How to Increase Your Restaurant Profit Margin
It is not for the faint of heart to open a restaurant. Even if you are passionate about your idea, it can’t be sustained without a proper restaurant profit margin.
The profit margins in the restaurant industry are dwindling. For example, they have shrunk from 15-20% two decades ago to 4-7% in Philadelphia. This is on par with national averages.
We’re not here to make you feel wrong about the low restaurant profit margin. Instead, we want to help you solve this problem with a guide on how restaurants can grow their profit margins sustainably so that they can thrive.
What’s the Average Restaurant Profit Margin?
According to Restaurant Resource, the average restaurant p profit margin is between 2% and 6% GroGroupquick quick-service restaurants are at the lower end, while quick quick-service restaurants are at the higher end.
It is essential to know the difference between gross profit and net profit.
What Is Gross Profit?
The gross profit is the difference between what you sell a dish and how much it cost to make that food (cost of goods sold).
For successful restaurants, gross profit hovers around 70%. Click To Tweet
That means that customers’ gross profit is $70 out of every $100 spent.
How to calculate gross profit
The gross profit is calculated by subtracting the total cost of goods sold (COGS) from the total revenue (food, beverage, etc.)
For example, let’s say Johnny’s Burger Bar sold $1.25 million worth of burgers in the last three months, and it cost them $400,000 to make those sales.
The gross profit can be calculated using this formula:
Gross profit = Total Sales – Cost of Goods Sold
Gross profit = (1,250,000 – 400,000)/1,250,000
Gross profit = 850,000/1,250,000
Gross profit = 0.68
The gross profit as a percentage is 68%. That means for every $100 a customer spends at Johnny’s Burger, $68 is gross profit.
What Is Net Profit?
The net profit is the amount of money that remains after subtracting operating expenses from your gross profit. Operating costs include payroll, rent, utility bills, and leasing fees for equipment.
How to calculate net profit
To calculate net profit, you need the following information:
- Sales revenue
For example, let’s say Johnny’s Burger Bar had $1.25 million in revenues, $50,000 in gains, and $1.2 million in expenses during the July to September period.
Net profit = (1,250,000 + 50,000) – 1,200,000
Net profit = 100,000
How to calculate net profit percentage
The formula for calculating net profit as a percentage is:
Net profit as a percentage = (Net Profit/Revenue) x 100
Net profit as a percentage = (100,000/1,250,000) x 100
Net profit as a percentage = 0.08 x 100
Net profit as a percentage = 8%
The net profit margin of Johnny’s Burger Bar is 8%. Every dollar that a customer spends makes 8 cents in profit.
Why Are Restaurant Profit Margins Low?
Low-profit margins in the restaurant industry are often due to a combination of factors, but one primary reason is the significant expenses referred to as “The Big Three.”
- Cost of goods sold
Usually, the average restaurant spends one-third of its revenue on COGS and another third to cover labor expenses. The remaining money goes towards overhead costs like utility bills and rent.
After all, expenses are paid, most restaurants make a net profit of between 2 and 6%.
As a restaurant owner, it is essential to know that there are many diff operating margins costs, and such,h the average profit margin varies. If you want your margins to be better than the ” average,” then research what type of restaurants have higher or lower margins to set goals for yourself.
How to Improve Restaurant Profit Margin
There are two ways to approach this: increase sales volume and decrease overhead expenses.
To increase sales and decrease expenses, there can be many tactics that can beat this goal. We have listed the most convenient ones below.
How to Increase Restaurant Sales
To increase your restaurant’s sales volume, there are several things you can do:
1. Optimize your menu pricing
When it comes to your restaurant, the best way to increase profit margins is by sim optimizing your menu prices. To do that, you’ll first need to know how much each dish costs and what percentage of revenue goes towards food costs.
To keep a restaurant financially healthy, it needs to be profitable and maintain its food cost percentage at 28% to 35%. This number does not translate directly into profit margin but instead gives you room for overhead expenses like rent, utilities, labor, etc.
If your food cost percentage is higher than 28-35%, you are underpricing the items on your menu.
Brian Cairns, the founder of ProStrategix Consulting, says that the biggest mistake he sees restaurant owners and operators make is not accounting for overhead expenses.
“Savvy restaurant owners and operators understand that they need to include all fixed and variable costs in their menu prices.”
To make sure your prices account for the costs of running a restaurant, add up how much those expenses cost you per month and divide that amount by the number of menu items.
That number is how much your restaurant would charge for each dish to preorder expenses.
If you are worried that raising prices will scare customers away, try to lower food costs. This can be done by finding cheaper vendors for increasing smaller portions.
2. Update your menu layout
Menu engineering is the strategic construction of restaurant menus. It’s a deliberate and calculated process that considers factors sat, as cost-effectiveness, food quality, and nutritional malnutrition.
Menu engineering is a data-driven strategy that uses psychology and design to increase customer satisfaction.
Some sources say that menu engineering can boost profits by 20%. Click To To
To succeed with menu engineering, you must understand the cost of your dishes and how popular they are. Menu optimization does not include these factors.
When you design your menu, it is essential to ensure that every item on the list can be profitable. This will provide a good profit margin for all guests.
Analyze your menu item sales
Begin by looking at your restaurant’s sales reports for a specific period to find out which menu items:
- Sell the most
- Sell the least
- Highest profit
- Lowest profit
Create a menu matrix
To categorize your menu items, break them down into four categories:
- Stars: High profit, popular items
- Cash cows: Low profit, popular items
- Puzzles: High profit, low popularity items
- Dogs/Duds: Low profit, low popularity items
A menu matrix is a tool that can help you visualize which dishes are the most important for your restaurant’s revenue.
When designing your menu, you should use the information in this article to ensure that people are drawn towards what is most popular and profitable.
Consider removing unwanted, low-profit items from the menu.
Update your menu layout
Menu engineers use design tricks to make erasures more visible. This technique can increase sales by up to 30%.
3. Provide better sales training for your servers
Your waitstaff’s ability to sell food and beverages is the key to making money for the restaurant. Good managers understand that their servers are not just order-takers but can be trained to upsell or cross-sell customers when they visit.
When your server gets interested in food or drinks, their excitement will carry over with each customer. WIt is vital to coach them into a natural delivery of the menu items when training servers. It also helps sample new products and gets excited about what they’re selling.
Increase sales by increasing cover averages
Covers refer to restaurant guests. Increasing the amount spent per cover increases your overall sales. Servers can increase this number by upselling to customers when circumstances allow.
Upselling doesn’t stop with beverages
Servers can help to increase your profits by adding shareable appetizers, salads, or sou,p before the main meal and dessert.
Hiring well-versed staff in your menu offerings and allowing them to taste the dishes can increase sales. Giving your servers their favorite dish for upselling purposes will also go far.
But if you can’t get customers, even high sales volume doesn’t matter.
4. Increase your traffic through marketing
Establishing a regular customer base is the first step to success. If you have one, consider rewarding their loyalty with special programs.
One way to get customers back in your establishment is by creating a points-based loyalty program. Customers can earn points for dining with you and redeem this ad as free drinks or discounted meals.
One way to increase the size of your customer base is by rewarding loyal customers. This can be done through special offers, discounts, or freebies only available for regulars.
It is not uncommon for people to post their food on social media in today’s society. Most individuals leverage the platforms to find new restaurant locations and promote their own business while they are at it. A recent trend has been using hashtags as a way of increasing exposure.
If you have any recent accolades, such as being voted the best restaurant in your area for [your cuisine], it is important to announce that achievement. A press release can be an excellent way to call attention to this accomplishment and win new customers.
5. Improve your table turnover
Table turnover is the amount of time a customer occupies a table. The more customers you serve, the higher chance for making revenue.
To maximize revenues, try to reduce the time a customer occupies a table (without making them feel rushed) while maximizing how much they spend.
It’s hard to balance the needs of a customer. If you serve them too slowly, they will not feel satisfied and might leave without buying anything at all. But if you try to be quick with your service so that more customers can buy from you, it may seem like we are rushing our customers and making them uncomfortable.
If you want to serve more customers per service, one of the best ways is by equipping your restaurant’s front and back-of-house staff with tools that speed up their workflows.
Seat guests faster
A faster seating process means that you can serve more guests per service.
As a restaurant owner, you want to ensure that your front of the house is not the bottleneck for guests arriving at your establishment. You don’t want it to be complicated or slow going from their car inside.
Serve guests faster
The best way to serve guests is by having a fast kitchen and wait staff.
With the KDS, wait staff can now order food for their tableside customer, and they will see it being prepared in real-time.
Rather than making a list of orders and sending them to the kitchen, waiters can take orders at tables. They send these orders directly to the appropriate workstation in the kitchen.
For example, suppose a guest orders an entree and drink simultaneously. In that case, they are automatically filtered by type (cocktail + entree) to be seen on both the bartender’s display system and the kitchen.
The kitchen display disorganizes orders chronologically andIresultingEnsurealso color-codes them and has audible alerts for new incoming orders. This allows the staff to prepare more food faster.
Once an order is ready to be delivered, the waitstaff can notify. This reduces back-and-forth between front and back of house staff.
Shorten your menu
You can create a short menu of lunch specials to help you get people in and out quickly. Ensure that this special menu takes less than 20 minutes to prepare. This is also an excellent way for new customers to try your restaurant without feeling like they are taking up too much time.
Process payments faster
When a table is ready to pay, wait staff can approach the guests and split checks.
Restaurants that utilize turning techniques are more likely to get customers in and out faster. As a result, both the customer and restaurant staff appreciate this efficient service.
6. Add more seating
If you are not fully booked, it may be time to consider expanding your restaurant. If the space is available and has enough room for additional seating or tables, this can increase customer volume per service.
Before you place tables in your restaurant, consider the guests’ comfort, the type of food service, and the specific square feet per guest are considered standard.
Average square footage per guest
- Fastfood dining: 11 – 14 sq. ft.
- Full-service dining: 12 – 15 sq. ft.
- Counter service: 18 – 20 sq. ft.
- Fine dining: 18 – 20 sq. ft.
When you can seat more guests or take larger parties, your profits will go up because the exact overhead costs are spread over a more significant number of people.
How to Decrease Overhead Expenses
Next, you can improve your profit margins by reducing costs such as labor and utilities.
1. Improve your employee scheduling
How do you decide how many servers to schedule for a given service?
As a restaurant owner, you should be aware of your labor costs and strive to maximize revenue per service.
If you schedule too many servers during slow business hours, your labor costs will be higher. If you don’t have enough staff to cover the slack in busy times, customer service quality can suffer.
When you plan your restaurant’s staffing schedule, it is essential to consider customers’ demands at any time during the day.
Restaurants spend about 30% of their monthly revenue on labor, the most significant operating expense. If you optimize your employee scheduling to have fewer workers during slow periods and more when it’s busy, it will increase revenues while decreasing ongoing costs.
2. Reduce food waste
The Boston Consulting Group (BCG) estimates that, by 2030, restaurants will lose $1.5 trillion in revenue because of food waste.
As a restaurant owner, you have to pay attention to the cost of goods sold (COGS). If you end up throwing food away, not only are you wasting money, but it also costs your business.
Restaurants that invest in food waste reduction save $7 for every dollar spent. If you’re looking to improve your profit margins, this is a great way to do it.
3. Lower utility bills
Have you ever noticed that restaurants use a lot more energy than other commercial buildings? That’s because high-volume establishments like quick-service restaurants and bars consume 5 to 7 times the amount per square foot.
Tim Powell, Managing Principal at food service management consulting firm Foodservice IP, states that fixed costs like utility bills account for up to 33% of a restaurant’s sales. Click To Tweet
When it comes to being eco-friendly, investing in appliances and lighting can significantly impact your monthly utility bills. You’ll be able to put more money back into the bank from sales.
If you want to save money on your utility bills, invest in ENERGY STAR certified foodservice equipment. You may feel like the initial investment is too high, but it will pay off over time.
The benefits of eco-friendly appliances
- Lower utility bills
- Consume less energy
- High ROI
When it comes to food waste and environmental impact, businesses that actively reduce their carbon footprint typically have margins 3.3% higher than those that don’t.
Final Thoughts on Restaurant Profit MargMany
Many restaurants fail because they are not able to manage their finances properly. Click To Tweet
Use the tips in this article to increase sales volume, decrease expenses and grow profit margins.
To increase your restaurant profit margin, consider trying out the above tactics. They are tried and tested ways that have been proven in many food establishments.