Blog Post / May 17, 2021 / Best Practices

How to Use Menu Engineering to Increase Your Profit Margin

by Restaurant365

Your restaurant menu is almost like a puzzle. If your goal is profitability, how do you make all the different pieces of your menu fit together?

The concept of menu engineering recognizes that a profitable menu doesn't just happen by accident. It requires leveraging information from your sales and food costs to make data-driven menu decisions. Luckily, with the right data at your fingertips, you can make the adjustments you need to optimize the profitability of your restaurant menu.

What is menu engineering?

Menu engineering involves many different moving parts, but it's actually a pretty simple concept. You are trying to maximize your profitability by promoting the menu items that make you the most profit.

Whether or not your restaurant is profitable doesn't depend only on increased sales. With menu engineering, the way to increase your profit margin is to optimize each menu item and focus on driving up the sales of your most profitable items.

Understand the impact of menu engineering on your profit margin

Menu engineering analysis pulls from two principal areas:

  1. Your items sold. Otherwise known as sales mix polling, this data comes from your Point of Sale (POS) system.
  2. Margin contribution. This data is drawn from your recipe costing, which we'll explore below.

Comparing these two sets of data shows you the quantities sold, relative to the margin for each item. This relationship is the foundation for all menu engineering decisions.

Cost out your recipes

Costing out your recipes accurately is key to all menu engineering; without it, none of your analysis will actually be useful. To cost out recipes efficiently, automate as much as you can with your restaurant management software and accounting solution.

How to calculate menu item food cost

First, break down the individual ingredients for every item on your menu to the penny (even including the salt, spices, and cooking oil). This not only requires standardized recipes, but it also depends on tracking both usage and yield of different ingredients.

It is incredibly time-consuming, difficult, and notoriously unreliable to calculate menu item food cost by hand. The most efficient and accurate method is to use your POS system to calculate food costs based on the data from two different places: your accounting software and your inventory management software.

These tools can track usage and yield automatically, with the additional benefit of automatically updating recipe costing when there are any supplier price changes.

How to calculate contribution margin

Your contribution margin of a specific item is the menu price minus the menu item food cost. Through menu engineering, you'll have a goal of maximizing the average contribution margin of each guest's order.

How to calculate food cost percentage  

Your food costs for a certain period of time are your beginning inventory plus your purchases, minus your ending inventory. Dividing this number by your total sales will give you a food cost percentage. You should be keeping your target food cost percentage in mind as you're making menu engineering adjustments.

Analyze menu item popularity vs. profitability

If you were to map your menu items on a matrix of profitability versus popularity, you could divide items into four distinct quadrants. Let's examine each category:

Stars - popular and profitable

Stars are the most valuable items on your menu because they are both popular and profitable. You want to increase the number of Star items that you're selling, which we'll talk about below.

Opportunities - popular, but unprofitable

Your Opportunity menu items are already popular, but you will want to increase their contribution margin. This may require careful or gradual price increases, or you can try to reduce the recipe cost by changing sides, ingredients, or portions.

Puzzles - profitable, but unpopular

Puzzle items have a high margin contribution, but for whatever reason, they're not popular with customers. To optimize the number of items on your menu with a good contribution margin, you want to create more demand for these items using some of our tips below.

Dogs - unpopular and unprofitable

“Dog” menu items are the items that are not popular with customers, and also not profitable for your bottom line. These are the obvious items to consider removing from your menu.

Use data to drive menu changes

The real benefit of menu engineering is leveraging the data to make strategic decisions. With data in hand, you are able to seize new opportunities by redesigning your menu.

Adjust pricing

Given menu item contribution margins, are certain items overpriced? Underpriced? Price adjustments are a fast, direct way to adjust your profitability with specific items.

Adjust portion size

If you know your customers may resist a price change, another way to change your contribution margin for a menu item is to adjust the portion size. Alternatively, you can consider switching out certain ingredients.

Remove “dogs”

As mentioned, "dogs" are unprofitable, unpopular items that are "dead weight" on your menu. Unless an item is something that lowers your food costs, like a special that uses leftovers or has low labor costs associated with prep, consider removing these items from your menu.

Update your menu with profit in mind

Menu adjustments don't need to stop with adding or removing menu items—there are far more updates you can make to your menu to optimize profitability.

Reposition menu items

The position of items on your menu actually has a large impact on what guests order. For example, many studies have shown that people tend to remember the first and last things in a series. If you are trying to direct customers to certain items, consider listing your Star or Puzzle dishes first or last in sections.

Draw attention to high-profit items

To direct guests to your high-margin items, consider using one of your most persuasive tools: your servers. Training your servers to suggestively sell certain items can draw attention to the Star or Puzzle items on your menu.

Limit menu items

A limited menu will not only help you direct customers to the items you want them to order, but it will also help you maintain a streamlined inventory in the back of house (BOH).

Use descriptive language to command higher price points

Guest perception of value depends heavily on how you present your menu items. Consider reevaluating your menu language to ensure it is interesting, descriptive, and appealing.

Improve guest satisfaction with menu engineering

Another benefit of menu engineering? When done well, it can actually improve guest satisfaction. When you strategically make menu pricing adjustments, rather than increase your prices across the board, your guests are less likely to notice the changes. In addition, by continuing to feature guest favorites, you are helping build future customer loyalty.

Why use menu engineering?

Menu engineering is a key tool to analyze your product mix, because each menu item affects your bottom line. By updating your menu engineering analysis frequently, you can better keep up with changing guest preferences and continually improve the guest experience.

Conclusion

Menu engineering is a powerful tool that relies on accurate, timely data. If done properly, menu engineering is a marketing tool that can improve your contribution margin and increase sales. Used as an ongoing process, your menu will drive bottom-line profit.

About the Author

Restaurant365 is the industry’s leading all-in-one, cloud-based accounting, inventory, scheduling, payroll and HR solution developed specifically for restaurants. The R365 platform simplifies day-to-day management for restaurant operators, allowing them to control food costs and optimize labor costs. Integrations and open APIs enable Restaurant365 to connect with other systems including POS providers, vendors and banks. The result is accurate, timely reporting that provides a clear and complete view of their businesses.

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