There is something about the restaurant business that makes aspiring entrepreneurs excited. Maybe it is the idea of creating lively spaces where people gather and enjoy themselves. Or perhaps it’s the personal satisfaction and status of having their own restaurant. Regardless of the reason, tens of thousands of entrepreneurs tackle the very competitive and demanding restaurant business every year. But the one thing many restauranteurs seem to spend the least amount of time considering happens to be the most critical part of their business: the restaurant profit margin.
What is a restaurant profit margin?
Calculating Gross Profit
To calculate your restaurant profit margin, first, we need to analyze a few important metrics. The first one is called gross profit.
To calculate your gross profit, you need to subtract the total cost of goods sold (COGS) for a specific period from your total revenue (your total food, beverage, and merchandise sales).
Gross Profit = Total Sales-Cost of Goods Sold
For example, Tim’s Seafood Restaurant had $1 million in sales in 2021. The cost of restaurant food and related items was $500,000. Tim’s gross profit as a percentage of sales is 50%, meaning that for every $100 Tim’s Seafood Restaurant earns, $50 is gross profits used to pay for operating expenses, such as employee salaries, rent, etc.
To calculate gross profit as a percentage, we would use the following formula:
Gross Profit = ($1 million – $500,000)/$1 Million
Gross Profit = 50%
Calculating Net Profit
After you have determined your gross profit, the next step is to calculate your net profit. Your net profit is the amount leftover from the gross profit after deducting operating expenses like payroll, rent, utility bills, ingredients, and equipment leasing costs.
To calculate your net profit, using Tim’s Seafood Restaurant as an example, we would take the gross profit earned by the restaurant ($500,000) and subtract it from operating expenses. We will estimate operating expenses at $410,000.
Net Profit = $500,00 – $410,000 = $90,000
To calculate net profit as a percentage = (Net Profit/Revenue) X 100.
Using Tim’s Seafood Restaurant as an example, the net profit as a percentage of sales would equal 9%. ($90,000/$1million) X 100
What is the Average Restaurant Profit Margin?
The average restaurant profit margin is estimated to be around 4-6%, although this number can vary depending on the type of restaurant. Quick-service restaurants have average profit margins that are as high as 9%.
How to Increase Your Restaurant Profit Margin?
Like any business, the key to increasing profits and thereby influencing your overall restaurant profit margin lies in boosting overall sales and lowering expenses. Here are some of the most popular ways restaurants increase profit margins:
1. Raise Prices
When it makes sense, increasing the prices of your menu items in ways that don’t reduce overall demand will increase your revenue. When raising prices, be sure to be sensitive to the prevailing economic environment and your customers’ sensitivity to having to pay more. If prices rise too much, it may lower demand where your sales could drop farther than you can handle.
2. Add Takeout, Delivery, and Curbside Pickup Options
If the pandemic years have taught restaurants anything, it is to diversify all aspects of getting their product into customers’ hands. Your restaurant should be heavily reliant on takeout, delivery, and curbside pickup as options for your customers.
Expanding how customers can get your food will inevitably increase overall demand, as customers can choose to support your restaurant in an ideal way for them. Utilizing an affordable and highly rated online food ordering system like ChowNow will provide your restaurant with the tools it needs to boost sales and revenue outside of the dining room.
3. Utilize Free and Affordable Marketing Channels
Free marketing channels, such as the ChowNow Marketplace, allow your restaurant to list for free on our platform and secure online orders at 0% commission.
Unlike other platforms like Grubhub or UberEats, you will be able to keep all of the profits! The more customers who know about you and have a reason to give your restaurant a try for the first time, the better it will be for gaining repeat customers that will keep your restaurant thriving.
In addition, don’t forget to check out the ChowNow Order Better Network, where your restaurant can connect with diners on other platforms such as Google and Yelp who are looking to order food from local restaurants like yours.
Tapping into these low-cost restaurant marketing ideas is a sure way to boost traffic to your restaurant and increase sales. More revenue will help boost overall restaurant profit margins.
4. Decrease Overhead Expenses
Can you negotiate a reduced rent? How about being more efficient with your employee scheduling, ensure coverage when needed most, and lower it at other times? Could you reduce the cost of the supplies and lower food costs without compromising quality?
There are tons of line-item expenses that have the potential to be reduced to save you money. The more money you can save on expenses, the better your restaurant profit margin. We don’t recommend cutting corners and reducing the quality of your food or service to lower costs. Doing this will hurt your business more in the long run. However, there are always opportunities to lower costs. You have to take some time to identify substitutes that can get the job done for less.
Can you Make Money in the Restaurant Business?
The answer to this question is a definite YES. Many have shown that the restaurant business can be lucrative. Just take a look at super restauranteurs like Danny Meyer and the massive success of his Union Square Hospitality Group. Or smaller, local restaurants in your community that have been around for 20-30+ years. You don’t stay in business that long losing money.
A strong restaurant profit margin is a good indicator of the potential success of a restaurant business. And there are always ways to increase profit margins with solid business growth and expense control. Getting a handle on this critical metric will be the key to long-term success in the restaurant business.