How Profitable Should My Restaurant Be?
How profitable are restaurants? They can be very 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 things for more income, such as real estate, cooking classes, shows and expanding their brand by selling products and merchandise online.
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.
So, what is the typical profit margin of most restaurants? Here’s the easy answer: the average restaurant brings in 3-5% profit margin, but it can range anywhere from 0-15%.
If you want to have a more profitable restaurant, there are ways of making more money with what you’re already doing. First, it’s important to understand profit margins.
Understanding Profit Margin
As mentioned already, profit and profit margin are two different things. Profit is the total amount of revenue without subtracting costs, while profit margin is what is 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 the profit greatly. It’s important to understand profit margin to have a successful business, as well as looking at how to increase profit margins, all of which will be discussed in this article.
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
So, 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
So, just subtract your expenses, all-inclusive, from your revenue to get your net profit.
The Average Profit Margin: How Profitable Are Restaurants
While profit margins can actually vary widely for restaurants depending on many factors, there are three main ones: CoGS, 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:
- Fast-food restaurant – 6 to 9%
- Full-service restaurant – 3 to 5%
- Catering service – 7 to 8%
- 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.
How Can You Boost Up The Profits?
Restaurant profits can be affected by rising food costs, having a low period for business, having alcohol or not, and other things. Some traditional ways to boost your profits include:
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.
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 psychology can drive profits up to 20%
Reduce Food Waste with a smaller menu and menu combinations that drive revenue.
- Find out what menu items and combinations are the most popular to pick what goes on the menu and where;
- Offer discounts for certain combinations that are popular
Optimize the menu pricing, introduce the idea of on-demand (more demand, less supply).
- 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.
Educate every team member who touches the customer experience about the potential value of your customer and the restaurant’s revenue goals.
- Make sure team members know about your core menu items and popular combinations
- Don’t forget to recognize returning guests.
- Schedule team tastings to make sure each customer experience team member knows your menu items by heart.
A customer intelligence and data-driven customer marketing platform that makes it super easy to focus on personalization based on buying and engagement patterns.
- Identify your restaurant’s customer cohorts by sales channel
- Find similar behavior and purchase patterns with powerful analytics and insights
- Develop a customer marketing program using dynamic segmentation and automation tools.
- Make sure to reward regular guests with membership programs and special. offers/discounts
- Get your name out there with content marketing, targeted advertising and social media.
For instance, when you find through marketing research 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.
But first, before you choose the upsell item(s) you would run a basket analysis to see which offer combination delivers optimum profitability. Then, you would study your customer groups to find the ones 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 these as well to see what message is the most advantageous.
Of course, this becomes easier when modern technologies like AI are utilized to gather this information and create an action plan to drive the most profit.
Utilize The Power of Modern Technologies Like AI
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.
POS systems and actionable CRMs
Many POS systems have built-in CRM systems, but they must be used by the business 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 can help you make decisions for sales, customer journeys, bundles, discounts and other customer experience opportunities.
So, what does a POS system with CRM software do? It 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, integrates info from social media and other platforms, records feedback and customer polls, and shares information with employees so they can be trained in this as well.
With restaurants being customer-focused, using Customer Intelligence to inform all methods of profit boosting is essential. 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.
So, what is Customer Intelligence exactly? CI is the process of gathering information on customers – 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 website, wifi, other communication you send, surveys, and more. CI uses data analysis to group these together and understand customer behavior so you can optimize customer service. Market Basket Analysis is one way to analyze data quickly so you can meet your business goals.
Here are some ways you can use Customer Intelligence to increase 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 your revenue and profitability goals;
- High-performing email campaigns and offers individualized to customers;
- More effective and efficient marketing, so your money goes unwasted.
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.
Then, 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 your store and online platforms, you can get a clear, 360 degree view of your customers 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 based on key attributes to offer various bundles and offers to people who want them.
Want to learn more and see if restaurant Customer Intelligence is for you? Just click on “Book A Consultation” and schedule a 35-minute call to find out!