In any business the frequency of purchase by your customers has a direct impact on your top line revenue and the more top line revenue, the higher your profit margin. If you cannot afford something in your business, it is because you do not have enough top-line revenue. In business, money solves 100% of all problems, so if you have money, you have no problems in your business; but if you don’t have money, then you have a big problem but the solution is easier than you think, why? Because your goal is now singular, clearly defined, and focused; Increase Top Line Revenue.
The problem and the opportunity in the restaurant industry
The journey of starting Milagro has been an incredible opportunity to learn the restaurant industry from two different vantage points, outsider and insider. I am very privileged to have worked with many incredible brands very closely, learn their restaurant business, and understand their challenges in owning and running restaurants. Some of those brands are corporate-owned, some are franchised, some are small and some are very large but the underlying challenges are all the same. In the past 13 years, by combining their experiences, my experience as a business owner, and my knowledge of technology, I find myself extremely shocked but extremely optimistic for the future of the restaurant industry, why? Let me walk you through.
So how does a restaurant increase top-line revenue? In any business, there are only three ways to earn more money;
- Get more customers – this is Customer Acquisition
- Increase your prices – given the state of the restaurant industry, this is often not feasible
- Increase the frequency at which customers buy – this is Customer Retention
At its heart, all businesses are equal, they sell something, and the higher the prices or the more frequently it is purchased, the business makes more money which then fuels its growth. I am going to dive into these 3 metrics tailored specifically for the restaurant industry.
My goal is to provide you with a new perspective on a restaurant as a very profitable business vs the status quo that restaurants have thin margins, unprofitable, and bad businesses to own.
70% of restaurant customers only visit your restaurant just once!
That is the shocking news. How can a business survive with 30% of its customers? This one specific statistic is the root cause of many problems that all restaurant owners struggle with. I am sure you’ve heard or experienced these common sayings within the restaurant industry:
- Restaurants have thin margins
- Restaurants have high food costs
- Restaurants have high labor costs
- Restaurants have an employee retention problem
Instead of taking these myths as facts, I decided to understand why. I started as a guest of the restaurants I visit, if I am paying $12 to $15 for a margarita or cocktail that costs $1 or 2, where are the thin margins or high food costs? If the least profitable item on the menu, the food, is marked up 300% plus, why does everyone say restaurants have thin margins? I have never met a restaurant owner whose menu items are not profitable. So then I started asking the same restaurant owners, what is your top-line revenue? Voila, most restaurant owners complaining of thin margins were doing less than a million dollars a year in top-line revenue. Why is that a problem you ask, read here to understand why top-line revenue is critical to the success of a restaurant.
Moving onto the labor issues, I started to follow the money, and top-line revenue again, why do restaurants have high labor costs but more importantly, what is considered high labor cost? That led me to employee retention within the restaurants. Again going back to my own experience as a guest of the restaurant, I was paying 15-20% in tips but in the past couple of years, I found myself paying on average 18 to 25% in tips and even tipping in areas where tips did not even exist few years ago. Why can Chick-fil-A and In-N-Out afford to pay their staff $17 to $20 per hour and all other restaurants fighting so hard to pay a living wage to their employees? A light bulb went off, a “living wage” was the magical word here. No server or employee wants to work two jobs to make a decent living, and by that I mean, have a roof over their head, have a reliable source of transportation, have food on the table, and yes, once a year take a paid time off for a week to relax and recharge. At the end of this rabbit hole, was a familiar conclusion. The restaurant owner had failed to put enough butts in the seats. Why is that the restaurant owner’s problem you ask? Read here to understand why top-line revenue is critical to employee retention.
Customer Retention does not exist within the restaurant industry.
I am extremely optimistic about this, why? Because it will create explosive growth for those savvy restaurateurs who understand and become the innovators and early adopters of Customer Retention in the restaurant industry. Going back to 2010 when I started the first version of Milagro, our goal was to fix Customer Retention by personalizing the marketing messages. The idea is that content is king, in simpler terms, if the message resonates with the customer, they are more likely to take action. You cannot send a steak promo to a vegetarian, kids eat free to a customer without kids, or alcohol specials to a customer who doesn’t drink and expect them to come in and spend money in your restaurant, it just simply doesn’t work effectively. To learn more, use this calculator to see how you can boost revenues by $263,000 a year by increasing the frequency of customer visits just by one additional visit per year.
This seemingly unbelievable metric is why Customer Retention is so important and it is the reason I am extremely optimistic. Those who master customer retention without discounting, couponing, and devaluing their brand will be among the most successful restaurateurs. Read more about customer retention, which will drive at least a 15% increase in topline, and its impact on the bottom line, and net profits.
Why are restaurants an incredible business to own?
In short, here are the reasons why restaurants are amazing businesses to own and operate.
- Customers will buy frequently – this means a recurring revenue stream.
- Customer retention doesn’t exist – this is an outstanding opportunity.
- The restaurant industry has not yet mastered technology – this is perhaps the single most valuable opportunity that just simply does not exist in any other industry.
- Profit margins are incredible – 70% profit margins are music to my ears.
- Many experts within the industry are multi-unit and multi-brand operators of restaurants – this means many expert restaurant franchisees are excellent at what they do, they just need the right opportunity to invest.
- No limit to its growth in terms of revenue and number of locations – a local restaurant can become a national chain with several hundred stores, creating some profitable opportunities for the franchisor, franchisee, vendors, and even vested employees.
- Opportunity : to own multiple restaurant brands physically next to each other while being extremely profitable at every single one and share resources.
Customer Acquisition for Restaurants
No business would exist without getting people to buy its products and services, therefore, this is the first major milestone while opening a restaurant, ensuring you are driving traffic to the restaurant for people to buy. The more customers, the better of course, but customer acquisition could get expensive in terms of hard cash spent on ads; whether print material, search engines, maps, or social media, as well as time spent on creatives and labor.
The unique opportunity within the restaurant industry is the lack of resources for brands with a holistic view of the entire lifecycle of the customer. Because the industry is so segmented with many moving parts, it is nearly impossible to track Return on Investment (ROI). This creates an extremely rare opportunity to drive customer acquisition costs down through efficient advertising through unconventional channels.
If your competitors are losing 70% of their customers after the first visit, that puts you, the savvy restaurateurs, in an unfair advantage over your competitors. This is a significant advantage to have as a business owner but it is just the first one.
Customer Retention for Restaurants
Once you’ve built a customer base, 99% of your competitors will have no Customer Retention Strategy or Tactic to bring those customers back in for additional visits. This is your next unfair advantage over your competitors, master this and the results will be increased top-line revenues, lower labor costs, and a net margin of 20 to 25% in your restaurant. This is your second most important unfair advantage in the restaurant industry, why do you ask? Because hardly anyone is doing it. Why? My research led me to a few reasons why customer retention is so difficult to master within the restaurant industry, so it is worth spending a few sentences on this.
First, you have to understand who your customers are and you must have a way to communicate with them. Until recently, even the largest restaurant brands did not have a Customer Data Platform (CDP) or Customer Relationship Management (CRM). So if you are not tracking your customers’ behavior, how will you implement a Customer Retention Strategy?
Secondly, the legacy POS providers built a profitable business around merchant services and left the restaurant owners to fend for themselves while they reaped the benefits of the hard work of the restaurant owners, not cool! To further safeguard their business model and profits, they built a wall around the POS. Sadly this has set the entire restaurant industry back by at least a decade if not more. By preventing other technology partners to build an ecosystem around their POS and by using antiquated technology, it crippled the entire industry in my opinion. On a positive note, this has created an incredible opportunity for savvy restaurant owners.
This created yet another major problem for the restaurant industry, where today if you want to open your doors, you must coordinate a minimum of ten or more vendors just to get the basics that you need to run your first transaction. At this stage, the restaurant owner may as well open an I.T. shop serving food and drinks!
Lastly, the lack of data sharing among all parties involved for maximization of their profits has created silos of customer data which prevents the restaurant from engaging with their patrons, if they had the resources to do so. This puts the restaurant owners in a situation where they feel that they are forced to pay $5,000 a month just for a waitlist and reservation app, fearing if they stop, they will not survive.
So why is Customer Retention so critical within the restaurant industry? Because hardly anyone is doing it due to many reasons; lack of time, lack of expertise, lack of unified technology platforms, lack of money, or whatever it may be. This is your golden opportunity as a savvy restauranteur to widen the gap between you and your competitors.
- 15% increase in customer retention, results in a 300% more profitable restaurant
- It is 25x cheaper to retain an existing customer than to acquire a new one
Sometimes people just do not want the easy button, they do not want to believe that it is that simple; that if your restaurant’s average check is $75, you serve 75 customers a day, and are open 6 days a week; you can boost your top-line revenue by $263,000 a year by just getting 15% of your existing guests to make one additional visit in the next 12 months! So yes customer frequency has such an unfair amount of built-in leverage that if you just dial it up a tiny bit, the results are magnificent.
To close this with the promise I made earlier of the 5 tactics that you can use to increase your customer retention. Here they are;
1. Your customer data is your gold mine – so consolidate your entire customer database into a single Actionable Customer Data Platform (aCDP).
Actionable is the key because if you are unable to use the customer data to elevate your guests’ experience, to make each guest feel like a VIP, and therefore increase their frequency of visits, then the data is useless.
2. Automate communication with your customers at a regular interval through a marketing automation engine.
This is important because many restaurant owners, due to lack of time, expertise, resources, and customer data, simply do not even bother sending a monthly communication to their guests. Email and Text messages are powerful marketing tools for any business.
Create a series of automated workflows that are executed as your guests hit the milestones. For example, here at Milagro, we have a first-time visitor campaign, lapsed customers campaign, 4th visit guests, and Life Time Value reaches Premium Loyal status. Each is designed to serve its purpose and move the guest towards a regular visitor, i.e. increase sales and profits of your restaurant.
3. Exclusive Loyalty Perks And Experiences in lieu of discounts, treat each guest like a VIP by empowering your front-line workers
This is a personal topic because my favorite restaurant in town made me wait in line for 45 minutes and treated me exactly like every other guest even though I spend twice as much and I tip twice as much. My perception is, they do not value my patronage and they are telling me to go somewhere else where I am treated like a VIP. After some time, they will lose their high spenders and will end up with average spenders with average profits and average tips, which then leaves the restaurant with thin margins, high food costs, and labor challenges because the staff isn’t earning enough tips.
The point is, that loyalty can be used to upgrade the guest experience by bumping them to the top of the waitlist, giving them a free flight of appetizers, or a free dessert every so often, all of which have negligible cost but an immense impact on your top line revenue, every guest loves a pleasant surprise, every guest loves to feel like a VIP.
4. Track Return on Investment (ROI)
This is a non-existent concept within the majority of the restaurants. Why are sales up or down? Who knows. Maybe the good weather? Maybe the marketing campaign we sent out? Maybe this and maybe that. Inspect what you expect, if it is important, then you must measure it. Yes, customer retention and profitability are extremely important, so measure the return on investment. Once you have the data, double down on the winning campaigns and remove the ineffective ones that are just wasting your resources.
5. Consolidate your technology stack, remember technology is a means to an end, and the end is profitability not running an I.T. shop.
I am a massive fan of technology consolidation, so much so that I have done the same thing within my own companies, having gone down from 12 different tech tools to more or less three, but one Operating System with all of our customer data, it reduces errors, duplication, lessens the training for new staff, reduces the cost of operation but most importantly, creates peace of mind through simplicity.