Are you maximising your profit margins?

Are you maximising your profit margins? – When pricing up a menu, you need to make sure you get it right from the very start! Take into account the actual cost of each menu item, from point of purchase to the point it is served to your customer. Include delivery fees, cooking costs, which will include all utilities, even water which is still a ‘paid for’ utility, heating, lighting, rent for premises, take into consideration everything right down to a teaspoon of salt! Apportion things like laundry costs, employee wages, and of course your own time if you are a Director.

Things to consider:

  • It is important to consider absolutely everything that is involved in taking delivery, preparing, cooking and serving the food!
  • The cost of the raw/basic product is the first thing to take into consideration. Apportion the total cost of all raw unprepared product over the number of meals you are expecting it to cover..
  • Prep time – Consider how long it is going to take your brigade/team to prepare the item in readiness for serving or cooking and apportion how much you pay your staff to prepare.
  • Cooking time and approximate cost – Consider the time it takes to cook the item. How much you are likely to use on utilities, wages for cooking time, salt pepper, sauces for stock – EVERYTHING
  • Service to table – Staff wages for serving/clearing, laundry costs, table set up costs, waiters note pads if used. Ink if electronic.
  • Clean down – Again, time taken, staff wages, cleaning products.
  • All utilities, premises rent and business rates must be considered in everything.

Adding all of these factors up will give you the base cost of your item or dish. Going through this process for every item on your menu can be time consuming, but it will be worth it in the end and will enable you to set reasonable and realistic profit margins for each dish on the menu.    If you don’t want to do this for every item you could look at what other restaurants in your area charge, but remember, they may have very different sundry costs to you!

Setting Your Price Point – If you are just starting out, a good ‘rule of thumb’ is to take your base cost per dish and treble it. If this works out to be too high look at 2 ½ times. Basically, from here, you take the first third to ‘buy’ the entire meal again. The second third to cover your sundries/costs etc. And the final third is profit. From here you can play around with your pricing.  From this baseline, you can adjust your prices to more closely match those of your nearest competitors. It is well known that ‘indulgence’ items such as desserts, cocktails, wine spirits etc. are very cheap to buy/produce and can be marked up considerably more. It would be worth considering a much higher mark-up on these type of items. A 200-300% mark-up is realistic, possibly even more depending on the location of your restaurant.  To give you an example of the mark-up on luxury items. I one bought a pair of spectacles, I obtained a prescription at the opticians and went to see a friend, a dispensing optician who said he would make me a pair of glasses. On completion I asked him how much they would be his response “As a friend, I’ll only charge you what it has cost me to make them including the cost of the frames- £34!!!” 

This was less than a pair of NHS glasses.  They retailed at £370 +VAT – Luxury item, designer glasses.

The Price Barrier – The term price barrier means the cost above which most middle income diners will not buy. The average price of a 3 course meal has risen by over 8% in the last three years and is now over £23 per head, so unless you are aiming at a particularly high end market, bear this in mind!

Menus and pricing – The price you set your menu at will say a lot about the type of restaurant you run and the demographic you hope to attract. Many restaurants round their prices up to the nearest £1.00 or sometimes £10.00 but they know that their clients will pay. Those restaurants that cater for a more family based client base, will usually set their prices just below the nearest £1.00 or £10.00 so you would be looking at £9.99 It’s basic psychology, but it works – people see a ‘9’ instead of a ’10’ and immediately see it as ‘more affordable’.

Displaying his is something that is entirely personal to you as the Restaurateur. If you want to attract the price conscious diner you could display all prices against each meal. This will however, force your customer to directly consider their meal price and they may be attracted to the ‘lower end’ of the menu, when perhaps the biggest profit margin is made on the ‘higher end’ of the menu..

Is the dish Selling? – If you find that a particular dish is not selling and is perishable, lower your price point. It is far better to secure a return on a dish, however small that to have to ‘bin it’ . A fantastic example of this, which ties in with a point about demographic as well is…Several years ago, we had a client who want to introduce something a little different to the standard, pie and chips restaurant in his very rural town. One day, he put ‘Coq au Vin’ on his menu, he made 20 portions and didn’t sell a single one, all he sold were his usual, ham Egg & Chips, Baquettes, Sandwiches, Steak pie, I suggested he sold the same the following day, and change the name on the specials board. The next day, he advertised his daily special as “chicken in red wine sauce” He sold the lot!!!

Re-structuring the menu – If you find that dishes aren’t selling, or dishes that yield a lower profit margin sell more, look to restructure your menu. Move the dishes that aren’t selling to a more prominent spot on the menu. You can also look at running a ‘Specials Board’ a 2 for 1 style of offer. Or completely change it, you will often find Cottage Pie on ‘specials boards’ on a Monday where Sunday’s Roast Beef which has not sold has been minced and used in a dish.

Demographics – This is vitally important on every aspect of your menu and pricing. If you are in an affluent area where you regularly serve middle class customers, you can indulge them. These diners like to try something new and are happy to pay for a quality meal and service. If you are in a lower income area, you need to consider very carefully what menu your customer are happy with, and may need to run more special offer to entice them. Before composing your menu, consider your demographic, very carefully, and of course, consider seasons!. Consider the ‘coq au vin’ tale of caution.

Our consultants have been in the Hospitality and Catering industry working at the highest levels in both front of house, kitchen and management for many years and by working with our experienced team of experts and outsourced providers we can help and advise on pricing policies, on how to price and structure your menu, and on how to maximise your profit margins.

Please email us at 5 Star Hospitality Consulting for further information.

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