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How to Increase Your Restaurant's Profit Margin

business.com editorial staff
business.com editorial staff

You can pump up profits for your restaurant with a few tried-and-true methods paired with creative balance of costs.

  • Your restaurant's success depends on the net profit margin that can be expected for the restaurant.
  • The profit margin of a restaurant is dependent on two things: the gross profit and the net profit.
  • Restaurants that are experiencing low profits may be able to turn it around and begin earning a profit by following a few simple best practices.

What is profit margin?

A profit margin is the measure of your restaurant's earnings (profits) in relation to its revenue. There is no right or wrong answer as to what the typical profit margin should be for your specific business. The numbers can vary tremendously; however, the average restaurant profit margin averages about 3-5%, but it can have a broad range, with as much as 20% earnings or sometimes even more. Although there aren't too many parameters that you can use to gauge the success of your restaurant, your net profit margin will give you a clearer picture of whether or not your restaurant is going to survive down the road.

How is profit margin calculated?

There are two kinds of profit margins: gross profit and net profit. Gross profit margin is the amount you have left after deducting the costs of all of your sold goods. The gross revenue is the revenue from selling food, beverages and merchandise. This number is essential to measure the efficiency of your restaurant, but it does not take into account all the costs of running your restaurant.

You get the net profit margin when you deduct the costs of running your restaurant from the gross profit. The net profit margin includes costs such as mortgage or rent, payroll, utilities, insurance, and taxes. For example, if your restaurant is spending 90 cents for every dollar it brings in, your net profit margin for that specific period is 10%. This is the number you'll use to assess the profitability and success of your restaurant.

Are profit margins different for different types of restaurants?

Each restaurant has different expenses based on a variety of factors, including the location, menu choices and the style of restaurant. However, a few types are often more profitable than others. 

  • Full-service restaurants: The profit margin tends to be higher for full-service restaurants, which are restaurants that have managers, kitchen staff, bartenders, servers and hosts. These numbers can vary greatly by the restaurant's size, price range, location and turnover rates. Restaurants that serve alcoholic beverages also tend to have a higher profit margin.

  • Fast-food restaurants: The profit margin for this type of restaurant depends on factors such as whether it is chain-owned, independent or franchised. However, the average profit margin for fast-food restaurants is typically higher than for a full-sized restaurant, because there is typically less staff, higher turnover and less expensive ingredients.

  • Food trucks: Food trucks often have similar numbers for food costs as brick-and-mortar restaurants. However, they have lower overhead costs for staff, utilities, rent and insurance.

Ways to increase restaurant profits

Following flavor trends year to year is how many restaurants try to stay ahead of the curve with their menu offerings. As carefully as you study fluctuations in your customers' ever-changing tastes and expectations, you must do the same with market prices and costs. Knowing where you stand month to month, or even week to week, in sales and costs can help you adjust here and there to increase your profit margin.

1. Check your food costs – then check again.

The industry-standard percentage for food costs is 30%. The lower you can get it, the better. You shouldn't sacrifice quality, though. If the true cost of a burger and fries at your restaurant is $1.50, you have some room to play with the menu price. Just make sure you're calculating those food costs accurately and regularly, as the market price for meat, produce and baked goods fluctuates. Of course, you can't change your menu prices weekly, so shoot a little higher with your prices, giving you a buffer for profit versus cost.

It's important to keep customer satisfaction high, though, so remember to price items for minimum negative psychological impact. If you increase a menu item from $8.49 to $10.99, customers may balk at the double digits. Instead, bump it up to $9.99; customers will feel like they're getting value, and you still increase your profits.

2. Offer daily specials.

A great way to increase profits is to offer a chef's special that's creative, tempting and priced slightly higher than your regular menu items. Exclusivity combined with a limited-time offer can be a big selling point. You can keep costs low by using seasonal ingredients, and you can push the special with seasonality as a selling point too.

Make sure your customers know what your specials are by snapping a photo of a completed plate at the beginning of the day and promoting it online through Snapchat, Instagram, Facebook and Twitter.

3. Offer a loyalty program.

Too many discounts can affect your bottom line negatively, but the more often your customers visit your restaurant, the higher your profit margin will be over the long term. Whether you choose a digital rewards mobile app, receipt discounts or punch cards, discounts can bring loyal customers back regularly so they earn that free appetizer or two-for-one meal.

4. Reevaluate your labor costs.

Mass layoffs would be counterproductive to your goal here. You want to maintain or increase revenue and give a big bump to profit. One area where you can save on costs is labor, but you need to look closely at your daypart sales.

Compare tickets during a business day in both sales ticket volume and check totals. You may be making the same amount of revenue with dinner tickets as lunch, but fewer tickets overall in the evening. You can cut staff a bit in the evening and still bring in the same sales while costs go down.

5. Try old-fashioned upselling.

If your staff is well trained, they're already pushing appetizers, drinks and desserts on your customers. It's these items that drive up the check totals and, ultimately, your bottom line. Get your staff excited about the items you want to sell more of, and the customer will be just as excited to try them. Your servers need to know the menu front to back, so be sure they've tried everything – including daily specials. A server who has tasted the bacon-wrapped Brussels sprouts with lemon dill dipping sauce is better equipped to sell it.

The bottom line is that your profit margin won't increase unless you are effectively selling high-quality, fairly priced menu items to your customers. That means finding the balance between your costs and revenue.

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