Customer Lifetime Value

Customer Lifetime Value

James Sandrini 10th November 2017

Come again? Let me explain.

CLV – or Customer Lifetime Value – is the net profit gained from a customer over their entire life with your brand. An example:

Monica comes to your bar in October and spends £12 on 2 drinks. Your profit on each drink is £3, so you earnt £6 from that visit. Thanks Monica!

Monica comes back another 3 times, orders the same drinks and pops another £18 in the profit bank. Unfortunately, Monica then ups and moves to Winchester or wherever, never to be seen again. Bye Monica!

Monica, the star that she is, made you a cool £24 profit from her lifetime with your brand. Her lifetime value was £24.

Why Does This Matter?

Well, let’s assume that you have more than one lovely customer and let’s figure out what the average Customer Lifetime Value is across all your loyal guests (you can do this, but you kinda have to want it).

Once we know this, we can chart if it goes up or down each month / year, which is a fantastic indicator of the experience you’re providing your guests (if it goes up, you’re doing good. Tick).

You can also figure out quite how much to spend trying to attract new customers. If you know you’re making £20+ profit per guest, then it ABSOLUTELY makes sense to pay £15 to get them in the door (if you want to know how to spend that kinda cash wisely, give us a call).

How Does This Translate to Hospitality

Generally quite well. Hospitality does suffer more from wastage at the point of sale than most industries (blame the long shifts and the late nights, plus the fact that food and drink are perishable), and is a sector prone to refunds and giveaways. Hospitality business’ also tend to rapidly amend their pricing models and are immediately affected by competitors, so the maths is not quite as clear and crisp as it might be in, say, manufacturing.

Sounds Great, But Does Anybody Actually Use it?

Behold! A handy case study, courtesy of The Ritz:

They give every single team member a kitty of £2,000 to keep a guest happy. £2,000! Shook.

Why the largesse? Because they know that the average customer spends £25k lifetime with them, so if it takes £2k to keep that guest happy, that’s money well spent.

I'm Not Giving Away £2,000

Sure. I mean don’t. But, if you knew your CLV, you could tell all your team to give away a free coffee or dessert when shit goes down without even grabbing a manager. Or you could offer £10 off the bill for a first time customer. Or…well, you get the idea.

You Mentioned That I can Figure This All Out...

…but I never told you how. Very observant of you.

Granted, you might not have all the data today. Sorry. I could have mentioned that earlier. But you can get it. First, set a realistic time period to review. Things change super-fast in F&B, so a year is usually about right. Then, note how much money you made over that period. That’s the easy bit.

The hard bit is then figuring out how many unique visitors you welcomed during this period, which is easy if you sell a product on Amazon (or….you’re Amazon) and a whole lot harder if you work in a bar. Sorry again.

You're Not Making This Easy

Guilty.

To solve this, you can find out how many people checked into your venue on Facebook more than once. Or review your booking software for repeat guests. Or send a survey anyone that you have an email address for. This is all far from perfect, but it’s a good start.

In an ideal world, you’d do what the coffee chains all do so well – incentivise people to come back with a loyalty offer so good that they always notify you that this is their 2nd, 4th or 13th time back. They do the work for you and you get all the info you need to take your business to the next level.

There’s more. I know you want to tell me more. You caught me. The next step is, rather than just to use this figure to give stuff away, to define what makes your customers even more valuable. What would make Monica’s Customer Lifetime Value £30? Or £40? Ask it, define the answer and action it. That’s where the real value is.