What is a restaurant's profit margin?
A restaurant profit margin is the amount of money your restaurant makes from the sales after all expenses have been paid from revenue, and it's usually measured in two ways: gross profit margin and net profit margin.
Gross profit margin
Gross profit margin measures the profitability of your food and beverage sales, minus the cost of goods sold (COGS) from your revenue, divided by your revenue:
[Selling Price – CoGS] ÷ Selling Price = Gross Profit
Net profit margin
Considered the most comprehensive measure of your restaurant's profitability, net profit margin takes into account all of your expenses, including COGS, labour, rent, utilities, marketing, and other operating costs. It's calculated by subtracting all expenses from your revenue and then dividing that figure by your revenue:
[Net Profit ÷ Revenue] x 100 = Net Profit Margin
Both gross and net profit margins are important for understanding your restaurant's financial health, and although they both serve different purposes, regularly monitoring and analysing those metrics is crucial for long-term growth and profitability.
Key factors that impact your restaurant's profit margins
Several factors can affect your bottom line, but the most common ones, often called the "Big Three," are
- Cost of Goods Sold (COGS) - The price you pay for ingredients, beverages, and other consumables directly related to your menu, as a rule of thumb, it's a third of your expenses.
- Labour costs - These are the wages, salaries, and benefits you pay your staff, also considered to usually account for another third.
- Overhead expenses - Include your ongoing costs, such as rent, utilities, insurance, and marketing - typically accounting for another 30%.
Given the above, what's left is the 10% profit - but anyone in the food industry will agree that this number often is rather elusive. The range of profit margins will also vary depending on the type of restaurant - QSRs, food trucks and Michelin-starred restaurants will typically operate on different margins.
Restaurant's profit margins are under constant pressure, especially with the current challenges of soaring energy prices, rising food costs, and ever-changing consumer preferences. Between the never-ending list of restaurant business expenses, like equipment maintenance, inventory, payroll, licenses, waste disposal, staff uniforms and regulatory changes or natural disasters, it's easy for costs to spiral out of control.
Moreover, seasonal variations, with peaks during holidays and warm weather months, troughs during colder or post-holiday periods, as well as the cost of ingredients depending on the season, can significantly impact your margins, leading to dramatic swings in sales revenue and ultimately disrupting your restaurant operations, impacting, already stretched, profit margins.
However, by understanding these challenges and strategically managing your expenses as well as optimising your operations, there are several steps you can take to properly improve your restaurant's profit margin.
Strategies to improve restaurant profit margins
There are two main ways to approach it:
- increasing your sales capacity relative to expenses - which could involve attracting more customers, encouraging larger orders, or raising prices strategically.
- decreasing your expenses relative to sales capacity - which might mean finding ways to cut costs, streamline operations, or improve efficiency.
In the next section, we'll list the practical tips you can implement today to decrease your expenses relative to your sales capacity, protect your profit margins and boost your profitability.
1. Menu engineering
Your best menu is the one that's most profitable, so when looking to increase your margins, start by analysing your menu item costs and sales.
When analysing the menu item costs and sales, identify your "stars" (high-profit, high-popularity) and "plow horses" (low-profit, high-popularity) and adjust prices, portion sizes, or ingredient sourcing accordingly. Discover how to increase your restaurant's profitability with these 20 expert tips on menu engineering.
2. Cost control
From forgotten produce spoiling in the back to over-pouring drinks, waste is a silent profit-killer, and every gram and millilitre wasted can impact your bottom line.
Meticulous inventory management, with every ingredient tracked, from delivery to dish, reliable suppliers who offer the best quality and prices, and a culture of waste awareness among your staff can significantly reduce food waste and protect your profit margins. Explore our best practices on restaurant inventory management, offering essential strategies and insights to help you manage expenses and boost your profitability.
3. Labour management
As mentioned before, labour-related costs account for a third of your expenses, so given how much of your revenue goes to staffing, optimising your labour management practices is essential to improve your profit margins.
Over-scheduling and under-scheduling can quickly erode your profits. Therefore, tracking your busiest times and days and matching staffing levels to projected sales is one way to reduce your labour costs and streamline staff schedules.
Beyond schedule optimisation, another crucial aspect of labour management is investing in your staff's training and development. Highly trained staff are not only more efficient and less prone to costly mistakes but can also secure more lucrative cross-sells and upsells.
By retaining experienced employees, you not only avoid the costs associated with recruitment and training but also benefit from a more stable and productive workforce, which, in turn, can positively impact your labour costs, contributing to healthier profit margins.
4. Pricing and menu strategies
Your menu is much more than just a list of dishes and prices, and we already covered how an optimised menu can help you protect your bottom line. However, a well-crafted menu and pricing strategy can work in tandem to influence customer behaviour and drive sales.
Dynamic pricing
Dynamic pricing, also known as surge pricing, is a tactic where businesses flex prices at particular times in response to shifts in demand, time of day, or seasonality. This strategy is rapidly gaining traction across various industries and is increasingly being adopted by restaurants seeking to maximise revenue and optimise their profit margins.
Strategic discounts
While raising prices might seem like the most obvious way to boost profits, strategic discounting can also play a crucial role in improving your profit margins. By offering time-limited discounts, such as popular Happy Hours, deals tied to holidays or seasonal events, or discounts targeted to specific customer segments, such as students, seniors, or families, you can generate some buzz, broaden your appeal and capitalise on increased spending (customers tend to spend more during holidays).
Menu items placing matters
The study "The effect of menu design on consumer behaviour: A meta-analysis" published in the International Journal of Hospitality Management found that the placement of items on a menu significantly influences consumer choices. Items placed in the "golden triangle" (the centre of the menu and the top right and left corners) receive the most attention and are more likely to be ordered.
Descriptive language influences choices
The same study also revealed that descriptive menu labels (e.g., "Succulent grilled lobster" instead of just "Lobster") can significantly increase sales of a particular item. You can use this insight to craft more appealing descriptions for your high-profit margin dishes.
Other menu psychology tactics
- Utilise the power of ''9'' endings (e.g., €9.99 instead of €10) to make prices appear more attractive.
- Offer a slightly higher-priced item to make other options seem more reasonable in comparison.
- Offer meal deals or combos to encourage customers to spend more.
Make the most of your menu with recipe management software, streamlining your kitchen operations and boosting your restaurant's efficiency and profitability.
5. Marketing and loyalty programs
A strong online presence is crucial in today's digital age, and the best part of it is that you can actually achieve impressive results with a relatively low cost and time investment.
Online marketing
According to a recent survey, 99% of users in Ireland use the internet daily and there's a growing trend of using online platforms to discover new restaurants and make reservations.
- Website - Your website is your online storefront; it must be aligned with your aesthetic (colours, language, brand image), easy to navigate and regularly updated. These are relatively simple upgrades that can have a big impact.
- Social media - TikTok has proven to bring fame to many restaurants. Take advantage of it and try creating buzz and excitement around your venue. Although it might not be an overnight success but a work-in-progress strategy, creating content on your own or inviting food influencers is another low-cost, high-impact idea.
- Email marketing - 99% of internet users in Ireland aged 16-64 checks their private inbox every day, meaning that you have a daily chance to speak to your customers directly. But to avoid having your carefully crafted email campaigns end up in the spam folder, segment your email list based on preferences and send personalised communication.
Loyalty programs
While attracting new diners to walk through the door might be the logical step when improving revenue, you shouldn't overlook your regular customer base, which proves to be a true goldmine. Not only do repeat customers tend to spend more per visit but it's also estimated that it costs five to ten times more to acquire a new customer than to keep a current one.
Consider launching some sort of loyalty program and reward your regular's loyalty with enticing rewards - from discounts on dishes to free items like drinks or desserts.
6. Sustainable practices
Sustainable practices are not only resonating with environmentally conscious consumers, but they're also proving to be a smart business move, generally leading to significant cost savings for businesses.
- Energy consumption - make mindful changes to your habits - turn off lights in unused areas, switch off unnecessary ceiling fans, consider LED lighting and keep an eye on your indoor temperature. When changing equipment, choose the most energy-efficient options.
- Gas consumption - gas is a major energy source in commercial kitchens, so apart from its mindful usage, make sure that the appliances are kept clean (to avoid grease and carbon built-up, which would require the cooking equipment to use more energy) and check if air vents, chimneys, and flues operate correctly.
- Ethical sourcing - whenever possible, prioritise local and seasonal ingredients from suppliers who adhere to sustainable farming practices to reduce your carbon footprint and serve the freshest food.
- Sustainable packaging - according to a McKinsey study, the majority of global consumers are willing to pay more for products with sustainable packaging, which is great news because by using eco-friendly packaging, you're not only reducing your environmental impact but also can potentially increase your revenue by offering such packaging options.
- Digital sustainability - cut down on paper by reducing paper menus and other printed materials and reuse and recycle your technology and hardware. It all adds up, they say.
By embracing sustainable practices, you're not only doing your part to protect the environment, but you're also making a smart business decision that can improve your profit margins and build a loyal customer base.
Technology to support improving restaurant profit margins
As we've explored, there are many things you can try when maximising your restaurant's profit margins and although, at first, it might seem like a pain, thankfully, we're living in a digital era where technology can help with most of the daunting tasks. The right technology solutions can streamline your operations, provide valuable insights, and empower you to make data-driven decisions that directly impact your bottom line. While some technologies may require an upfront investment, these solutions end up paying for themselves in several ways.
Let's take a look at how technology can transform your restaurant's profitability, aligning with the strategies we've discussed.
POS system
A modern, cloud-based, fully integrated point-of-sale (POS) system does much more than just process transactions.
- Sales data analysis - helps with menu engineering decisions as it tracks sales trends by item, category, time of day, and day of the week, helping to identify your most profitable and popular dishes.
- Order accuracy - reduce human error in order taking, ensuring that what reaches the kitchen is exactly what the customer ordered, meaning less waste and more happy customers.
- Faster service - by streamlining the ordering and payment process, your staff can serve more customers in less time, leading to increased table turnover and higher revenue.
- Pricing accuracy - eliminate manual pricing errors by ensuring that all items are correctly priced in the system.
- Upsell prompts - modern restaurant EPOS systems offer the functionality to save and automate upsell prompts, making it easier for your staff to consistently suggest additional items or upgrades to customers.
Customer Relationship Management (CRM)
Hospitality CRM that collects customer data (such as customers' preferences, behaviours, and spending habits), will help you build lasting relationships, generate more revenue, and thus increase profit margins.
- Personalised marketing - knowing all the nitty gritty details about your customers will help you create those targeted promotions and offers that truly resonate with individuals, increasing the likelihood of repeat visits and higher order values.
- Loyalty program management - create strategic loyalty campaigns to drive customer spend and increase customer visits by adding the fully integrated Loyalty Module to your CRM.
- Data-driven insights - gathering valuable data on customer behaviour, such as visit frequency, average spending, and favourite dishes will help with your menu engineering, pricing strategy and marketing campaigns.
Access Hospitality is here to help
In this article, we've looked at some of the areas of your daily operations where targeted improvements and the help of technology can directly enhance your operations. From menu engineering and cost control to marketing and sustainable practices, implementing the tried strategies outlined here will help you build a more profitable and resilient business.
Access EPoS, our hospitality EPoS system, is designed to do much more than just handle the transactions, and its insights are a powerful tool in transforming your restaurant's financial performance. To learn more about how Access EPoS can help improve your restaurant's profit margins, download the brochure or talk to the team today.
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