The two most common reasons why restaurant owners think advertising doesn't work for them are distraction and a lack of clear objectives. It's hard to blame them, it's not something they teach in school, and I've never met a high level advertising agency that takes responsibility for what they do. I'm not saying there aren't any, there certainly are. I just think there are very few.
Agencies often talk about ROAS (return on ad spend). This is not the metric you should be looking at. You don't care about having the highest ad spend. Then you only need to show advertising to customers who already know your brand and either have bought in the past or would have bought without advertising. There are two metrics you should look at, especially with paid advertising:
Profitability (ratio of lifetime value to customer acquisition cost).
Liquidity
The first ratio tells you whether the cost of acquiring customers is justified. If this ratio is negative, you should change your operations.
The second indicator tells us whether we are not losing cash flow during customer acquisition. A good scenario is when the value of the customer's first transaction (revenue) is greater than the cost of advertising. The ideal situation is when the profit (after deducting the cost of producing the product, service or, more generally, the gross margin) from the first transaction is greater than the cost of the advertising spent to acquire it. This is not always possible, and a company that has the financial resources, e.g. in the form of working capital loans, to invest in customer acquisition at a cost below the LTV (Lifetime Value), i.e. the PROFIT that the customer will bring during all interactions with the company, will always win because it will have access to a larger pool of customers:
Acquisition of customers below LTV cost
Acquire customers below LTV cost and first transaction value greater than acquisition cost
Acquiring customers below LTV cost and profit on first transaction greater than acquisition cost
When we run a foodservice business, we need to understand how much it costs us to acquire a new customer, and what value that customer brings during his or her relationship with our company. This is what we call Customer Acquisition Cost (CAC) profitability in the context of a customer's Lifetime Value (LTV).
What is CAC and LTV?
CAC is the total cost of bringing a new customer into our restaurant. This can include advertising, promotions, loyalty programmes and digital marketing spend.
LTV, on the other hand, is the total value a customer brings to us over the course of their relationship with us. It includes all the purchases a customer has made with us from their first visit until they stop using our services.
An illustrative example from the hospitality industry
Imagine you run a restaurant and decide to invest in a Facebook advertising campaign to attract new customers. The campaign cost 10,000 PLN and attracted 200 new customers. In this case, the cost per customer acquisition (CAC) is:
First impression: Advertising seems unprofitable
Let's assume that each new customer spends an average of PLN 40 during their first visit. This means that after the first transaction every customer brings us money:
At first glance, it looks like the cost of acquiring a customer (50 PLN) exceeds the value the customer brings in the first transaction (40 PLN):
Retention activities and customer satisfaction
However, let's assume that the customer is very satisfied with the food and service, which keeps him coming back to our restaurant. We also introduce retention activities, such as a loyalty program, regular promotions, or personalized offers to encourage them to return. The average customer returns to our restaurant five more times, spending an average of PLN 40 on each visit.
LTV calculation
Now we can calculate the customer's lifetime value (LTV):
Profitability over the long term
Looking at the entire period of the customer relationship, the LTV is PLN 240, while the CAC is PLN 50. This means that the cost of customer acquisition was fully justified:
At first glance, advertising may seem unprofitable because the cost of customer acquisition exceeds the value of the first transaction. However, due to customer satisfaction and effective retention efforts, the customer returns to our restaurant, increasing its LTV. As a result, the cost of customer acquisition is justified and leads to a significant profit. ROAS is not a good metric because we are interested in maximising the number of customers we acquire with a positive lifetime value to acquisition cost ratio. Put simply, we don't just want customers who order champagne and caviar. We want all the customers we can earn from, and we want as many of them as possible.
Understanding and controlling the relationship between CAC and LTV is crucial for any foodservice business. It not only allows you to evaluate the effectiveness of your marketing campaigns, but also to optimise your marketing spend and customer acquisition strategies. Imagine driving a car and not knowing how much petrol is in the tank. If you're a driver, you've probably seen the type who drives at 50km/h with his nose over the steering wheel, even though the limit is 100km/h. He's hunched over, his nose is over the wheel, he can't see anyone around him and he's driving erratically. Then there's the other type of impatient frustrator. They overtake you by millimetres, gasping loudly, only to find out after a while that the whole manoeuvre was unnecessary because they have to stop next to you at a red light anyway. If you don't know the lifetime value of your customer, you don't know how much you can pay to keep them. You're flying blind, you can't tell if it's expensive or cheap to acquire a customer. You don't know if your actions make sense, and instead of slowing down - shouldn't you be speeding up?
The Profitability Equation
After many years of trying, books, learning on the job and my own mistakes, I have finally managed to create a pattern, a thought pattern, that allows me to understand what I should focus on at any given time. What will be the one thing that will make my business profitable.
Profit is made up of two elements:
Revenue
Cost
If your business is making a loss, the problem is definitely on one side. We can look at it differently. This way we can understand the business from the perspective of the person we are helping to solve the problem, to provide the service. If the business is losing money:
Profit:
Customer acquisition cost - ineffective advertising or low perceived value of the product or service.
Customer value - what we earn per customer throughout their relationship with the company is too low.
Customer acquisition costs are all advertising and promotional costs, including salaries and discounts. We can break down the value of a customer further:
Customer value:
Retention - how many times we sell our offer to the customer
Margin per transaction - how much profit we make on a single sale of an offer
We can break the margin down further.
Price - how much we sell our quotes for
Production cost - how much it costs us to produce a quote for a customer
We can break down manufacturing costs into:
Constants. The most important are:
Media. This is not a mistake. In my experience, media costs are fixed regardless of the number of orders. I write more about this in the
Local
Leasing cars, machinery
Variables. The main ones are
Food costs
Salaries per offer
Logistics costs
Details of the margin can be found in this article.
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