01 Jul 6 Effective Ways to Increase Profit Margins at Your Restaurant
The pandemic has exacerbated the restaurant labor crisis and there is only one way out – offering staff higher wages and improving benefits. To achieve this while still staying in the black, restaurants need to significantly increase profit margins, but how?
In our last article we explored adding auto-gratuity to the bill and sharing tips with BOH staff. This sparked a lively debate around the efficacy of mandatory service fees. Is it fair towards customers? Is it worth it considering the IRS taxes auto-gratuity?
Many customers relate to the plight of service staff and are fine paying for what is clearly intended to supplement higher wages. They might even welcome not having to decide how much to tip at the end of a meal.
On the other hand, tipping has always been perceived as a discretionary means to incentivize good service. Many customers do not appreciate having to pay for something that should be optional. And forcing a patron into another service fee which ultimately increases spend, might just turn them away.
As the restaurant industry continues to explore the issue of raising wages, here are 5 alternative solutions to increase profit margins:
Table of Contents
Boost Staff Efficiency and Retention
Retention means money. Money not spent on ramping up new trainees, interviewing, paying commissions to HR firms or websites, and more.
Investing in retention will help battle the high employee turnover rate plaguing the restaurant industry right now. And since retention and staff efficiency go hand in hand, improving your staff’s efficiency should be your focus.
Cross training your team to fulfil multiple positions in the kitchen or front-of-house will allow you increased flexibility to staff according to demand. The same goes for providing career advice and training.
Expanding your employees’ skill set and experience will also foster loyalty and improve their work, allowing you to hire less – but more qualified – staff.
Know Your Product Costs
Buying cheaper products is not always an option. But Restaurants can still significantly reduce product costs by adjusting to price fluctuations in the market.
Knowing what food is going to cost in the near future enables restaurants to plan accordingly. Cheetah’s bi-weekly Market Watch report, offered to all our clients, summarizes food cost trends and competitive intelligence. This saves time and helps restaurant operators make informed business decisions.
When there is an up-tick in food costs, search for alternatives – both in ingredients that make up each dish and the suppliers you use.
Finally, look for suppliers who are upfront about prices. Getting your supplies from Cheetah can help you get the most competitive, up-front prices in the Bay Area. Download the app to start saving!
Don’t Forget about Hidden Costs
Needless to say, the goal of every restaurant business is to be profitable. Especially when times are tough like with the current labor crisis, operators need to reevaluate their costs – both of what they see and of what is hidden.
Important hidden costs that operators sometimes overlook include waste, gas money and countless billable hours spent on roaming the aisles of wholesale warehouses like Restaurant Depot.
Just-In-Time (JIT) is a great way to reduce many of these hidden costs. By getting ready-to-cook pre-prepped products, made to your unique specifications, your staff will waste less time on shopping and prepping and less money on gas – making every billable hour count towards bringing in profit.
JIT also guarantees you get 100% usable product, which translates to zero waste. This means a significant reduction in cost per pound of produce and time saved on dealing with waste.
Increase Profit Margins with Smart Menu Engineering
When you divide profit by revenue you get what is called profit margin. Profitable items are products that bring in more revenue relative to their cost – both upfront and hidden.
To improve profit margins, restaurants can either reduce costs – which we’ve just discussed – or raise prices (or both). Finding ways to raise prices should be the key activity of every restaurant.
Raising menu prices is not simply a matter of adding higher-value items or raising the price of all menu items. The key to engineering a high-margin menu item is balancing:
- increasing sales of higher margin items,
- portion sizes,
- prep time,
- and perceived customer value
We’ve already discussed reducing prep time with better staff efficiency and JIT. When you sell or upsell more high-margin items, you increase your overall profitability. Let’s take soda as an example for calculating product cost. 2 dozen cans of Coke Classic cost around $12 ($0.50 each) and they can be sold for $3. The profit margin on this item is therefore 80%, ($3 – $0.50)/$3. It’s clear that when you are able to push a Coke with an order, you’re increasing your overall margins significantly.
Another way to increase profit margins at your restaurant is to consider portion size. Depending on the cuisine style, community eating habits, and how you want customers to perceive the dining experience, less might mean finesse, cumulatively saving you produce.
An important thing to remember is to introduce the new menu gradually. Throwing the old menu out the window – along with its lower prices – will lead to a spike in the overall cost-to-dine at your restaurant. This could lose you loyal customers.
To go around this, consider the ‘Specials Menu’. Specials are accepted by guests as being more expensive and also more lucrative. Today it’s on offer, tomorrow maybe not. This way, you can see what your customers like while learning if you really do make a better profit on these items.
Third on the list of increasing profit margins is the perceived customer value. The perceived customer value refers to what customers think or feel they are getting as opposed to the simple function of what they are buying.
In other words, when a patron buys a meal at your restaurant they’re not just buying food, they’re buying a dining experience. The better you present your menu – with descriptions, menu design or as described by the server – and the more appealing the dish looks – the more money customers would be willing – even expecting – to pay.
The trick is to make a dish look more appealing while keeping product costs to a minimum. Choosing the right plate size and having a garnishing kit that includes squeeze bottles, shavers, precision tongs, plating wedges and so on is a good place to start.
An even better way to go is to style the dish with herbs that add color or a splash of truffle oil to make it taste, look and sound irresistible. A truffle fries might cost you $0.20 more to prepare but can be sold for $1 more.
Remember – the perceived price is in the details, which brings us to our next point.
Create Unique Dine-in Experiences
Dine-in customers are more profitable than take-out or delivery customers. This means that for most restaurants, the more dine-in customers they have the higher their profit margins.
To attract more dine-in customers, create a unique dining experience that pays attention to details in hospitality, design, cleanliness and seamless ordering options.
Specials, happy-hours and entertainment are also effective in getting customers through the door.
Another option is to have a dine-in-only menu. Some foods just don’t travel well, they get soggy and saucy instead of staying crunchy and fresh. Tell that to your customers. Not only will they appreciate your respect for the food, but they’ll also be curious to try those exclusive dishes.
Whatever way you choose to go – be honest about it. Tell customers what they’re paying for. Be it locally sourced ingredients, top-quality service and ethical labor, or a unique design experience, you have put effort into it and that is worth money.
If you do choose to add auto-gratuity, train waiters to politely explain to your guests what it is and why it’s added. Be sure to clearly state it on the menu or instruct servers to inform diners about it.
If you decide to increase menu prices, be honest and upfront. Explain why the previous price changed, just as we do when you buy produce and supplies.
To sign off, a “Thank You” note for choosing to dine at a fair and equal pay restaurant that sources locally is a nice touch that will make patrons feel better about the entire experience.
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