CLV in Your Food Business

Customer Lifetime Value in Food Business

Customer Lifetime Value (CLV) is a powerful metric that tells you how much each customer is worth to you in dollars. Knowing and tracking this metric can, and should, have implications on the decisions you make (see the blog post “How Do I Use CLV?”). But before we talk about using CLV, let’s break down what it is. 

The basic CLV calculation is:
the value of each customer visit         X        # of visits a customer makes over time

So if I spend $12 per visit to a cafe, and I come once a week on average, then my CLV in revenue for that cafe (per 12 month period) is = $12 x 52 = $624. In other words, I spend $624 per year at the cafe. If the cafe’s gross margin is 40%, then my value in terms of gross profit (discussed more in “Don’t Make These CLV Mistakes”) is $249.60. 

Understanding the CLV levers that you can adjust in your business can have drastic impacts on your profitability.

You can see how this is useful for the cafe to grow: they could find more customers like me who will spend $624 per year or they can increase the amount I am worth to them each year. The CLV of each customer segment  can be be increased by influencing one or more of the CLV “levers” or drivers of customer value. 

The levers of CLV are:

  1.  # of orders in the customer lifecycle 
  2. Average amount of each order
  3. Gross profit

For our example cafe, they could increase overall company profit without adding any new customers by adjusting the CLV levers for the customers that they already have. Any combination of increases to the amount of orders made per year, the amount spent per order, or the gross profit per order would increase profits with the same number of customers.

For example, if the cafe were to institute a loyalty program that encouraged me to come back twice per week on average and training cashiers to up-sell coffee customers on pastries, a higher gross margin product, my CLV would increase. I would spend $15 per twice a week visit at a gross margin of 41%. My new CLV is

=$15 x 104 x 41% = $639.60
$390 increase in gross profit 

If the cafe has 100 other customers like me in this example, that’s $39,000 more in gross profit per year without acquiring any new customers. Understanding the CLV levers that you can adjust in your business can have drastic impacts on your profitability.