As a restaurant, a primary concern is how to acquire more customers at a lower cost.
Customer Acquisition Cost (CAC) is a metric has been created to measure the estimated cost of each customer. There are several methods of finding this calculation.
The CAC metric is great for websites that store customer information and can determine exactly when a visitor has made a purchase or visited the site before.
However, it may be somewhat challenging for restaurants to find the CAC as it assumes that you can differentiate between new and existing customers, as well as where each set of customers came from.
Here are a few tips on identifying your own CAC metrics and taking steps toward reducing customer acquisition cost.
Determining Your Customer Acquisition Cost
The basic way for a restaurant to determine their CAC is by dividing the monthly marketing spend by the amount of customers received.
For example, if the restaurant spends $5,000 per month on marketing and it has 2,500 new customers, it has a customer acquisition cost of $2.00.
The challenge is to determine what percent of customers each month are new and which ones have visited the restaurant before.
If you spend $5,000 per month on marketing and have 5,000 customers the same month, this is a cost per customer of $1.00. Applying this straightforward calculation is likely to underestimate the actual cost of acquiring a new customer.
There are two potential ways to combat this. The first is to apply a way to distinguish between new and existing customers.
This may be done by blatantly asking customers if it is their first time at the restaurant and then taking a manual count, monitoring the usage of loyalty card programs, and/or understanding the seasonal adjusted demand.
You may find that 70% of your customers have visited your restaurant before by taking three sample measurements per month for one year.
Any spike or reduction can be explained by either a decrease in customer loyalty, or a decrease in the acquisition of new customers.
If you are trying a new marketing campaign or have a budget change, it can be easier to discover the impact.
Here is an example for Tony’s Pizzeria:
- Average customers for month of November: 5,000
- Percentage that are returning customers: 70%
- Actual customers in November: 4,000
- Returning customers: 3,500
- New customers: 500
In this example, we assumed the amount of returning customers was constant. This helps us to measure the amount of new customers for the month of November, compared to the average amount of customers.
If the amount of new customers for November is 500 and you spent $1,000 on marketing for that month, the customer acquisition cost would be $2.00.
This is an important metric to know as you adjust marketing campaigns and shift budgets, assuming that your regular customer base remains consistent.
Now that you know how to determine your CAC, here are four tips to lower it given the latest strategies in the digital age.
1. Get More Reviews
Yelp! and Google Places have displaced the Yellow Pages almost entirely and the most powerful marketing method. Word of mouth, is never more prevalent than on these sites.
Incentivizing staff to encourage guest reviews may be one way to get more reviews, but you must also make sure that your company profile on review websites is properly maintained.
There are ways to strategically enhance your Yelp! presence and get more visibility, which then means you can lower your customer acquisition cost due to increasing your fanbase from greater awareness.
2. Ask Your Customers Where They Came From
If you are placing expensive print and television advertisements, you may be running your marketing campaign on a high-stakes game of guesswork.
If you do not know where your customers are coming from, you cannot determine the cost of acquiring them from specific channels.
You never know if a new surge in customers could be from a press release covered about you three weeks ago that has delayed effects rather than the local television placement.
You can help to understand where your customers came from by either attaching discount codes with certain media that will link it back to the campaign, or outright asking your guests.
It is not necessarily important to ask every customer, but getting at least 40% should provide a sizable sample population in order to understand where they are coming from.
This will help you to lower customer acquisition cost by avoiding advertising spending that has little impact on your bottom line.
3. Update Your Website Regularly
Many restaurants have a basic website with a menu and pictures of the location, but you want to be more profitable than many restaurants.
Having an up-to-date website means using Google Analytics to understand where your website traffic is coming from and performing split-testing to improve the conversion rates.
Conversion rates showcase the amount of people calling the restaurant or placing an online reservation.
Websites do not need to necessarily be equipped with sophisticated designs and flashy images, but it should reflect your brand and communicate the identity of your restaurant.
If you are targeting people that prefer upscale Vegan or French food on the Upper East Side of New York City that may focus entirely on the food quality, this is an entirely different image than low budget fast food or a dimly lit romantic restaurant.
Your website should track all user behavior, understand where visitors are coming from, and communicate the culture and experience that you want to translate.
4. Be Friendly with Local Media
In a simple sentence, it pays to know people in the restaurant industry. Editors have friends and good taste, which means that a free meal invitation with premium treatment or a request from a friend is unlikely to go unanswered.
We are not advocating bribery, which his likely to backfire and insult moral code, but you may find yourself particularly friendly with editors because you like their great fashion sense and share the same hobbies.
Being friendly with the local media may mean you spend a few hours per week having coffee with someone at the editorial team, which costs very little, but can yield high upside if it results in a better review or even a slight preference to additional media coverage.
Determine where your local media professionals congregate after work, as editors enjoy happy hour too, and coincidence is often easy to imitate.
The Bottom Line
There are many more ways to reduce customer acquisition cost for your restaurant, but the bottom line is gathering the data.
If you have the information and can perfectly attribute what marketing channels are generating new customers, the route to lowering your cost per customer will become clear.
For existing restaurants, this has never been easier with websites tracking user behavior, loyalty programs, and a large database of previous customer information.
This may be more challenging for restaurants that have just entered the market, but they can avoid basic missteps by planning ahead and interacting with restaurateurs to learn from their previous mistakes.
If you have very little or prior operating history, there are numerous business plan resources to aid you in the business plan creation process.
Customers react differently depending on their demographics and preferences, so make sure than any research is applied to comparable restaurants.
Researching the marketing channels for a popular franchise to form assumptions about a corner café is probably not the best approach, but inviting a restaurant owner to lunch that is in a non-competing location could help you to gather good insights to learn more their data.
Regardless of your restaurant’s size and location, calculating customer acquisition cost and lowering it will remain at the top of your core objectives.
Author Bio: Chase Hughes is the Project Manager for business-plans.com. Chase has seven years of executive level experience in the investment banking and management consulting industry.