Using the best seller, slow seller analysis, you evaluate food and beverages according to their profitability and can then make informed pricing...
5 Proven Strategies to Improve Your Restaurant's Profit Margin
Discover how to increase profits in the foodservice industry and calculate the profit margin for your restaurant, ensuring financial success.
Anyone who runs a foodservice business knows how crucial the ongoing monitoring and optimization of key metrics are for success. In particular, the profit margin plays a significant role in this.
This KPI provides information on how efficiently a business operates and how well it can control costs. It is important for restaurateurs to monitor the profit margin and develop strategies to improve this metric in order to ensure the profitability of the business.
In this post you'll learn:
- What the restaurant profit margin is
- How to calculate profit margin for your business
- What the average profit margin is for restaurants
- How to improve your restaurant's profit margin with 5 strategies
- Why an improved profit margin ensures financial success in restaurants
What is the restaurant profit margin?
The profit margin of restaurants represents the ratio between the profit and the total revenue of a business. This is typically expressed as a percentage.
The profit margin should not be confused with the profit itself. The profit indicates the actual amount of money that remains as surplus from a business's revenue at the end of a specific period.
A high profit margin in restaurants suggests that a business has a healthy financial status, creating room for growth and enabling long-term success.
How to calculate profit margin for your business
To calculate the profit margin for your restaurant, subtract all costs, such as beverage and food costs, personnel expenses, rent, etc., from your total revenue. Then, divide the profit by your total revenue.
It's important to regularly monitor and carefully analyze the profit margin to keep track of the financial performance of your business and make informed decisions to increase profits. A low profit margin suggests that you may not be selling your food and beverages profitably, which could lead to losses.
Depending on whether you want to determine your profit margin in gross or net terms, there are two different methods of calculation:
Gross profit margin
The gross profit margin in the foodservice sector indicates the difference between the sales price of a dish and the costs of the ingredients used to prepare it.
To calculate this, you must first determine your gross profit by subtracting all production and sales costs for a specific period from your revenue. Then enter the value in the following formula:
Gross Profit Margin = (Gross Profit / Revenue) x 100
Net profit margin
The net profit margin represents the amount that remains after deducting total costs. It indicates how successful and profitable your business is.
To calculate net profit, you need to subtract all business expenses (cost of ingredients, salaries, rent, etc.) from the revenue. Then, to calculate the net profit margin, you use the following formula:
Net Profit Margin = (Net Profit / Revenue) x 100
Average profit margins by restaurant type
As with every KPI in the restaurant industry, there is also no universal answer as to how high the average profit margin should be for restaurants. After all, this is influenced by a variety of different factors, such as the average cost per guest or the type of restaurant.
For example, the revenues and expenses between a fine-dining restaurant and a fast food restaurant differ significantly. Consequently, the profit margins also vary. For this reason, restaurant owners should research the profit margin specific to their niche to ensure long-term success.
Here is an overview of some different types of restaurants with their respective average profit margins in percentage:
On average, the profit margin for these businesses ranges between 3% and 5%. The reason for the low margin is the high overhead and labor costs.
Fast food restaurant
In comparison to full-service restaurants, these establishments require fewer employees as they mostly offer self-service. As a result, the average profit margin is somewhat higher, ranging between 6% and 9%.
Here, too, the average profit margin is between 6% and 9%. These businesses benefit from lower overhead costs such as rent, insurance, and utilities.
Similar to food trucks, catering businesses also benefit from lower overhead costs. The average profit margin for catering services is between 7% and 8%.
Improve your restaurant's profit margin with these strategies
If your profit margin is too low, there are two ways to improve it. You can pursue approaches to increase sales volume or decrease overhead expenses. Here are five strategies you can choose for your restaurant to increase profitability:
Increase sales volume
Optimize pricing of food and drinks
When was the last time you updated the sales prices of your dishes? Do you know which food and drinks are selling well and how much profit they are making (best sellers and slow sellers)? Regularly review and optimize your prices on your restaurant menu to ensure that they cover the cost of the ingredients and make a reasonable profit at the same time.
Pricing goes hand in hand with menu adjustments. Once you have determined your new menu prices, you can highlight the dishes on the menu that bring in a good profit.
Provide sales training for staff
What is also essential for top-notch service in restaurants is the ability to promote additional sales. Strategies such as cross-selling and upselling can help you generate more revenue.
For this to be successful, it is advisable to adequately train your service staff by going through potential sales scenarios together. Your employees should also be well-versed in your menu to provide each guest with personalized and fitting recommendations.
Take marketing measures
Another way to increase your revenue is through marketing initiatives. Whether through social media, promotions, or newsletters: leverage various channels and marketing strategies tailored to your concept and target audience to attract more customers and boost demand.
Decrease overhead expenses
Reduce food waste
Reducing food waste is crucial for increasing a restaurant's profit margin. By accurately storing food and carefully planning purchases, you can avoid overstock and reduce your food costs.
Opt for a digital tool
Use a restaurant management software to streamline these processes and maintain an overview of inventory costs, pricing, food costs, and more.
What you should also consider when aiming to improve your profit margin by reducing wasted food is demonstrated by this study: For every dollar restaurants invest in reducing food waste, they can save 7 dollars.
Improve employee scheduling
Effective employee scheduling involves finding the right balance between staffing needs and costs, contributing to improved profitability and, consequently, profit margin.
To align working hours with demand, it is particularly helpful to review your past planning: How many customers were there on a specific day? How many employees were scheduled? Was there too little or too much staff on site? Often, patterns can be discerned from experiences alone, providing valuable support for future employee scheduling.
Financial success in restaurants thanks to improved profit margin
In the foodservice industry, the profit margin plays a central role in business success. It allows restaurateurs to assess the efficiency of their establishments and control costs effectively. A high profit margin signals financial health, creating room for growth and long-term success.
The average ideal profit margin varies depending on various factors, such as the type of restaurant you operate. However, don't fixate too much on a specific value. Instead, regularly review and adjust your profit margin to ensure the financial stability of your business.