We’ve all heard the stories about how low margin our industry is but, the truth is that there are restaurants and restaurant groups out there that do make great money. And you can too.
I’m going to be providing you with smart tactics and methodologies to dramatically increase restaurant profit margins and your financial sustainability.
Gain financial insight and maximize your restaurant profits with menu optimization, sales-boosting techniques, cost reduction strategies & more.
Leverage technology to streamline operations and gain valuable insights into your business.
Key performance indicators that have the greatest impact on profitability.
Understanding Restaurant Profit Margins
Gross profit margin and net profit margin are two factors to consider when trying to understand the most average restaurant revenue and profit margins. These measurements act as barometers for a business’s financial health.
Understanding these indicators is key in ensuring there is enough room between cost of goods sold (COGS) and total revenues, which will ultimately determine whether or not your company can sustain itself financially on an ongoing basis.
Gross Profit Margin
The gross profit margin is an essential metric that helps identify a restaurant’s profitability, showing the amount of income gained from COGS and labor.
Financially successful restaurants have profits margins ranging around 50%. This figure underscores the importance of optimizing costs in order to maximize restaurant revenues achieved through smart spending and efficient operations.
Net Profit Margin
Today’s restaurant industry shows an average net profit margin of 7%.
Net Profit Margin is obtained by deducting all expenses associated with operations, such as labor costs, overhead expenses, fees and other operating outlays, from gross revenue to calculate overall business profits (known as ‘net profit’).
Gross Profit Margin evaluates income generation, while this more comprehensive approach factors-in every expense when assessing your restaurant’s fiscal health.
Factors Affecting Profit Margins
Profit margins are affected by obvious factors such as food costs, labor expenses and rent. The type of the restaurant, its location size along with ownership structure can all influence margin, as well. Competition also plays a significant role in optimizing a restaurant’s financial health.
We must become intimately aware of how these factors can impact our profitability so that we can plan accordingly from the earliest stages of the venture.
Average Profit Margins by Restaurant Type
Understanding the average profit margin of different kinds of restaurants can be a really useful resource for entrepreneurs.
Being aware that the potential profit margins range from 6-9% for fast food and food trucks, 2.5 – 15 % for cafes, 3 – 5% full service restaurants and eateries, as well as 7 – 8 % catering businesses will help in establishing realistic goals.
We must consider what the true benefits and limitations of each tier of dining are when evaluating the viability of our restaurant business venture.
Strategies to Improve Restaurant Profit Margins
In light of the significance that restaurant profit margins have, it is time to look into effective methods for increasing margins.
We will consider menu modifications, approaches aimed at augmenting sales volume as well as tactics designed to reduce expenses all directed towards maximizing one’s net income/restaurant profits and its respective margin.
Menu optimization can be a great tool to maximize revenue. This is done by analyzing sales data, making adjustment to the menu based on that data and utilizing what is known as ‘menu engineering’, which uses elements from psychology, analytics and design together, creating menus that generate more profit when customers order them.
A popular way of helping restaurants determine how well their menu is performing is through using a Menu Matrix. It gives owners useful insights into arranging dishes based off importance- setting priorities according to profitability levels while also taking out unpopular offerings that won’t bring any benefit (or even losses). The result is a streamlined menu that is highly profitable.
Another amazing tool is a Benchmarking Analysis. This tool compares the prices of your menu items with the menu items of your competitors, highlighting opportunities to increase pricing to meet the market.
Sales Boosting Techniques
There are several techniques to increase sales volume, such as upselling, cross-selling and promotions or loyalty programs. The most effective tool I have found for scaling a restaurant’s per customer average sales is the Perfect Check. Click here to direct access to that training and template.
Cost Reduction Strategies
Finding ways to lower operating expenses, is a great way to increase profits.
By cutting back on labor costs, food waste and utility bills, our profit margins can be improved significantly.
Advanced inventory control tools, like Margin Edge and Meez, are highly effective in providing real time data and monitoring portion sizes can help in minimize food waste.
Leveraging Technology to Maximize Profits
Technology plays an important role when it comes to restaurant profits. By utilizing the proper software and tools, you can streamline operations while providing worthwhile insights for sound choices. Let’s explore the most common tech tools below:
Point of Sale (POS) Systems
Having a reliable Point of Sale (POS) system can prove to be extremely advantageous for restaurant management. A POS contains features such as inventory and menu management, employee tracking and sales monitoring which make the operations within the eatery more streamlined.
The best-rated systems are SpotOn, Toast, and Square that allow restaurants to optimize their processes while effectively keeping track of data pertaining to profit margins in particular.
By investing in a suitable POS platform owners can expect improved operational productivity plus increased profits overall due to greater efficiency levels afforded by this technology based solution.
Online Ordering Platforms
Online platforms can make it easier to increase sales, giving customers the convenience of ordering from their favorite restaurant. These applications offer many quick service restaurants several advantages including: bringing more people into your establishment, providing rewards programs for loyal patrons, and boosting brand visibility.
Staff Scheduling Software
The days of using an excel spreadsheet to do your staff schedule are done (or at least they should be.)
With the help of effective staff scheduling software, restaurants can optimize their employees’ schedules and significantly decrease labor costs in order to improve profit margins.
These systems also help with employee communication and retention and some services offer predictive analytics that can help you schedule labor more efficiently.
As a result, not only will you keep your restaurant operating expenses and operational costs low, but also potentially open up new horizons for increased profits from improved efficiency gains.
Monitoring Key Performance Indicators (KPIs)
Keeping an eye on metrics such as labor cost percentage and food cost percentage is crucial in order to maintain the financial health of a restaurant.
Regularly analyzing these key performance indicators (KPIs) provides insight into potential issues, allowing timely corrective actions to be taken which helps maximize profit margins for greater success of the business.
My favorite KPI’s to track are:
Per Customer Average Spend
Loyalty Sign Ups
Ultimately, with a sensible plan of action, successful tactics and intelligent utilization of technology, it is possible to scale your restaurant’s profit margin.
Optimizing menus, increasing sales revenue and decreasing expenditures – as well as taking advantage of current technology available – observing KPIs (key performance indicators) all combine to provide outstanding results in maximizing profits for any restaurant.
Now is an opportune time to take those first steps towards improving financial stability within your restaurant.
Frequently Asked Questions
What is a good profit margin for a restaurant?
The Corporate Finance Institute states that a 10% average restaurant profit margin rate would be thought of as average and 20% profitable, which makes it noteworthy.
Why are restaurant profit margins so low?
Running a restaurant presents numerous challenges due to costs such restaurant expenses such as rent, labor, equipment and inventory. As a result, restaurants struggle to keep prices low while staying competitive. Thus leading to razor-thin profit margins despite their hard work.
Do restaurants make a lot of profit?
Net profit margins for restaurants usually vary between 2-6%, yet many fail to make a sustainable income due to economic and size issues. For a full service restaurant become profitable, it normally takes two years of hard work from restaurateurs.
What is the profit margin for the food industry?
The net profit margin of the food industry has, in general, been between 20-30%. Yet rising expenses this year have put a strain on the cash flow of many operations within the sector.
How much do restaurant owners make?
Restaurant owners can expect to receive an attractive pay package that could reach up to $333,000 in annual earnings. According to ZipRecruiter’s data, the typical salary for this role is about $97k per year and wages vary from as low as 45 grand annually to a maximum of 6 figures yearly. They make around 47 dollars hourly on average.