The number of restaurants in the United States is consistently increasing and is predicted to grow by 5.1% through 2027. This is what makes customer acquisition challenging and expensive, and it brings us to the importance of calculating customer acquisition cost (CAC).
It’s essential for a restaurant manager or owner to monitor and control their CAC. This cost refers to the amount of money it takes to acquire every new customer. Keeping track of this cost will allow you to determine if your restaurant marketing efforts are worth it.
This blog post covers three key points on how to calculate customer acquisition cost in the restaurant industry. Let’s start with the basics.
What Is Customer Acquisition Cost?
Customer acquisition cost measures the approximate cost to acquire a customer. When a business has an increase or decrease in total sales, it is likely due to having fewer customers acquired or a decrease in customer loyalty.
There are different ways to measure customer acquisition cost and this depends on the business and its industry. For example, some businesses may prefer to measure their CAC by directly asking each customer if they’re new. On the other hand, some businesses may utilize their loyalty program to differentiate between returning customers and new customers.
Why Is Customer Acquisition Cost Important for Restaurants?
Customer acquisition cost is important for restaurants because it determines how effective the restaurant marketing strategies are. Keeping CAC in mind is especially important when opening a business for the first time. This includes opening a restaurant, opening a coffee shop, and opening a food truck.
New and existing restaurants benefit from acquiring new customers. Customer acquisition cost provides insight that will allow you to improve your acquisition efforts as a whole.
Knowing what works and what doesn’t is crucial for a new business, especially when it comes to marketing strategies. This way, you can alter the strategy accordingly.
For example, say you’re spending most of your restaurant marketing budget on different types of email marketing. Before testing out a new marketing strategy, you want to have sales numbers to compare new results. This is where the customer or client acquisition cost will come in handy.
CAC is also useful when determining which acquisition channel is the most cost-effective for your type of business. For example, email marketing is often cheaper than paying for social media ads, and has an average ROI of $36 for every $1 spent. However, if social media ads bring in the right kind of customers at a slightly higher cost, you may consider changing your marketing approach.
Key Takeaway: It’s necessary to calculate the customer acquisition cost for your restaurant in order to identify if the marketing efforts are paying off. This way, you can tweak them as necessary.
How to Calculate Customer Acquisition Cost
Calculating customer acquisition cost requires a business to have a few different numbers on hand. For a restaurant, you need the cost of all money set aside in the marketing budget for targeting new customers.
Take the following scenario for example. You’re running an on-site promotion for customers that focuses on improving CRM or customer retention strategies. The money spent on this promotion doesn’t impact your CAC unless it brings in new customers.
Customer Acquisition Cost Formula
The customer acquisition formula may differ based on the industry. It’s also essential for you to come up with an effective way to determine which customers are new versus existing.
The customer acquisition cost formula is:
Customer Acquisition Cost = Marketing Expenses / Total New Customers
To get a customer acquisition cost that is as accurate as possible, you have to take marketing costs into account. This includes the discount you offered for the promotion.
For example, say you’re using your online ordering platform for a promotion that offers 10% off of a customer’s first online order. You allocate $1,000 for Instagram advertising efforts. This money comes from your budget for marketing on third-party websites.
To calculate CAC in this scenario, you also have to account for the 10% discount on all new customer orders. This results in a loss of potential revenue, but in exchange, you get a new customer.
In this case, it’s also crucial to look into the lifetime value of a customer (LTV). The LTV is a projected revenue amount that a customer will generate over their lifetime at your restaurant.
CAC for an Existing Restaurant
If you have an existing restaurant, calculating the customer acquisition cost is easier. This is because there’s a greater chance of you having traceable and specific promotions and campaigns to evaluate.
Let’s go back to the example above where you allocate $1,000 on Instagram advertising to target first-time customers ordering online. After evaluating your restaurant sales data, you discover that the average online order size is $30.
Once the 10% promotion is over, you learn that the promotion was used 15 times. Therefore, you acquired 15 new customers.
To put things into perspective:
- Instagram advertising: $1,000
- Online ordering discounts: 10% of 15 orders of $30 (10% off of $450 = $45)
- Total new customers: 15
To calculate your restaurant customer acquisition cost, you have to add the total marketing expenses of Instagram advertising and the cost of the discount.
Marketing Expenses = $1,000 + $45 = $1,045
Then, divide the marketing expenses by the total number of new customers that you gained from this promotion.
- Customer Acquisition Cost = Marketing Expenses / Total New Customers
- Customer Acquisition Cost = $1,045 / 15 New Customers
- Customer Acquisition Cost = $69.66 Per Customer
This means that your restaurant business spent an average of $69.66 to gain each customer from this promotion.
Lowering CAC
After you use the customer acquisition cost formula to calculate your restaurant's CAC, you may need to think about how to lower it. This is necessary if you discover that your CAC is too high and your marketing efforts aren’t worth it.
The customer acquisition cost is hard to control when you’re unsure of what drove your customer to your restaurant. That’s why it’s important to do the following:
- Track total new customers. This is where a restaurant POS system will come in handy to automate the process. POS systems allow you to track unique credit card transactions and restaurant loyalty program sign-ups. These are often indications of new customers.
- Test different marketing ideas. It’s important to test each marketing idea one at a time. This way, you know exactly which marketing effort leads to each result. Stop each marketing effort completely before starting the next one.
- Utilize free exposure. As a business owner, you don’t always have to pay for marketing. In fact, you can utilize word-of-mouth marketing and Google My Business.
- Use directly-traceable marketing. This is possible by offering unique promo codes or coupons to see who uses them.
Frequently Asked Questions About Customer Acquisition Costs
In the restaurant industry, the customer acquisition cost is a crucial factor to keep in mind. This is similar to other important factors such as inventory carrying cost, cost of goods sold, and labor cost.
Since every business and industry is different, the customer acquisition cost formula may vary. To better understand CAC and its importance, continue reading the following commonly asked questions.
How Do You Calculate the Customer Acquisition Cost for a Restaurant?
To calculate the customer acquisition cost for a restaurant, divide the total amount of new customers by the marketing expenses. This will provide you with what your business spends on average to acquire a new customer. You can use this metric to determine how effective your marketing efforts are and if you should change your customer acquisition strategy.
How Can I Reduce My CAC?
Consider doing the following to reduce your CAC:
- Prioritize the right target market
- Improve your sales funnel
- Consider trying affiliate programs
- Use A/B testing to compare results
- Retarget customers
- Use marketing automation
- Improve customer retention strategies
Can My CAC Be Negative?
Although rare, it is possible for the customer acquisition cost to be negative. This happens when businesses start to get paid for obtaining customers. However, the possibility of this varies by industry.