It’s no secret that many restaurants run on razor-thin margins. On average, most restaurant’s profit margins range anywhere from 3-5%. While several different factors contribute to a restaurant’s overall profitability, there are steps restaurant owners can take to increase those margins and drive revenue.
What Is My Profit Margin?
A profit margin is used to measure how much money a business is making by subtracting the cost of what it takes to run it from the gross profit. For example, if your restaurant has a gross profit of $500, but is paying $650 in fixed costs and labor, then your restaurant isn’t profitable.
There are several equations that restaurants use to calculate their profit margins. Read on to learn more about them.
Gross Profit Margin
To find your gross profit margin, you first have to find your gross profit. Your gross profit is the selling price minus the cost of goods sold. Divide that gross profit by the selling price, then multiply that number by 100 and you’ll have your gross profit margin. See below for an example equation:
A restaurant sells a burger for $10, and that burger costs $3 to make. Therefore, this burger would generate gross profits of $7 (selling price – cost of goods sold ) and a gross profit margin of 70% ($7 / $10).
Although this equation helps understand how efficiently your restaurant is making money, it doesn’t show you the bigger picture because it doesn’t take into account your fixed and variable costs such as rent, utilities, equipment, etc. This is where your net profit margin comes in!
Net Profit Margin
The net profit margin is what you want to use to see how profitable and successful your restaurant is overall. This formula considers all of your expenses, such as rent, utilities, and labor.
For example, say your restaurant makes $100,000 this month, but the cost of all your expenses adds up to $93,000. Your net profit calculation would look something like this:
Total Revenue – Total Expenses = Net Profit
$100,000 – $93,000 = $7,000
This means that every month, your restaurant is making $7,000. To further calculate the net profit margin, you’d then take your net profit and divide it by your original total revenue and then multiply by 100. See below:
(Net Profit ÷ Total Revenue) x 100 = Net Profit Margin
($7,000 ÷ $100,000) x 100 = 7%
How Do I Improve My Profit Margins?
There are a few things you can do to help improve your margins. You can improve them by increasing your sales and decreasing your costs. Read on to learn how you can do both.
Get Into Delivery
The food delivery business is growing quickly. Since 2014, the industry has grown 300% faster than the dine-in business. A growing majority of people are choosing to eat in over dining out. As a result, people are ordering delivery from their local restaurants more than ever. If your restaurant doesn’t offer delivery yet, you could be missing out on tons of potential sales.
If you don’t have the manpower to deliver food, try partnering with a third-party delivery app such as Grubhub, Postmates, or UberEats. Although third-party delivery apps take a percentage of your sales, you can still increase your restaurant’s visibility to potential customers and drive revenue.
Streamline Your Menu
Having a big menu with lots of options is a great way to appeal to a wide variety of different customers. But if you’re not selling those options consistently, then those ingredients will go to waste. Pay attention to what sells the most, and hyper-focus on those menu items instead.
Is your sports bar selling pounds of chicken wings every week, but your dessert menu isn’t getting a lot of attention? Get rid of the cakes, and focus on expanding your appetizer and chicken wing options. By trimming the fat on your menu, you’ll start running your menu options more efficiently, and your sales will likely get a boost.
Get Customer Feedback
Sometimes the best way to know what your customers are looking for is to by simply asking them. Take the time to notice your regulars and chat with them about what they like and what they think could be better.
Getting feedback from your customers is not only a great way to improve their experience, but it’s also a great way to increase the likelihood of them becoming regulars for life. Your customers will appreciate their suggestions and opinions being valued. Even if you don’t use every suggestion, you’ll gain insight into what your target market is looking for. If you don’t have the time to talk to your customers individually, another option is to create an online survey and put it on your receipts.
Nowadays, POS systems do more than just process payments. With a high-end Point of Sales system, you can start gaining insight into what’s profitable and what isn’t for your restaurant. You’ll be able to access data that shows you insights such as how much the average customer spends on food and drinks, which dishes are your most popular, what time of day generates the most sales, and more.
While this technology is an added expense, the learnings you’ll gain are invaluable. With this extra information, you’ll be able to adjust your menu, shifts, and other necessary changes accordingly.
Build A Social Media Presence
Having a strong social media presence can help your restaurant can reach new customers, build relationships, and create brand loyalty. Research shows that 72% of consumers use Facebook when making retail or dining decisions. Around 90% of guests will research a restaurant online before dining there. By not engaging with your customers through social media or having a strong online presence, you could be losing out on potential sales and customers.
Use Your Kitchen Space As A Ghost Kitchen
Amid the rise of demand for food delivery, ghost kitchens have become increasingly more popular. Ghost kitchens (sometimes known as virtual or dark kitchens) are a delivery-only and cost-efficient restaurant model that prepares and sells food. Since most restaurants already have the kitchen space and staff, the start-up costs for ghost kitchens are typically extremely low.
When launching a ghost kitchen, you can design a new restaurant concept that compliments your brand, or you can partner with a company like Nextbite that simplifies the process for you by offering researched, pre-developed restaurant concepts that can be implemented in a flash.
Reduce Cost Of Goods
This one seems obvious, but by reducing what you spend on goods, you’ll make more money without having to raise your prices. While we don’t recommend sacrificing quality as a way to cut costs, we do encourage you to carefully examine which goods are worth the extra investment and which goods can be replaced with a cheaper alternative. You can start by shopping around for great vendors, building close relationships with them, and getting an idea of where you can get the best deals. Don’t be fooled into ordering more than you need with bulk discounts. Although this may seem like you’re saving money at first, you’ll lose more money if those goods end up going to waste. US restaurants waste anywhere from 22 to 33 billion pounds of food every year, and a contributing huge factor is over-purchasing.
Now that you understand how to calculate your profit margins and improve your bottom line, you can start making your restaurant as efficient and profitable as possible.
Check out our website for more information on how to drive revenue for your restaurant business.