique dining experience, others won't. These decisions are all shades of gray, and they're endless.
Certain Costs and Uncertain Benefits
The reality is that every restaurant CFO is forced to predict what their guests are willing to pay for, and to what extent. Over the years, tools have emerged to help CFOs understand what's working and what's not, including:
- Online Reviews
- Secret Shops
- Traffic Counts
Each is insufficient.
Online Reviews: Do the opinions of these people represent our guests in general?
Secret Shops: Even if we deliver our brand standard to one party, does it resonate with all guests?
Traffic Counts: Are we churning through guests, or are we doing a good job retaining them?
To this day, CFOs are faced with certain costs and uncertain benefits—the balancing of guest experience and cost. When faced with 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 customer expectations." Restaurant margins are often 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 Lifetime Value is a Critical Guest Health Metric
In other industries, especially retail e-commerce, brands optimize everything around Lifetime Value (LTV). LTV is the predicted cash flow from a guest, based on their recency, frequency, and monetary spend. You can think of it as a guest-level Discounted Cashflow Analysis.
Professor Peter Fader of The Wharton School at The University of Pennsylvania pioneered the LTV field 20 years ago, and it has since gained traction across industries. In 2016, Fader founded a company called Zodiac, which calculated customer lifetime value and was later acquired by Nike. Recently, Fader founded another company called Theta, which calculates company valuations based on guest data. Fader's and Theta Equity's work is used in tech, e-commerce, and hedge funds to help leaders fine-tune day-to-day operations.
The LTV science applies as much to restaurants as any other business. Legacy POS systems, tech vendors that "own" the guest data, and fragmented SaaS systems are the root problem. It's impossible to know the value of each individual guest 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 just a few others do it well.
Retail e-commerce nailed it. Restaurants can take lessons on six fronts: Strategy, Marketing, Operations, Menu, Labor, and Real-Estate.
How Restaurants Can Use Lifetime Value
According to Olo data from more than 18 million guest records, the top 5% of restaurant guests (by LTV) drive about 30% of revenue, and the top 20% of guests drive 60% of revenue. This is a law for every restaurant business. The entire executive team should understand:
- Who those top guests 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 increasingly precise and measurable. Top guests spend 6x the average and 25x the bottom. On the side of 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 guest teaches you where to fish. Historically, the challenge has been tracking a single guest 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, 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.
But guest relationships can’t be entirely dependent on individual employees. Otherwise, every time you hire someone new, 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.
To ensure that guests keep coming back, even when staff turnover occurs, brands need an institutional memory rooted in data. Today's restaurant systems ensure that all employees know the regulars—whether they're in the building or ordering online. But we shouldn't stop at regulars. What about people who had a bad experience last time, 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 better schedules. That part is obvious, yet mostly subjective.
The simple metric to provide managers is an employee’s Repeat Customer Rate: the number of guests who come back for another visit divided by the total number of guests they see. Managers should know an employee's Repeat Customer Rate within the first 90 days of hiring a new front-line employee.
What if you indexed your hourly pay to Repeat Customer Rate? Employees who drive high repeats should get paid more per hour. Repeat Customer Rate is a simple, transparent, fact-based metric to align employee incentives with those of guests 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 guests a disservice. Let's explore a few theoretical menu items:
- High volume, high repeat = All-stars, put these everywhere in your acquisition campaigns.
- High volume, low repeat = Guests want to love this item, but they don't. These are the worst items of all because they turn off droves of new guests. Test new recipes here, fast!
- Low volume, high repeat = It 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.
Every restaurant brand wants to pick locations near where their guests live, work, and play. In order to do that, you need to know exactly who your guests are and their respective lifetime values.
Brands can identify sites with high ROI potential by leveraging restaurant technology and analytics firms that provide actionable insights rooted in data, including mobility, demographic, LTV, purchase history, preferred sales channel, etc.
Give your real-estate team a spreadsheet with this intel so they can ensure your newest locations are set up for success.
How to Get the Restaurant CFO On Board With LTV
Today, you'll be uniquely good if you embed lifetime value into your company. In three years, you'll be uniquely bad if you haven't. LTV is the most critical guest health metric.
For non-finance types, if you're wondering how to convince your CFO to spend more money—prove to them that your project will drive LTV through:
- Acquiring enough new target guests
- Maximizing the "lifetime" of each guest
- Maximizing the transactions guests make over their lifetime
- Maximizing the margin per transaction
To find out how to unlock LTV and leverage those insights across your entire business, contact us.
Today, you'll be uniquely good if you embed lifetime value into your company. In three years, you'll be uniquely bad if you haven't.