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  • Writer's pictureDavid B Townsend

How to Build a Loyal Customer Base

Opening a new restaurant, or updating your concept requires doing something which seems counter-intuitive at first. Design the menu with higher food costs than usual and instead, offer great deals below your competitive market prices. You first need customers, and having a full dining room is a lot better than great costs with only a few new customers each day. You need cash flow, not high profits at this stage. Fill the room first. Then build guest counts, and check averages over time.

Here is another example. You're a full-service restaurant in a destination locale or a small hotel with a dedicated room for food service- breakfast and lunch or maybe three meals weekends. Your business can not merely rely on overnight guests to keep the operation viable. Fully booked rooms around town may fill you up on occasions, but regular occupancy averages tell another story. You need the locals both for cash flow, and essential word of mouth referrals. Let's talk about promoting your food establishment through improved service and a reasonably priced menu. Improved service I've discussed in a prior article (5-star service). Pricing your menu based on an 'ideal' food costs may affect your ability to gain support from your community if you can't compete with them on overall appeal.

One of many insights I learned years ago from a successful multi-restaurant operator Bill Lee ( SUR Restaurant, Carmel ) on the Monterey Peninsula, which in the 80's and 90's saw dozens of places come and go, is that food costs are not of critical importance when you first open. If the food is good and service exceptional the crowds keep returning. Now, the food not only needs to be high quality but fit a niche and be modestly priced to allow people to feel good about returning to try many different items on the menu. Once you build a loyal base, you can bring down overall costs with better purchasing, new menu items like higher end desserts or wines, and appetizers.

Allow me to present a three-step process which can get you on-track to build a large local customer base while promoting your brand as the local favorite. Locals become frequent diners and they talk around town to both other residents and, if your town is a popular destination, they will often interact with out-of-town guests. Once you build this base, you keep up interest by introducing them to new and different specials and thereby increasing the average check.

In basic outline here is how it works:

1- run higher food cost- attract the locals as a reasonably priced dining spot.

2- locals fill your dining room and talk you up, keep your dining room full with the added perception to incoming visitors that you are a great place to dine.

3- build check averages through new and distinctive items, signature desserts, appetizers, odd or rarely seen local wines & beers.

And all done with great standards of service that keep the locals and visitors coming back for more.

Let me explore this concept in more detail. In an average well-established restaurant, you strive for and succeed if your food cost is in the 30-35% range. National average for full service is 32%.* I say run a 35-40% cost and makeup in cash flow what you don't get in net profit. Stay with me, it's not as crazy as it looks.

Locals want and need a better place to eat. If you can get them in the door at a price which is 'perceived value' ..... as being way better than a $8 hamburger at a local take-out, wow them with good service, you will have them eating with you several times a month. Lowering the price will create a sense of value to the locals and not only will they come into your place more often, but tell every tourist and friend they encounter how great the meal and service staff is. You may just eliminate the cost of some of your expensive advertising.

Here's an example: Let's take an entree with a $18 menu price, at 30% cost.

20 dinners at $18, 30% basic food cost- meal cost $5.4 ($360 gross-108= $252 net)

30 dinners at $15, 36% basic food cost- meal cost $5.4 ($450 gross-162= $288 net)

In this example- your profit difference is negligible, but your cash flow is nearly $100 greater, and with only 10 more meals, you won't need any additional staffing to accomplish ten more meals for the night. You could way over think this with bell curve charts to see what point the higher guest counts, with the optimal staffing costs equal out to the same overall profits, as with each 20 extra meals you will likely have added costs for staff and linens, etc. So, just imagine if you were able to double your volume in full dinner service, plus add another handful of patrons only looking to hang out in a busy place with a beer and appetizer?

The point is this:

1- You provide consistently good food at a great value even though it may involve a higher than normal food cost. You build traffic and repeat guests. It makes your restaurant full when out of towner's arrive and see the place busy. Higher food cost may reach above 35 to 40%, but volume can then make up better cash flow vs. higher profits.

2- Without increasing pricing, add new items and build guest check averages. Add better or hard to find wines, better desserts, more diverse appetizers. The same guest who has come in with a partner that spends on average $22 per person now ends up spending 28 or $30 and comes in just as often. Create a loyalty program, so every once in a while they get a bargain by offering a second 'daily special' meal at half-off, or a free appetizer, when they order the wine of the month. a variety of promotions can create the sense of value to the locals and through direct mail, or email you can keep them in the loop.

3- Statistics show that higher check averages in the $15- $25 range have the highest profit range of 3.5% *. So although the first goal is to build the loyalty of guests the ultimate long-range goal is to increase check averages.

This higher check average then becomes a normal selling technique for the servers who are also selling to the overnight hotel guests. It's a method to better sales and finally more stable profits.

A recent newcomer in the Sierra Foothills area along a popular highway route to several communities is a venue which is part entertainment pub, and restaurant. The opening menu shows a 'grass-fed beef' burger at $13, and a side salad add $3. While across town, the same 'grass-fed beef' burger (may not be the same local ranch) is currently $12 and comes either with a side salad or house fries. My observation is this: how can a new place with unproven service staff charge up to four dollars more as they open the doors to build an entirely new clientele, while they are likely working the kinks out of the kitchen operation? I think this is entirely the wrong approach. It proves my point- start with high food costs, fill the dining room and work out costs as your operation becomes stable and consistent.

* Full-service restaurants at all levels spent about 32 percent of each dollar on the cost of food and beverages, 33 percent on salaries and wages, and from 5 percent to 6 percent on restaurant occupancy costs. Profit margins, however, varied according to the cost of the average check per person. Those with checks under $15 showed a profit of 3 percent. Those with checks from $15 to $24.99 boasted the highest profit margin at 3.5 percent. * from article by Aurelio Locsin

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