Restaurant profit margins are typically lower than those of other types of businesses. That being said, in this industry it’s important to stay on top of your money.
In this article, we’ll cover how to calculate your restaurant’s profit margins, and how to increase them by increasing sales volume and lowering your cost of operation.
Calculating Restaurant Profit Margins
Now that we’re familiar with the basics, the first step is to calculate what your current profit margins are. Let’s cover the basics of what these terms mean and then get into the math.
Gross Margin vs. Profit Margin
The gross revenue of your business is not the same as your profits – profit refers to what amount of money you netted after subtracting the total costs. Both gross margins and net profit margins are good to know, and you’ll need to know the gross profits to calculate the net profits for your business.
To calculate gross profit, subtract the cost of an item’s ingredients from its listed menu price. This is a simple way to determine the efficiency of your restaurant before factoring in other costs.
For example, if you’re selling a chicken sandwich that costs $2.50 to make for $7.50, your gross profit for that single item was $5.00. Your gross revenue is important to know, but running a restaurant isn’t quite that simple.
Gross Margin Percentage Formula:
(GROSS PROFIT= SALES PRICE – COST OF PRODUCTION)
Net Profit Margin
Now that we’re familiar with gross revenue, it’s time to consider the most important number, your net profit margin. Simply explained, your net profit margin is equal to how much money your restaurant is making after factoring in all costs.
At this point you’re probably wondering, what is a good net profit average? Restaurants typically have a net profit margin of 3-5%. This number varies a lot from business to business, depending on location, convenience, staffing, etc., and can get as high as over 15%.
Restaurant expenses to consider when calculating your net profit margin include, but are not limited to:
How To Calculate Net Profit Margin:
(NET PROFIT = GROSS PROFIT – EXPENSES & LOSSES)
In summary, gross profit shows how efficiently your individual food sales are run, and net profit factors this in and determines how efficiently your restaurant runs as a whole.
Increasing Restaurant Profit Margins
You’ve calculated your net profit for your current business model, and now it’s time to improve upon it.
As mentioned previously, there are two very basic factors that determine how much money your business pulls in. They consist of your business’s sales volume and its cost of operation. Optimizing these factors is the key to taking control of your profit margins. The goal is to increase sales while lowering costs.
Increasing Sales Volume
Arguably the most important factor to consider when running a restaurant business is the customer. Understanding their needs and behaviors is what makes a good restaurant great. This is the difference between a restaurant that’s trying to keep its head above the water, and a restaurant with raving loyal customers. Consider the following when working to increase your sales volume.
The customer is always right! Look for areas of improvement in your customer’s overall experience. If you’re having trouble finding these areas of improvement, there are a few ways to look for this information.
Restaurant comment cards are cards that allow customers to give feedback about their restaurant experience. Many restaurants are also utilizing online surveys and offering coupons to customers who complete them. Finally, Yelp and other restaurant review websites allow customers to publicly share their individual restaurant experiences. All of your customer’s critiques are valuable information when identifying your business’s areas of improvement. Check out review sites and see where you can improve.
The layout of your menu plays a big role in your customer’s decision making process. Something as small as your menu can be optimized in different ways to help your profit margins. One common menu placement strategy for restaurants is called relative placement.
Relative placement is when you put a high pricing menu item next to a lower pricing one. When the customer sees this, they are more likely to assume they’re getting a good deal on the lower priced item, and will buy it.
Another tactic used mainly in the fast food industry is the concept of meal upgrades. When listing an item that’s sold in varying sizes, list the different sizes and their prices immediately next to it. This way a customer looking to save money and get a small order of french fries will see that a medium french fry only costs a dollar more, and will be tempted to buy it.
A solid online presence will play a big role in how many people end up visiting your establishment. Nowadays, most people will do their research before physically visiting a restaurant. Rightfully so – it’s a no-brainer way to save yourself from a bad meal.
Having a professional looking website with a clear layout and listed menu items will make your restaurant significantly more marketable. Most restaurants have these things already, but those that don’t either don’t realize how much it’s hurting them, or have an established loyal audience to sustain them. Others may have a great website, but without proper SEO no one will find it.
Having a professional website is key, but there’s more about your restaurant online than what you put there. As previously mentioned, restaurant review sites give customers a huge online platform to review your restaurant. There are plenty of review and reservation websites out there, and if your restaurant has poor reviews it may scare off customers.
Keep an eye out for any page that comes up when you search the name of your business. Reviews on Yelp and on other public forms can usually be replied to, and doing so helps show people who view them that you care. Replying to negative reviews and attempting to resolve the issue can even cause the user to take the review down, or make a new review.
Does your restaurant offer takeout or delivery services? Making these services available for order on your restaurant’s website is an easy way to accept more customer’s business. More and more people are turning to ordering their food on the internet, for a good reason.
Ordering online is convenient, and it gives people more time to consider their choices when compared to ordering on the phone. Be sure to have a clearly navigable online ordering system that offers promotions throughout the ordering process. Don’t forget to implement the same menu placement strategies that were discussed earlier in the article.
Lowering Cost of Operation
Now that you’re making more sales, you’ll want to make the most out of each one. It doesn’t matter how many sales you make if you’re not running an efficient business.
Price point is a huge factor for both you, the restaurant owner, and for consumers. It’s a fundamental factor that will make or break your restaurant.
If your restaurant is too expensive your sales volume will drop. If your prices are too low, you won’t be making enough profit. Finding the sweet spot in your menu’s price point is key if you want to optimize your profit margins.
Aside from optimizing menu items for the best profitability, you can also look for other ways to cut costs. Some things, like rent and staff costs, cannot be changed. Others can be manipulated to save money.
A good rule of thumb is to make sure your menu items cost roughly ⅓ of what they’re listed as on the menu. It won’t always work out that way, since some items have expensive ingredients and some are cheaper to make. Don’t follow this rule too tightly, but it’s good to keep it in mind as you move forward in your restaurant venture.
Know Your Location
Your location plays a big role in how you should strategize your menu items. Those who live in low to middle class areas are more likely to purchase cheap meals with lower quality and high value. However, if your restaurant is located in a more wealthy area, you’re going to want to raise the ingredient quality, and your prices along with it.
Optimizing Table Turnover
A table’s turnover is the total amount of time a guest spends at a table at your restaurant. Optimally if you’re busy, you’ll want customers to spend the least amount of time at their tables while spending the most amount of money. The less time they spend at their table, the more customers you get to seat.
That being said, don’t make your customers feel rushed. Their customer experience is still very important, and people don’t like being shooed out of restaurants. Keep your servers working at a brisk, balanced pace that keeps customers rotating through your business without feeling rushed.
Offering specials regularly is a good way to use up abundant ingredients and sell them more easily at potentially higher prices. If you really want to push a certain special, make sure your servers know this so they can give customers more information.
Experiment with different specials and see how your customers take to them. Listen to what the customers are telling the servers. If an item sells particularly well, or is easy to make, you can offer the special weekly or even add it to your regular menu.
When calculating or cutting the cost of your ingredients, you have to strike a balance. You don’t want to cut costs on ingredients and sacrifice the quality of your food. There are ways to budget your inventory, however. If you’re starting a new restaurant, shop around for food suppliers to test out different prices and quality. If your restaurant is established, you can also search for different food suppliers if you aren’t happy with yours. You can also look into different bulk pricing for items that won’t go bad too quickly.
There may be certain items that you can cut costs on easily without hurting the quality of your food. While meats and fresh produce should always be of the highest possible quality, there may be room to cut costs on other items or switch to a less expensive brand.
A simple factor that many restaurant owners overlook when budgeting are utilities. On average, restaurants consume a lot more electricity than other commercial buildings. Investing in lights that use less energy might cost more initially, it can help your restaurant save money in the long run.
Final Thoughts on Improving Restaurant Profit Margins
When increasing restaurant profit margins, the biggest factors to consider are sales volume and cost of operation. Be sure to find the right balance between the two to provide good customer service and cultivating a loyal customer base while making good money in the process.