Understanding Restaurant Profit Margins: A Clear Path to Success

By Emma LiburdiJun 10th, 2024

Running a restaurant is a balancing act of managing expenses and maximizing revenue. On average, the profit margin for a restaurant is 5%, though this can vary significantly depending on the type of restaurant and its location. Understanding and optimizing these margins is crucial for long-term success. In this article, we’ll explore how to calculate your restaurant profit margin, what affects it, and practical strategies to improve it.

How to Calculate Your Restaurant’s Profit Margin

To calculate your restaurant’s profit margin, you’ll need to understand both gross and net profit margins:

  • Gross Profit Margin: This is calculated by subtracting the cost of goods sold (COGS) from your total revenue and then dividing by total revenue. 

Gross profit margin calculation

  • Net Profit Margin: This includes all expenses, not just COGS. It’s calculated by subtracting total expenses from total revenue and dividing by total revenue.

Net profit margin calculation

Components Affecting Restaurant Profit Margins

Several factors can influence your restaurant’s profit margins, with food and labor costs often the most significant line items:

  • Cost of Goods Sold (COGS): This includes the cost of ingredients and beverages. High COGS can eat into profit margins.
  • Labor Costs: Wages, benefits, and other labor-related expenses are significant costs for any restaurant.
  • Overhead Costs: Rent, utilities, and other fixed costs must be managed efficiently.
  • Menu Pricing: Setting the right prices that reflect the value and cost of your offerings is crucial.
  • Sales Volume: Higher sales volumes typically lead to better margins due to economies of scale.

Strategies to Increase Profit Margins

There are two main ways to improve your restaurant profit margin: increase sales volume, and decrease costs. Here are some effective quick-wins and long-term strategies to do both:

Increasing Sales Volume Relative to Expenses:

  1. Diversify Revenue Streams: In addition to dine-in and takeout, consider offering catering to bring in bigger ticket sizes. You can also expand your online ordering channels and start taking orders directly from your own branded app, a commission-free marketplace, and discovery sites like Google and Yelp.
  2. Invest in Diner Marketing: Marketing is a great way to attract new customers and drive repeat orders from loyal diners. Leverage diner contact and ordering trend data to send targeted emails and push notifications to hungry diners. Social media is another powerful, cost-effective channel to directly engage with diners, promote new menu items, and drive diners to order online. 
  3. Promote High-Margin Items: Design your online menu to highlight dishes with higher profit margins and encourage upselling. This includes moving your most popular and profitable dishes to the top of your menu, and adding menu photos to stand out. Check out this article to learn more tips to optimize your menu for upselling.

Decreasing Costs Relative to Sales Volume:

  1. Optimize Inventory Management: Use inventory management software to reduce waste, forecast inventory needs, and manage stock efficiently. You can also implement a just-in-time (JIT) inventory strategy—this means you’ll receive supplies as close to the time it’s needed as possible. Get more tips for improving inventory management here.
  2. Negotiate Better Supplier Deals: Work with suppliers to get the best prices for ingredients without compromising quality. This can include bulk buying of larger quantities, flexible payment terms, and effective communication of expectations for stronger partner relationships.
  3. Opt for margin-friendly ordering: While third-party marketplaces can help attract new diners, orders from these delivery apps often come with hefty commission fees for restaurants. Make it easy for diners to order from your most profitable channels. Set up commission-free ordering directly on your website, and promote your preferred platform on social media and discovery channels, like Google.

Improving restaurant profit margins is a multifaceted challenge, but with careful calculation, evaluation, and strategic adjustments, significant improvements can be achieved. Focus on enhancing customer experience, diversifying revenue streams, and controlling costs to see tangible benefits.

For personalized advice and to learn how ChowNow can help your restaurant improve its margins, talk to an expert today.

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