What is the Average Restaurant Profit Margin? [+ 11 Ways to Increase It]
Running a restaurant is about more than just creating an inviting environment, delighting guests and serving memorable meals. A restaurant is a business, and businesses need to generate revenue to be sustainable. Knowing your restaurant’s profit margin can help you make informed business decisions that will keep your venue open for years to come.
We’re giving you the scoop on everything you need to know about restaurant profit margins, including:
What a restaurant profit margin is
Why knowing it is important
How to calculate profit margin
The average restaurant profit margin
11 ways to increase your restaurant’s profit margins
What is a restaurant profit margin?
Restaurant profit margin, also known as net profit margin, is how much money your restaurant makes after it pays for its total expenses. Net profit margin measures your business’ profitability ratio: how much revenue you earn compared to how much it costs you to earn that revenue.
Restaurant profit margin calculator
How profitable is your restaurant? Use this restaurant profit margin calculator to find out.
Restaurant profit margin = (Revenue − Cost of goods sold)/Revenue
Revenue, also known as gross sales, is how much money your restaurant generates before expenses are paid.
Cost of goods sold (COGS) is the sum of all of the expenses that go into earning that revenue. This includes the cost of ingredients, labor, rent, utilities, technology, appliances and more.
Let’s say you manage a hotel restaurant and want to know its net profit margin for the last year. According to POS reports, the restaurant generated $10 million in sales during that time. The restaurant spent $4 million on food costs, $4 million on labor, $1 million on rent and utilities and $500,000 on technology, appliances and miscellaneous expenses for a total cost of goods sold of $9.5 million.
According to the restaurant profit margin calculator, your business had a net profit margin of 5% last year.
Why is knowing your restaurant profit margin important?
While gross revenue may seem like the most important metric for financial wellness, this figure paints an incomplete picture. If, for example, your restaurant earns $5 million but spends $10 million during the same time period, then your business isn’t doing well financially.
Restaurant profit margins show how much you spent to make the money you earned. Knowing your profit margin helps you understand if you need more of a buffer between your COGS and your menu prices. You can use it to inform business decisions, like raising prices or switching vendors who offer the same ingredients at lower costs.
Average restaurant profit margin
So, what’s the average restaurant profit margin? Use these figures as benchmarks against which to measure the financial health of your business.
Whether you run a bar or a full-service restaurant (FSR), here are some strategies you can use to increase sales and reduce costs to boost profit margins.
1. Opt for direct tech solutions instead of third-party solutions
Third-party tech tools like reservations software and online ordering software can consume a significant chunk of your profits. Third-party delivery apps charge up to 40% commission, while reservations platforms charge a fee for every cover.
2. Convert third-party customers into direct customers
In some scenarios, it may make sense to maintain third-party technology to expose your restaurant to the platform’s customers. However, if you maintain these tools, it’s essential to convert these third-party diners into direct customers to increase your restaurant’s profit margins.
Send third-party reservation diners a link to your direct reservations platform to use for their next visit. Do the same with diners who place a pick-up or delivery order. Help them make the switch by explaining how direct ordering and reservations helps keep you in business, and by offering an incentive, like a freebie or discount on their first direct order.
3. Leverage menu engineering
Menu engineering involves designing your menu to emphasize items with high profit margins and take the focus away from dishes that generate smaller profits. Having a limited menu is one menu engineering tactic.
This simple, low-cost strategy can drive sales of your most profitable dishes, thereby increasing your net profit margins.
4. Optimize labor costs
Consuming 30% of all overhead costs, labor is one of the highest operating expenses restaurants have. Reduce labor costs and you increase profit margins. Fortunately, you don’t have to fire your staff and compromise service quality to save money.
Instead, use technology that optimizes your labor needs. Use reservation data and historical sales data to accurately forecast your staffing needs so you don’t overschedule shifts or incur overtime costs.
5. Implement self-service ordering
Introducing self-service ordering technology can help you lower labor costs while increasing your capacity for sales, thereby improving your restaurant’s profit margins.
Implement mobile order and pay functionalities throughout your entire venue, or just in certain areas. For example, you may decide to turn your lounge or sidewalk cafe into self-service zones, while maintaining full-service dining in the main dining room.
Place QR codes throughout the self-service zones to let guests order and pay on their own time.
6. Leverage mobile payments
Give guests the ability to pay the check by scanning a QR code and paying by card from their smartphones. Guests don’t have to wait for their server to pick up the bill presenter, go to the POS to process the payment and bring the bill presenter back.
Instead, diners can pay when they’re ready and leave more quickly. By doing so, you’re enabling faster table turnover and maximizing how many parties you can serve. The more covers your restaurant serves, the more revenue it generates and the greater its potential for higher profit margins.
7. Implement a no-show fee for reservations
Reservation no-shows hurt restaurants. If you save a table for a party that won’t show up, you may have to turn away guests who are present and willing to pay for goods and services.
By introducing a no-show fee, you incentivize customers to cancel a reservation if they can’t make it so you have enough time to find a new party to take that place. And, if they don’t cancel and don’t show up, you can charge a fee, which helps cushion the lost sales and protects your restaurant’s profit margins.
8. Boost repeat business
Increasing customer loyalty with great service and a loyalty program will help your restaurant generate more revenue, and thus increase profit margins. What’s the secret to keeping guests coming back for more? Creating memorable dining experiences.
Use a restaurant CRM that collects customer data in the form of guest profiles. These profiles serve as cheat sheets to diners’ preferences that your team can use to wow guests.
9. Reduce staff turnover
The restaurant industry has always been notorious for having high staff turnover. Before the pandemic, the annual staff turnover rate stood at a staggering 73%. It’s even worse now due to the COVID-19-induced labor shortage.
Replacing staff isn’t just a headache; it’s also a costly problem. In fact, turnover costs businesses $6,000 per employee in lost productivity, hiring costs and more.
By reducing turnover, you’ll also reduce overhead expenses and give your profit margins a boost. Aside from paying staff competitively, creating a great workplace culture is one of the best ways to keep staff happy.
10. Reduce food costs
Another way to lower operating costs and improve your restaurant’s profit margins is to lower food costs.
TouchBistro’s State of Full-Service Restaurants report found that two in three suppliers raise their prices at least semi-yearly. If you’ve been working with the same suppliers for a while, shop around for ones who can give you a better deal. Or, join a restaurant buying group to gain access to wholesale prices.
And, if you can’t switch vendors, try negotiating lower prices. Only four in 10 full-service restaurants use this cost-saving strategy.
Or, you could do what one in two FSRs does to reduce costs: decrease portion sizes while maintaining menu prices.
11. Reduce waste
One in two restaurateurs struggles with over-ordering inventory. When this happens, food is bound to spoil, which is equivalent to throwing your money into the garbage. Improve your inventory management practices to minimize food waste and maximize your restaurant’s profit margins.
Improve your restaurant’s profit margins for a sustainable business
When you know your restaurant’s profit margins, you gain a more holistic understanding of its financial health than when you look at sales alone. Your profitability ratio informs business decisions that can help you stay in business for years to come.
SevenRooms is a restaurant guest experience platform that gives you the tools and data you need to maximize profit margins. Request a demo today.
Restaurant profit margin FAQs
1. How do you calculate profit margin for a restaurant?
Profit Margin Formula = (Revenue – Total Expenses)/Revenue
2. Why are restaurant profit margins so low?
While there are many factors that contribute to low profit margins in the restaurant industry, three major expenses – inventory, labor and rent – are to blame.