The key to running a successful, profitable restaurant isn’t the food or the service.
Of course, those things are critical. It’s a nonstarter--without good food and good service, people just won’t eat at your restaurant. But when you dig into what actually sets apart the most successful restaurants, chains, and franchises, it’s not because they have the best dish or the nicest staff.
It’s the math that makes the business work.
The bottom line for any restaurant is that it’s a numbers game. In order to survive, you can’t just create great food, do great marketing, or provide an awesome experience. You have to nail the operations part, too. And that means knowing your numbers cold and understanding how to manipulate the numbers in order to keep your business profitable and sustainable.
Many restaurant owners like to get right down to the nitty gritty; one of the most granular calculations you can get is the cost per meal.
The reasoning is simple. You need to be aware of how much you’re making from each of your menu items to properly budget and monitor costs and profits. While an overall projected sales figure is a great measure of financial health of a business, calculating the margin you’re making per meal and menu item is one of the best ways to optimize your menu.
We’re not suggesting you base your entire menu structure on the dishes that make you the most money; obviously the items you’re most passionate about will get special consideration.
When it comes to the overall health and success of your business, it pays to be mindful of the costs associated with them.
The Importance of Cost Per Meal
Cost per meal gives you the most accurate description of your food costs as they pertain to the volume of meals you’re selling.
Cost per meal is also the gateway to unlocking other powerful ways of looking at your business: Average cost per plate (the sum of all your dishes prices divided by the number of dishes), as well as quick-and-dirty calculations such as total costs vs profit per party (average dish price multiplied by number of seats filled).
You can also use a percentage approach per meal to understand the margin being driven by each individual dish. Even if you’re at a consistent 32% overall food cost, for example, it’s good to know if that cost is similar across all dishes, or if you have a number of dishes at varying percentages.
Having these numbers in mind can inform decisions such as which dishes to promote, which to redesign, and which to retire, depending on your overall strategy.
Calculating Cost Per Meal
This process can take quite a bit of time to master properly; don’t get discouraged or attack this task halfheartedly. As with any calculation, the deeper you’re willing to go, the more accurate a picture you’ll paint.
Many chefs will go as far as adding in costs for utilities and labour per meal. This is up to your own personal preference, but as we said before, the more ways in which you can analyze your business finances, the clearer picture you’re going to get.
For our purposes, we’re only going to analyze food costs when discussing cost per meal.
Cost per meal is calculated by simply adding up the total cost of the ingredients used to make the dish.
You can also turn this into a percentage by then dividing the cost by the menu price.
Calculate your food costs at least twice: once before you start selling the item, then again about a week after you’ve added it to your menu. This second calculation will ensure (or show) that you’re actually spending the same amount as your initial calculation.
A dramatic change in overall food costs may also be a good time to revise your calculations.The more often you’re willing to run these numbers, the clearer a picture you’ll have.
Still manually entering invoices to track all your costs? Get a full line of sight into all of your purchases.
Maximizing Revenue and Profit
By analyzing your menu, either by hand or via the output from your POS, you’ll begin to notice some dishes will float to the top and some will sink to the bottom.
There are many ways to look at this, but the general consensus is to approach analyzing your dishes by breaking them into four segments. Do this for each section of your menu so you have a list for every section customers would potentially order from (Appetizers, Desserts, Mains, etc)
Be ruthless when you do this! Categorizing your menu in this way allows you to have an accurate sense of which dishes are your stars and which could stand to be reevaluated. Your menu can then be updated accordingly:
High Profit, High Popularity:
Highlight these dishes and ensure your menu focuses on them prominently.
Low Profit, High Popularity:
Great stalwarts, don’t tuck them away but don’t focus all your energy on them. Consider adding a version that you can sell at a premium (such as a sampler that contains elements of several of these dishes), or provide add ons that can help you increase profits while adding to the experience.
High Profit, Low Popularity:
Consider highlighting these, or asking your staff to promote these items. You could try lowering the price to see what happens, or consider redesigning the presentation. Either way, make sure you reserve some of your key menu space for these items.
Low Profit, Low Popularity:
Often times you can’t simply remove this item; maybe it’s standard fare for your type of cuisine, or one that holds deep emotional connection. Take an objective view and don’t focus too heavily on these items, but don't allow them to take up prime menu real estate either.
Maximizing Prime Menu Real Estate
Menu experts agree on something called the “Golden Triangle” when it comes to menu placement.
Namely, this is the tendency of most customers to look first at the upper-middle section of a menu, followed by the upper right then upper left corners.
Experts recommend placing your most profitable dishes in this Golden Triangle for optimal viewing. This does not necessarily mean the most expensive items live here, but, instead, your most profitable ones.
Menu Design Meets Psychology
Behavioural psychology is one of the most fascinating - and overlooked - fields for an aspiring business owner.
Subtle forces that can influence and affect people’s behaviours are innumerable. There are a few psychology tips that you can keep in mind when designing your menu, if for no other reason than to be aware of the possible effects your design decisions may have.
In addition, it’s great to maintain an informed perspective on your patrons and industry overall.
The colour of your menu highlights can create powerful associations in a customer’s mind. Green can inspire feelings of fresh quality produce, whereas red is associated with speed and passion, and pastels can offer a calming effect while encouraging contemplation.
There are a wealth of resources on colour theory and colour’s emotional psychology. Consider these factors when deciding how and where to highlight on your menu, in addition to your overall decor.
Pricing can be a matter of contrasts, with the second- or third-most expensive menu items often being the top sellers (as opposed to the highest or lowest cost items).
This is because the highest priced item on the menu sets the bar for a diner’s expectations.
This phenomenon, known as price anchoring, is well known. Keep this in mind when pricing out your menu.
If your second- or third-highest priced dishes are also those with thin food cost margins, check to see how much of the remaining menu is being compromised. Consider an adjustment to either costs going into the dish, or the price being displayed to your customers.
By the same token, the most and least expensive dishes on your menu may suffer from what is known as extremeness aversion--a documented phenomenon that essentially describes human’s tendency to gravitate towards the middle of the pack when faced with choices representing a series of extremes.
Keep this in mind when forecasting and planning your menu. Items on either side of the average may suffer from a lack of popularity, no matter how delicious they are.
Consider listing items or sizes in an array that you can accommodate, and expect customers to gravitate towards the middle of the pack when presented with a range of choices.
At the end of the day, there are many factors that will make your restaurant successful and profitable.
But one of the most important components--and the part that is often most difficult for restaurateurs--is getting the numbers right. Figuring out how to maximize the business operations can be a challenge. But it’s not impossible.
Use these calculations and “menu hacking” tricks to maximize your revenue and increase your profits.
Cost analysis is easier with digital invoices. We’re here to help - learn more about streamlining your restaurant operations and accounting.