Restaurants operate on infamously slim profit margins. It’s extremely difficult to get rich in the restaurant business. Even for a simple dish like a sandwich, you have to pay for all the different ingredients and employee labor, the most crucial and expensive piece. Then customers expect it to cost next to nothing. You’re lucky even to make a buck on cheap dishes. Because of these low-profit operating cost-to-menu price ratios, the restaurant business is really about volume.
There are other restaurant business models, such as expensive, limited-seating tasting menu operations, but most restaurants rely on high customer volume. With any restaurant, though, you want your customers to spend as much money as possible during each visit.
What is Customer Spend?
Customer spend, also referred to as customer spending, is the amount of money customers spend on services and products for personal use, entertainment, or other purposes. You can get insights into this spending behavior and spend data using the spend analysis process. This helps make informed business decisions on the basis of purchase data, market segmentation, direct spend analytics, and predictive modeling tools.
Why Track Customer Spend?
While conducting customer spending analysis, businesses are able to identify the boundaries of their target market. They can further use this data to create actionable insights, such as customizing the spending process, raising prices dynamically, improving strategic sourcing and spend management, or developing several optimizations. The spend analytics methods generally vary across organizations, you can focus on a few common prediction and calculation methods to increase customer spend.
Restaurant Operating Costs
Before we explore how to increase customer spend, let’s dig into restaurant operating costs. There are three categories. Fixed costs are generally the same every month and include things like rent and salaried employee pay. Variable costs change month-to-month according to sales and operation and include things like food and hourly employee pay. Semi-variable costs make up the last category and include labor as a whole, encompassing all types of employee pay — anything that’s only partially predictable.
It’s essential to understand how you’re spending your business money and have a handle on your budget. Labor is the highest cost for almost every restaurant owner and includes everything from regular pay to bonuses, overtime, and benefits. It’s important to pay and treat your employees well because their efforts, whether as cooks, servers, or dishwashers, will define how successful your business is.
Food Costs
Food tends to be the second-highest cost for restaurant owners. Obviously, you need food to sell as a base, but it’s more complicated than that. Supply chain issues such as bad weather that ruined a certain percentage of a produce crop can make prices skyrocket without warning. Certain ingredients, like saffron or avocado, tend to be pricey to begin with. With a bit of ingenuity and smart, agile menu planning, you can avoid the overspending trap presented by those issues. Perhaps the most crucial way to keep this cost low is to make sure you, your chef, and other kitchen employees waste as little food as possible.
Employee Costs
Part of why it’s so important to compensate your employees well is you want the best people in the business. A great chef will know how to order precisely the amount of food you need for each day or week. He’ll also know how to utilize as much of a single ingredient as possible. He’ll train everyone who works under him to properly use those ingredients as well, ensuring that your kitchen uses as much of every single ingredient as possible. You must ensure that you and your employees are doing everything possible to avoid food waste; not only is food waste terrible for the environment, but it’s also bad for your bottom line.
Marketing Costs
Another cost, often forgotten, is advertising. Different kinds of restaurants require different approaches to advertising. Still, you always want to make sure you’re using some type of restaurant marketing plan to attract more customers to your business. This might mean billboard advertising, especially if you’re conveniently located near a highway exit. It could even mean Cartvertising or Receipt Tape Advertising, as grocery store advertising rates are relatively affordable, and when people grocery shop hungry, they’re very open to learning about new places to eat. You might also want to pay to have your business featured on Yelp or another online platform.
How to Calculate Customer Spend?
In order to outline how customers spend money on your business and what their typical behavior is, you need to focus on two key values – average spend value (ASV) and average transaction value (ATV). These values can be useful in forecasting future sales and demand.
Average Annual Spend Value
You can compute the average annual spend value using the following calculation:
Average annual spend value = average annual spend per sale / annual spend frequency
Average Annual Transaction Value
To find the average annual transaction value, you need to use the following calculation:
Average annual transaction value = total annual transaction value / annual number of transactions
Even though these calculations may not offer comprehensive measures, they can be good starting points for figuring out how much and how frequently customers spend money with a business on average.
How to Increase Customer Spend
If you’re a restaurant owner, you hopefully already know precisely how much money your business needs to operate on a month-to-month basis. Hopefully, you already have some level of a marketing plan. What you want to know is, once you’ve got customers in your restaurant, how can you increase average spend of your customers? There are a few tried-and-true methods.
Upselling
The easiest way to make your customers spend more money is to upsell them. Whether your restaurant has servers or cashiers, train them to suggest menu items in a way that tempts their customers. Is someone ordering coffee after their meal? Suggest a dessert item that would pair well. Are they ordering a lot of heavy food items? Suggest something light and refreshing to balance out the meal. Are they drinking alcohol? Ask if they’d like another drink as soon as theirs starts to get low.
Alcohol is one of the best ways for restaurateurs to make money. There’s the cost of the drink itself, as well as liquor licenses, but minimal labor cost unless you’re selling complicated cocktails. Every server should upsell every customer as long as it comes off as natural. This doesn’t have to happen in person, either! If you use a delivery platform, build out your menu within the platform so that when a customer selects a specific item, they’re automatically asked if they’d like to add a complementary side to their selection. A motto to live by – Always be upselling!
Deals
Another great strategy to increase customer spend is to utilize coupons, deals, or bundles. If you know your costs and profit margins well, you can easily create deals that incentivize customers to spend more with each dish. Something like an “all-you-can-eat lunch” or a “bottomless mimosa brunch” is a great way to do this. Set a time limit for the deal, limiting the “bottomless” mimosas to a one-hour period.
Check how many mimosas the average customer orders during an average brunch and price the deal based on that. Charge a flat price for that hour that ensures you’ll make a profit — if most customers drink two mimosas in an hour, charge the cost of three to four mimosas. People will feel like they’re getting a great deal while spending more per drink.
Loyalty Programs
Customer loyalty programs are another great way to increase customer spend. Have customers enter their phone number into your system to track their spending, and offer $5 off for every $100 they spend, or whatever similar percentage works for your business. It’s not a significant deal, but they’ll still want to hit it and save that little bit of cash. This is a great way to increase average customer spend over a more extended period of time and turn them into loyal customers.
Menu Design
One last way to increase customer spend is with your menu design. A cleverly designed menu will highlight more expensive dishes using a combination of layout and writing. Make your more expensive dishes, or dishes with higher profit margins, seem more tantalizing and desirable. Have your servers recommend these dishes, too.
Even with these business tactics, it’s always hard to get your customers to spend more money. You have to keep on top of it at all times, constantly ensuring all your employees are up-to-date on best practices and working hard to bring in sales. The restaurant business isn’t easy, but it’s rewarding. If you do it right, you can see a much higher profit margin.
By Eric Shafer
By IndoorMedia Marketing
