How Profitable Are Restaurants? A Definitive Guide to Understanding Restaurant Profit Margins in 2022
Understanding how profitable are restaurants – which answers questions like, is a restaurant a profitable business, do restaurants make good profit, and how much money do restaurants make in a day, month, or year, comes down to understanding restaurant profit margins and looking at ways of easily raising them.
Let’s get into the major questions, run through how to calculate restaurant profit margin, and then talk about how to increase restaurant profit margin in ways you can implement today.
How Profitable Are Restaurants?
Restaurants can be highly profitable in terms of overall money coming in or total profits, but the problem comes in after costs with profit margins, which are typically not very high.
Some major chains and popular upscale restaurants can generate a healthy income, while many restaurants take on other variables for additional income, such as real estate, cooking classes, shows and expanding their brand by selling products and merchandise online.
Raising your restaurant’s profit margins is possible when you use the right methods. This article will go through traditional and new methods, and explain how using technology with a data platform can dramatically increase your restaurant’s profit margins.
Why are restaurant profit margins so low?
Compared to other types of businesses, restaurants overall are simply not that profitable in terms of what they take home, and the average is significantly less now than it was 20 years ago.
What is the average restaurant profit margin?
The average restaurant brings in 3-5% profit margin, but it can range anywhere from 0-15%.
Do restaurant owners make a lot of money?
What are the most profitable restaurants?
Understanding Profit Margin
What is restaurant profit margin? Profit and profit margin are two different things. Profit is the total amount of revenue without subtracting costs, while profit margin is what’s left over after all costs are taken out, meaning it’s a percentage of the total sales.
A restaurant can take in a high profit amount, but the profit margin is low because of the high costs involved with running a food service business.
Gross profit and net profit are both necessary to understand when looking at profit margin for restaurants, and the difference between the two is of ultimate importance because many people, when they do not understand this, can more easily lose profits.
The first few years of a restaurant are critical, and many close during this time because costs can easily exceed income. Restaurant location, cost of living, competition, and buying habits or purchase patterns of customers can affect profit margins greatly.
It’s important to understand profit margins to have a successful restaurant business, as well as looking at how to increase profit margins, all of which will be discussed in this article.
Restaurant Profit Margin Calculator
Gross Profit Margin
Here’s how you calculate your gross profit margin:
[Selling Price – CoGS] ÷ Selling Price = Gross Profit
Gross Profit x 100 = Gross Profit Margin
In short, just subtract the cost of making an item from what you sell the item for, and you get the gross profit from that item.
Net Profit Margin
Your net profit is what you have left over after the gross profit, and additionally includes all the costs for running your business, from rent or mortgage, to paying employees and other bills, insurance, taxes and more.
In other words, you’ll need to know your gains, expenses and losses, plus your revenue from sales to factor into your net profit.
Here’s how you calculate the net profit:
Total Revenue – Total Expenses = Net Profit
[Net Profit ÷ Revenue] x 100 = Net Profit Margin
In short, just subtract your expenses, all-inclusive, from your revenue to get your net profit.
The Average Restaurant Profit Margin
While profit margins can actually vary widely for restaurants depending on many factors, there are three main ones: CoGS (cost of goods sold), Labor, and Overhead Costs.
According to the Restaurant Resource Group, the average restaurant profit margins fall between 2%-6%, but they vary depending on type of restaurant:
- Average profit margin for Fast-food restaurants: 6 to 9%
- Average profit margin for Full-service restaurants: 3 to 5%
- Average profit margin for Catering services: 7 to 8%
- Average profit margin for Food trucks: 6 to 9%
Remember that these numbers are average, meaning they’re affected by the outliers on either side – if you have a restaurant, or are set on owning one, there are ways to raise your profit margins if you are willing to invest some time, testing and strategy.
There are many traditional strategies, as well as data-driven, technological ones that are coming to the forefront of running a successful restaurant. The good news is that today, there are more possibilities than ever before – so much so that restaurants that used technology during the pandemic grew, meaning they increased profit margins and even added new locations.
14 Ideas for How to Increase Restaurant Profit Margins
Restaurant profits can be affected by rising food costs, having a low period for business, whether or not they carry alcohol, and other things.
Usually, the two main ways of increasing restaurant profit margins are by either boosting your sales above your expense amount or saving on expenses so you get more profit from sales.
An example of saving on expenses would be to cut staff or supplies, but this must be done with caution because these can negatively affect the bottom line if done incorrectly.
To do these better, use technology like smart scheduling software to avoid over- or under-staffing problems, and add online ordering channels, for instance. Other ways of tracking these include:
Increase profit margin through staffing choices
Educate every team member who touches the guest experience about the potential value of your customer and the restaurant’s revenue goals.
1. Make sure team members know your core menu items and popular combinations
Training your employees to know your menu and what you’re looking to sell more of, upsell and cross-sell is important to increasing profits when they can put this into action.
2. Don’t forget to recognize returning guests
You can easily do this with GoGoGuest’s platform, which integrates with your POS system so you can know who people are – even if you don’t remember their face.
3. Schedule team tastings
Letting staff in on your food and beverage items – that they’re selling – makes sure each customer experience team member knows your menu items by heart. They can also give better recommendations this way.
Reduce food waste with a smaller menu and menu combinations that drive revenue.
4. Find out what menu items and combinations are the most popular
This helps you pick what goes on the menu and where to optimize what people see and order more often. The easier it is to see, the more likely they’ll remember to order it.
5. Offer discounts for popular combinations
When people typically buy the fries with the burger, making a combo with a discount encourages guests to go ahead and get the combo.
6. Optimize the menu pricing, introduce the idea of on-demand (more demand, less supply)
Creating excitement around popular items without buying as many of the ingredients makes people pay attention more, and they’re more likely to come in to get that popular product before it sells out.
When you optimize menu pricing, this means figuring out which items are the most profitable and popular vs items that are popular but not profitable, and so on. Make sure pricing is correct for what the cost of ingredients are, plus how much it sells, to make sure you’re getting enough profit from the item.
7. Calculate the cost per serving and food cost percentage of each menu item
Food costs need to be kept between 28-35%. If you’re not meeting this, then raise the prices of your menu items in order to factor in overhead expenditures.
8. Update menu design and layout by sales channel based on customer buying patterns
Strategically creating your menu, which includes the items on the menu, layout and design, and using psychology, can drive profits up to 20%.
9. Test your restaurant or coffee shop concept with a Minimum Viable Product (MVP) before investing in it
Introduce an item on trial specifically to get feedback, and improve it if you decide to keep it. This saves costs, allows you to gauge how well the item will do with your customers, and helps you not to overspend.
Increase profit margin with an online presence
Add social media, a website, online ordering and more so people know you exist from anywhere, and can find out about your menu, pricing, location and more through a simple online search.
Here are ways to make sure your online presence is up to date and actionable:
10. Make sure to update your Google business listing to include up-to-date information
This includes details like hours, location, phone number and website.
11. Encourage guests to leave you reviews on Google
Having a lot of reviews, and mostly good reviews can help you gain more traction. Make sure and respond to reviews as well.
12. Add marketing efforts to social media
This includes Facebook, Instagram, Twitter and LinkedIn, or even advertise online for more outreach.
13. Get someone to take high-quality photos and even video clips of your store
Get photos of inside and outside your store, plus photos of your food to post online on social media, Google location and your website to create more reasons for people to notice and want to come check out your restaurant.
Today, there’s even more technology that’s easily accessible for any size of restaurant business to do more with personalization and outreach. You can increase restaurant profitability even more when you use a customer intelligence and data-driven marketing platform.
14. Utilize The Power of Modern Technologies Like AI to increase restaurant profit margins
Traditional methods are still a necessary and effective way to boost sales, but adding modern technology can have an even greater impact on business success.
Using AI, implementing a cloud POS system, and embracing Customer Intelligence (CI) are some of these methods to utilize if you haven’t already.
Here’s how Customer-focused software can increase restaurant profit margin:
What is Customer Intelligence (CI)? CI is the process of gathering information on guests – like demographic info and their preferences – analyzing the data, and using it to build stronger relationships with customers. CI helps you understand customers better so you can better serve them and keep them coming back.
You likely already have customer data coming into your business through various means, such as your website, WiFi, third-party delivery apps, surveys, and more. CI uses data analysis to group these together and understand customer behavior so you can optimize customer service.
Many POS systems have built-in Customer Relationship Management (CRM) systems, but they must be manually used by you to be effective. These systems work for you to gather customer data at the point of sale and transfer it to other software you’re using for this purpose.
CRM systems keep all your Customer Intelligence in one place, where it can easily be analyzed without you having to manually input information. Then, the system itself helps make decisions for sales, customer journeys, bundles, discounts and other guest experience opportunities.
What does a POS system with CRM software do?
- Stores customer information such as contact info automatically
- Pinpoints loyal customers
- Keeps a record of purchase patterns
- Looks at current and future sales and inventory information
- Segments customers into groups
- Creates guest profiles so you can hyper-personalize offers and communication
- Integrates info from social media and other platforms
- Records feedback and customer polls
- Shares information with employees so they can be trained
Customer-focused restaurants should be using Customer Intelligence to inform all methods of profit boosting.
Today, since many restaurants are doing this already, it’s becoming not only a way other businesses are crushing the competition, but also an expected part of the experience from the perspective of the customer.
Market Basket Analysis is one way to analyze data quickly so you can meet your business goals.
Here are some more ways you can use Customer Intelligence to increase restaurant profit margin:
- Re-work your menu for profit by knowing what customers are buying and in which combinations (for instance, one item that doesn’t seem as profitable on its own might actually be more than meets the eye if customers who purchase it are also purchasing other things with it);
- Crafting or tweaking your loyalty program to convert first-time diners into raving fans and support profitability goals;
- More efficient marketing so your money goes unwasted;
- High-performing email campaigns and SMS messages with hyper-personalized, real-time offers to guests;
- Reducing slow times by offering well-timed promotions to reflect what people are buying.
Real-life restaurant examples of how AI can help you
- When you find out that a low-cost, resource-efficient menu item like roasted cauliflower sells out every lunch time, you can then use this menu item as an upsell to a kofta kabob or a shawarma bowl.
- Before you choose an upsell item, the customer platform would run a basket analysis to see which offer combination delivers optimum profitability.
- You can study your customer profiles and segments, which include things like purchase patterns, to find items most likely to convert into first, second or third time orders.
- Once revenue and customer segments are figured out, the next step is to craft the visual story in the form of an email campaign, an SMS message and or a social media post.
- You can test marketing efforts as you go to see what message is the most advantageous.
Next Steps to increase your restaurant’s profitability
Wondering if using Customer Intelligence is a worthy use of precious profit margin? GoGoGuest has helped restaurant type businesses achieve:
- 78% increase in customer acquisition across channels
- 84% increase in revenue
- 92% increase in loyalty
- 79% increase in cost savings
No matter where you are as a quick-service or full-service restaurant, we can help you achieve your goals. We help with guest WiFi marketing and analytics, data-rich email marketing, personalized SMS marketing and customer loyalty programs.
We take all the data from these channels and analyze it into one understandable report that you can actually use to increase your profit margins.
Using things like one-click partner integrations that integrate with your store and online platforms, you can get a clear, 360-degree view of your restaurant guests like never before.
We sync all your data in one place so there are no more inconsistencies and you can trust the data. You can also build dynamic customer groups and personalize offers to each guest based on key attributes to offer various bundles and offers to people who want them.
Want to increase your restaurant’s profit margin today? Schedule a FREE assessment and see how GoGoGuest can help your business grow. Book an appointment today.