How to increase your restaurant's profit margin

Increasing profit margin is one of the biggest challenges every restaurant faces.

That's because this indicator is affected by different sides of the business, from the cost of ingredients to staff turnover. In other words: it takes a lot of dedication to reach good profitability.

But there are several strategies you can adopt to reach that goal. In this article, you'll understand how to increase your restaurant's profit margin. Follow along!

What is profit margin?

Profit margin is an indicator that represents the percentage of sales that turned into profit. It's important for assessing the profitability and financial health of the business.

A very low profit margin, for example, may indicate that you're charging too little for your products or that your expenses are too high.

To calculate profit margin, two variables are used: costs and revenue. In other words: how much you spent and how much you earned selling your products.

There are several types of profit margin and different calculations you can run. The most widely used are Gross Profit Margin (GPM) and Net Profit Margin (NPM). Let's look at how to calculate each of them below.

Access now: Free profit margin calculator

How to calculate profit margin?

The GPM focuses on the relationship between revenue and the Cost of Goods Sold (COGS), helping you understand the efficiency of production and sales. The NPM, on the other hand, takes every cost and expense into account, offering a broader view of the restaurant's final profitability.

Both are essential for analyzing the financial health of the business and making strategic decisions. See how to calculate them below.

Gross Profit Margin (GPM)

The GPM shows what percentage of sales revenue is left after deducting COGS. The formula for the calculation is:

GPM = (Total Revenue – COGS / Total revenue) x 100%

For example: consider a restaurant with total sales revenue of R$ 200,000 and COGS of R$ 120,000. Plugging that into the formula, we'd have:

GPM = (200,000 – 120,000/200,000) x 100% = 40%

This means that, for every real sold, the business keeps R$ 0.40 after covering COGS.

Access now: Free COGS calculator

Net Profit Margin (NPM)

The NPM shows the final percentage of profit a restaurant gets from its total revenue after subtracting every cost, such as rent and bills, operating expenses, interest, taxes and so on. The formula for is as follows:

NPM = (Net Profit / Total revenue) x 100%

Considerando que o restaurante teve a receita total de R$ 200.000 e, após deduzir todos os custos e despesas, incluindo impostos e juros, obteve um lucro líquido de R$ 60.000, a MLL seria calculada como:

NPM = (60,000 / 200,000) x 100% = 30%

Isso significa que, depois de pagar todas as despesas, a empresa tem um lucro líquido de R$ 0,30 para cada real de receita gerada.

What is the ideal profit margin for restaurants?

A pretty common question is: what's the ideal profit margin for my restaurant? How do I know if my margin is too high or too low?

Answering this question is genuinely far from simple. That's because each type of restaurant has its own characteristics and, as a result, expenses and revenue are very different, affecting the profit margin in distinct ways.

A fast food style restaurant, for example, can reach a higher profit margin because it doesn't need a very large service team and, generally, the ingredients are cheaper.

It's completely different from an à la carte restaurant with an extensive menu and full service.

In this case, you need a bigger team, the recipes use several ingredients (usually more expensive ones) and losses and waste are greater. So the margin tends to be lower – though that's not a rule.

A restaurant's profit margin can also vary depending on the location, the target audience and the strategy used for pricing. Assim, o recomendado é buscar referências da margem de lucro de restaurantes semelhantes ao seu. 

Even so, broadly speaking, a net profit margin considered healthy for restaurants is between 10% and 20%.

What might be hurting your profit margin?

As we've seen, profit margin can be affected by a range of factors that push costs up and profitability down. Before thinking about strategies to increase your profit margin, it's worth looking at these points.

Losses and waste of ingredients

Inefficient inventory control, improper storage, oversized portions, lack of demand predictability and excessive prep are some of the factors that increase losses and waste in restaurants.

They can account for a significant share of operating costs and, in turn, negatively impact profitability.

Taxes

A list of taxes that restaurants have to pay is long, and it's no wonder they're seen as the great villains of this kind of business.

There's no way around this obligation, but good accounting can reduce the tax burden and, in doing so, help increase profitability.

Commissions and fees

Another thing that drives operating costs up are the commissions and fees paid on services like card machines and delivery platforms.

In the first case, you need to study which payment options are best for your restaurant, looking for the lowest fees.

You can also adopt solutions that help cut costs by automatically selecting which acquirer is most advantageous for each transaction.

With delivery, on the other hand, you need to evaluate the commission rates and price your menu well on the platforms.

Mão de obra

Labor is one of the biggest operating costs of a restaurant.

Beyond your permanent staff, it's also common to hire freelancers for the busiest days. When turnover is high, there are also the costs of severance, hiring and training.

Automating processes can contribute to greater operational efficiency and a smaller headcount. Using technologies like the digital menu and self-service kiosks, for example, can help reduce the number of freelancers.

pricing

Uma mispricing of your menu items can end up hurting your business. Prices that are too low can result in very small profit margins, while prices that are too high can drive customers away.

That's why it's important to have clarity on all the costs involved in production, on the prices your competitors charge and on your audience's profile. That way, you can map out proper pricing strategies.

Watching each of these points constantly, always looking for improvements, is crucial to the restaurant's financial success. Below, check out some strategies you can apply to increase your profit margin.

5 strategies to increase restaurant profit margin

Broadly speaking, there are basically two ways to increase your profit margin: cutting costs or earning more. See below for some ideas that can help.

1 – Automate inventory control

Efficient inventory control is essential to the restaurant's success.

Automating this process helps reduce human error and makes inventory management easier as a whole, from purchase planning, through tracking what comes in and goes out, to optimizing recipes for better use of ingredients.

This cuts your losses and waste, reducing what you spend on buying ingredients.

2 – Highlight the most profitable items

Sometimes the most profitable items on your menu aren't getting the spotlight they deserve and, because of that, customers end up choosing the ones that aren't as advantageous for your business.

Identifying which items are most profitable is strategic for your restaurant. Use engenharia de cardápio, highlight what brings in the most profit and train your waiters to offer these items to your customers. That way you increase sales of what delivers the best return.

3 – Increase your average ticket

How much does your customer spend in a single visit? Increasing the average ticket is another strategy for earning more.

There are several strategies for this: up selling and cross selling, suggestive selling, loyalty programs, among others.

Learn more:  9 ways to increase your restaurant's average ticket

4 – Adopt Self-Service

O self-service systems is an excellent way to gain operational efficiency and cut labor costs. By giving your customer autonomy, you can provide faster service with a leaner team.

5 – Sell combos

Promotional combos are a great way to increase your profit margin. You can create combinations of the most profitable items with the most popular ones, driving up orders.

Get to know EPOC and start earning more

To have a healthy profit margin in your restaurant you need to track several sides of the business and keep refining them. That's why it's important to count on a platform like EPOC, with complete solutions such as POS, ERP, Digital Menu, Self-Service, KDS and much more.

Beyond speeding up service and running a more efficient operation, from production through to inventory control, you'll also have reliable data and an easy way to run analyses and spot opportunities for improvement.
To get to know our platform and find out how we can help your restaurant grow, fale com nossos consultores.