Pricing Food in the Restaurant Business
What is even better than running a restaurant with delicious food? Tasty profits! Yes, there is money to be made in the restaurant industry, but to do it well means knowing the right strategies.
Financially, restaurants are one of the most challenging business categories. 60% of restaurants close or change ownership in the first three years, and one of the biggest reasons is insufficient profits. A restaurant is typically a single-digit margin business. Knowing how to maximize profits is the path to short-term and long-term success.
In this article, we review what businesses are most profitable and how to maximize the food profit for the business you run. You will gain a deeper understanding of food costs and pricing methods to ensure you maintain a profitable restaurant.
What is the Most Profitable Restaurant?
There are a few answers to this question. As outlined in a previous article (insert link to How Much Profit Should You Make in a Restaurant) here are overall profit percentages for different restaurant types:
- Full-service restaurants: 3 to 5%
- Catering businesses: 7 to 8%
- Fast casual restaurants: 6 to 9%
- Food trucks: 6 to 9%
If your restaurant sits within a lower percentage category, you can still come out on top. Any type of restaurant can be successful; it just takes the right mix of profitability and demand.
Where Do Restaurants Make Their Most Money?
It’s all about the food and drinks you serve – after all, those are the reasons your customers left the house in the first place.
Overall, the highest profit comes from alcohol. What food items are most profitable? The winners are:
- Bubble tea
- Ice cream
- Rice dishes
These foods provide profits from 10 to 15%. They are low-cost, easy to make, and easy to serve.
How to Set Your Menu Pricing
The first step is to gain a deep understanding of food, drink, and operational costs. Today’s POS systems help you easily track all your costs in an easy-to-read format. As a POS provider, BNG-POS often sets up these software systems.
Keep in mind that your prices shouldn’t maximize profit over all other considerations. You need a steady flow of customers, and if food is overpriced, your customers may choose a close competitor and warn away others.
The average food cost percentage in relation to the final pricing is between 29 and 32%. If you include alcohol with the cost of food, the percentage should end up around 21%.
As a basic gauge, a strong customer profit margin is between $15 to $25 per meal.
Using the Contribution Margin Calculation
One method for price determination is to calculate your contribution margin and add it to the food ingredient costs per customer. The contribution margin calculation creates a base limit assuming each customer results in the same amount of profits and expenses.
You will need your total non-food costs including labor, rent, and overall maintenance. Choose a period of time the expenses cover. Then determine the overall profit you want from your restaurant for this same period. Add the two figures together and divide the resulting number by the total number of customers you expect in that same period.
Food and Overhead Costs + Desired Profit / Number of Customers = Contribution Margin
Once you have your contribution margin, add it to the food ingredient cost per customer for a menu item. This results in the base selling price.
The CoGS Margin Model
The CoGS (Cost of Goods Sold) relates to the cost of food and drinks and excludes all other costs like labor and overhead. You get a strong look at your percentage profit for your menu items only, creating a good snapshot to determine if repricing is needed.
To get your CoGS for a given time period, take the value of your beginning inventory for a specific span of time, including any recent purchases. Then minus this total of your ending inventory.
Beginning Inventory + Purchases – Ending Inventory = CoGS
Divide this figure by your sales for that same time. The result is your food spend percentage.
CoGS / Sales = Food Spend Percentage
The percentage should end up around 30%. If it is higher, or if it increases, you should reevaluate the menu item. Do this weekly and correct pricing as soon as possible.
Pricing work can be a daunting task, but today’s POS systems help with tabulations to save you time while maintaining a clear look at costs for ongoing decision-making.
Other Ways to Make Your Restaurant More Profitable
Determine Your Menu Item Popularity Using Menu Engineering Methodology
You may have heard of menu engineering, but what is it exactly? It is a pricing and menu design strategy that maximizes the sales volume and profitability per guest. It encourages the customer to purchase in specific ways that benefit your profit.
Some examples are menu configurations with special meal deals and high-profit sides, treats, drinks, and lower-cost meals for large groups. You can create lower-grade food dishes of popular options for a reduced cost while maintaining the same profit percentage. Another option is to shift from an extensive menu or two-panel menus to smaller, one-panel menus to reduce the burden of choice while encouraging certain foods. You can also create truly awesome menu descriptions to draw more attention. Pictures with descriptive adjectives work as terrific eye-catchers.
All of these strategies create higher profits per customer. As a restaurant POS provider, we help even further by offering handy menu templates.
Complete a Menu Matrix
A menu matrix is a list of categories that defines menu items for improvement. Place each menu item into one of the following categories:
- Highest performing foods
- Items with high profits and low sales
- Items with good sales but bad profit margins
- Menu items that are poor in both sales and profits
With each item defined, solve item challenges by reevaluating the menu, changing the recipe, changing the menu price, removing the item, etc.
Manage Your Food Costs Weekly to Avoid Drops in Profits
To maintain an ideal profit margin, keep an updated and organized set of books and maintain them weekly. Food costs often fluctuate based on demand in the marketplace. A higher price leads to a drop in profits. Again, POS software is a helpful tool for this.
Lower Recipe Food Costs
Food suppliers are your most important relationships. They are your lifeline to quality food ingredients, and how much you pay is the most important component to your success. The trick here is balance. You need a strong relationship, but at the same time you need profitable dishes. As much as 92% of restaurants overpay on plate costs by nearly 86%.
Know what food is important for your business and zero in on popular menu items that are essential to your profit. Work with your suppliers on pricing and discuss popular items in relation to your monthly recipe plate costs.
Another good trick is to buy from local farmers. You cut out the middleman for more profit and more competitive menu pricing.
Profitable Customers Follow the Golden Rule
If you have a certain clientele that brings strong profits for your business, you don’t have to recreate the wheel. Take a close look at your current customer base. Learn what your customers like and buy and look at other decisions customers like them make. Find ways to increase customer satisfaction and demand. The more you know them, the more they will come back and tell other potential customers.
Keep an Eye on Millennials
Regardless of your customer base, millennials are huge buyers and have become THE key demographic. There are more millennials than any other age category, and they spend money. They also have their own way of doing things, such as prioritizing the dining experience, customer service, healthy options like vegetarian and vegan dishes, and eating farm-to-table. Focus on quality service, a creative atmosphere, and special menu items they value.
Understand the Importance of Good Service
Maximizing profit for your business requires excellent service teams. Maintain ongoing conversations with staff so they know the menu inside and out. Have them taste EVERYTHING on the menu by offering special wholesale pricing to them. Train them on upselling to increase professional service while boosting profits. And learn what your customers want from your service and what they don’t. All of this adds up to more profits per service.
One nifty service trick is to keep track of special orders on your POS system so all staff knows what the customer wants whenever he or she comes back. And with their email, you can even advertise options to them.
Intelligent Scheduling of Your Staff to Reduce Labor Costs
Today’s POS systems let you track profits by the day, week, month, or year. You can then schedule staff time wisely. When a busy time hits, you are prepared. When times are slow, you save significantly on labor costs, adding to your profit.
A Marketing Plan is a Must
Boost Your digital presence with online advertising and social media. If it fits your business model, make room for merchandise. It spreads the word about your business while making every inch of your restaurant more profitable.
Expand Ordering Capabilities
An online menu and takeout menu expand your reach and expand it further by including your menu on popular delivery apps.
Today’s POS systems back you up by improving pickups and deliveries. You can move these orders directly to the kitchen for high order turnover and text customers when pick-up is ready – even provide estimated order times for certain times of the day to ensure prompt pickup.
Offer special deals for customers on receipts or through frequency cards. A loyalty program is a great way to keep the money coming in. As a POS provider, we can set up these benefits for specific times or at specific quantities per customer you dictate.
When it Comes to Servicing Guests, the Customer is Always Right
As in following the golden rule, make it a habit to listen to guests in order to learn what they like, gain new ideas, and address concerns. Sure, some requests won’t be realistic, but if a discussion doesn’t happen, you won’t know where to improve.
Without a strong guest experience, your profits will suffer. Listen to feedback from guests. Invite it with comment cards or simply inquire. By keeping the guest experience alive, you turn disgruntled customers into happy guests who will bring more business your way.