How to Calculate and Boost Your Restaurant Profit Margin

Your restaurant’s profit margin defines whether your business is successful or not. No company can survive without earning enough money. Whether you’re just getting started or you have owned a restaurant for years, you should learn how to calculate and boost your restaurant’s profit margin.

We’ll simplify it by guiding you through every step in this article. Moreover, we’ve included valuable tips on how to increase your restaurant’s profit.

What is the profit margin of a restaurant?

The restaurant profit margin measures your profitability ratio, which is how much you earn compared to how much you need to spend to earn that. It is an important metric that can tell you if your food business is on the right track or if you should update your tactics.

The profit margin can be measured in two ways:

• Gross profit margin: This metric compares the revenue you generate with the direct costs of producing the food and beverages, often known as the Cost of Goods Sold (COGS).
• Net profit margin: while gross profit only takes into account the direct costs associated with food, the net profit factors in all the necessary costs involved in keeping your business open such as rent, maintenance, labor, and permits.

Both ratios are valuable because they help you make informed decisions. Below, we’ll show you how to calculate each of them.

Read more: 10 Important Restaurant Ratios & How to Calculate Them

What is the average profit margin for a restaurant?

It is no surprise to you that running a restaurant is quite challenging. This is reflected by the average restaurant profit margin which is only 7%.

The percentage also differs according to the type of restaurant:

• Full service-restaurant: 3-5%;
• Fast casual restaurant: 6-9%;
• Catering services: 7-8%.

How to calculate your restaurant’s profit margin

Before you start calculating your profit margin, you must first choose a period. It could be a week, a month, a year, whatever you want. Afterward, you will have to determine the following:

• Your total revenue for that specific period: you can get this data easily if you use a POS system that is integrated with an online ordering system. Check out the one from GloriaFood that comes with useful features that make your work easier.
• The Cost of Goods Sold: you can easily calculate using this formula:

• Total expenses for that period: you must add the CoGS + labor costs + overhead costs. If you need help figuring out how much you spend, check out our dedicated article: How to Calculate & Reduce Restaurant Overhead Costs.

Restaurant gross profit margin

If you want to understand how efficient you are with your food preparation, use this formula to calculate the restaurant’s gross profit margin:

Let’s see an example to make it easier to follow. If your restaurant has a total revenue of $12,000 and your CoGS amounts to $5,000, your profit margin will be:

Restaurant gross profit margin = [(12,000 – 5,000)/12,000] x 100 = 58%

Restaurant net profit margin

The restaurant’s net profit margin gives a better overview of your business’s sustainability because you need to keep making a considerable profit to keep your establishment open for years to come. Use this formula to calculate the restaurant net profit margin:

Let’s see an example with the same numbers used above, adding in the value of all expenses at $11,000.

Restaurant net profit margin = [(12,000 – 11,000)/12,000] x 100 = 8,3%

Profit margin for restaurant menu items

It can also be helpful to calculate the profit margin for each menu item to identify which ones are more profitable so you can promote them. Use this formula:

The COGS in this case is the amount of money spent to prepare the specific dish.

How to boost your restaurant’s profit margin

If you want to keep making your customers live better with your delicious food for years to come, implement these valuable tips that will help you increase your restaurant’s profit margin:

1. Engineer your menu

By optimizing your menu, you can persuade people to order more of your profitable items. Here is what you must do:

• Add mouth-watering photos: people eat with their eyes first and if your images depict an irresistible meal, hungry clients won’t be able to resist;

• Use convincing menu descriptions: highlighting the mouthfeel, taste, ingredients’ origin, and preparation method;

• Place high-profit items near expensive dishes: to subconsciously persuade people to order the menu items that bring in the most profit.

Read more: 9 Menu Engineering Design Tips & Secrets That Will Boost Your Sales

2. Lower food costs

Food costs are often the largest part of your expenses, and they can easily drag your business down. Use these methods to lower food costs without affecting the food quality and the client satisfaction:

• Use seasonal ingredients: ingredients that are in season tend to be cheaper. Therefore, you can create seasonal menus that impress clients, while spending less on the prime material;
• Shop around for suppliers: you can try to renegotiate your ingredient’s prices with your suppliers or check out other ones available in your area for a better offer;
• Create low-food cost menu items: calculate the recipe cost and the profit margin for each item to see if they are a valuable addition to your menu. Get inspired by this list of the most profitable menu items;
• Make your portions smaller: if your customers often leave food on their plates, your portions may be too large, and you end up throwing money away. Smaller portions allow you to keep the same price while paying less to prepare the dish.

3. Increase table turnover

The more people you can serve in a day, the bigger the profit. But the trick to boosting the restaurant’s profit margin is to increase table turnover while still providing clients with an amazing experience, with no rushing involved.

You can do so easily with two free solutions:

• Use a table reservation system with the order ahead feature: like the excellent one provided by GloriaFood that allows clients to choose what they want to eat and even pay when they book a table. This way, they can be served shortly after they are seated with no time wasted waiting around for available servers;

• Allow customers to order at the table: If you use the online ordering system from GloriaFood, you can enable on premise ordering and generate a QR code that you stick on every table. When customers are seated, they can scan the code, browse the menu, order, and pay, just by using their phones. The faster service will surely be appreciated.

4. Lower staff turnover

Hiring a new employee is a lot more expensive than keeping an existing one happy. And it also takes up a lot of your valuable time that could be better used elsewhere.

Here is what you can do to boost your restaurant profit margin by increasing staff retention:

• Provide adequate training: so employees have all the necessary tools to do their jobs at the best of their abilities;
• Offer a competitive salary and benefits: the main reason employees are dissatisfied with their jobs is that they don’t earn enough money for a comfortable living. Be a great employer and your staff will stick around.
• Foster open communication: you and your restaurant managers should be available for the staff so you can solve their problems before they take the big step and quit;
• Show appreciation: whenever an employee performs over expectations, show them you appreciate their effort using words or other monetary rewards. This will motivate them to keep it up.

Read more: 10 Restaurant Staffing Issues and How to Address Them

5. Increase your average order value

To maximize your restaurant’s profit margin, on top of serving more customers, you must also get them to spend more. Start by mastering the art of upselling and cross-selling where you teach employees how to make great recommendations.

Another great and non-invasive way to increase the average order value is to add promotions to your menu. Here are a few examples of restaurant deals that tempt clients to spend more:

• Free delivery for orders over $70;
• Free dessert for orders over $60;
• Combo menus;

Take advantage of the GloriaFood Promotions module to set up a variety of tried and tested restaurant deals in a matter of seconds:

Read more: How to Increase the Average Check in a Restaurant

6. Reduce waste

The ingredients that end up in the bin are not only hurting the environment but are also hurting your restaurant’s profit margin. If you want to get as close to using up all the prime material you paid for, check out these tips:

• Keep your menu short: it will be much easier to keep track of your inventory if you focus on a couple of quality dishes than if you have an extensive menu;
• Use all parts of the ingredients: get your chef to express their creativity by using up as much as possible from one ingredient, such as the meat bones for stock or vegetable peels for decorations;
• Run end-of-day promotions: if you are reaching the end of the day and still have cooked dishes, run a 50% off deal for them to encourage people to place an order.

Read more: How to Reduce Food Waste in Restaurants: 7 Tips & Tricks

7. Leverage marketing

Marketing is a must when you want to get more new clients and increase the number of returning clients. But promoting your restaurant doesn’t have to take up all of your budget, there are ways to do it for cheap:

• Get a sales-optimized website: that not only ranks you high in Google searches but is also the best place to sell your food online as it comes with a free integrated online ordering system;

• Be active on social media: first, you need to have a direct link to your menu that allows people to order from social media. You can get it easily if you use the GloriaFood online ordering system. Afterward, make sure you post often about your food and constantly interact with your followers;

• Claim your Google Business Profile: ensure your updated data such as address, working hours and website link will appear when people search for your type of cuisine in your area;
• Get more positive reviews: ask happy customers to leave a good review for your restaurant to grow your online reputation.

Final words

Monitoring your restaurant’s profit margin is a must to ensure you are not losing money with your food establishment. If your calculations don’t lead you to the results you hoped, use the tips above to increase your profitability in no time.