Understanding Restaurant Profit Margins
Running a profitable restaurant requires understanding where every dollar goes. The average restaurant operates on thin margins - typically 3-5% net profit for full-service restaurants and 6-9% for quick-service establishments. Knowing how to calculate and improve these margins can mean the difference between success and closure.
Key Profit Margin Terms
- Gross Profit Margin: Revenue minus cost of goods sold (COGS)
- Operating Profit Margin: Gross profit minus operating expenses
- Net Profit Margin: What remains after all expenses, including taxes
- Prime Cost: COGS plus labor costs (should be 55-65% of revenue)
Calculating Your Restaurant's Profit Margins
Basic Profit Margin Formula
Net Profit Margin = (Net Profit / Total Revenue) × 100
Example calculation:
- Monthly Revenue: $100,000
- Cost of Goods Sold: $30,000 (30%)
- Labor Costs: $30,000 (30%)
- Rent: $8,000 (8%)
- Utilities: $2,000 (2%)
- Marketing: $3,000 (3%)
- Platform Fees (at 25%): $25,000 (25% - if using traditional platforms)
- Other Operating Expenses: $7,000 (7%)
- Total Expenses: $105,000
- Net Loss: -$5,000 (-5%)
In this example, the restaurant is operating at a loss, largely due to the 25% platform commission. Let's see how using Platesready changes this:
Same scenario with Platesready (5% commission):
- Platform Fees: $5,000 (5%)
- Total Expenses: $85,000
- Net Profit: $15,000 (15%)
The 20% commission difference directly converts to a 20% improvement in profit margin.
Breaking Down Restaurant Costs
Cost of Goods Sold (COGS) - Target: 28-35%
Your food and beverage costs should typically represent 28-35% of revenue:
- Food costs: Track ingredient costs per dish
- Beverage costs: Usually lower margin than food (15-20%)
- Waste and spoilage: Aim to keep under 2-4%
- Theft and loss: Implement inventory controls
How to reduce COGS:
- Negotiate better supplier terms (10-20% savings possible)
- Reduce menu size to minimize inventory
- Implement portion control systems
- Use inventory management software
- Create specials using ingredients near expiration
- Cross-utilize ingredients across multiple dishes
Labor Costs - Target: 25-35%
Labor is typically your second-largest expense:
- Front-of-house staff: Servers, hosts, bartenders
- Back-of-house staff: Chefs, cooks, prep staff, dishwashers
- Management: General manager, chef, shift supervisors
- Benefits and taxes: Add 20-30% to base wages
Optimizing labor costs:
- Use scheduling software to match staff levels to demand
- Cross-train employees for multiple positions
- Implement online ordering to reduce front-of-house needs
- Use POS data to identify slow periods for staff scheduling
- Consider automation for repetitive tasks
Occupancy Costs - Target: 6-10%
Your real estate costs are typically fixed:
- Rent or mortgage payments
- Property insurance
- Property taxes
- Building maintenance
Managing occupancy costs:
- Negotiate lease terms before signing
- Consider revenue-based rent agreements
- Maximize revenue per square foot through efficient layout
- Explore ghost kitchen or shared kitchen models for delivery-focused operations
Operating Expenses - Target: 10-15%
Day-to-day operating costs include:
- Utilities (electricity, gas, water): 2-3%
- Marketing and advertising: 3-6%
- Equipment maintenance and repairs: 1-2%
- Supplies (cleaning, paper goods, small wares): 2-3%
- Insurance (liability, workers comp): 1-2%
- Professional services (accounting, legal): 1-2%
The Platform Commission Problem
Traditional food delivery platforms can devastate restaurant profit margins:
True Cost of High-Commission Platforms
At 25-30% commission, these platforms often eliminate all profit:
- Direct commission: 25-30% of order value
- Marketing fees: Additional 10-15% for "sponsored" placement
- Payment processing: 2-3% on top of commission
- Reduced customer loyalty: Customers identify with platform, not your restaurant
- Menu price inflation: Forced to raise prices, making you less competitive
Real-world impact:
A restaurant with $10,000 in weekly online orders through traditional platforms:
- Weekly commission: $2,500-3,000
- Monthly commission: $10,000-12,000
- Annual commission: $120,000-144,000
That's equivalent to eliminating 2-3 full-time employee salaries in profit.
The Platesready Difference
At 5% commission with no hidden fees:
- Same $10,000 weekly online orders
- Weekly commission: $500
- Monthly commission: $2,000
- Annual commission: $24,000
- Annual savings: $96,000-120,000
This savings drops directly to your bottom line, turning unprofitable online ordering into a significant profit center.
Strategies to Improve Profit Margins
Menu Engineering
Optimize your menu for profitability:
- Identify star items: High profit, high popularity - promote these heavily
- Fix puzzle items: High profit, low popularity - improve descriptions/photos
- Re-engineer plow horses: Low profit, high popularity - find cost savings
- Remove dogs: Low profit, low popularity - eliminate from menu
Menu pricing strategies:
- Price for perceived value, not just cost-plus
- Use psychological pricing ($12.95 vs $13.00)
- Create high-margin specials and daily features
- Bundle items to increase average ticket size
- Implement strategic upselling at checkout
Waste Reduction
Food waste directly impacts COGS:
- Track waste daily by category (spoilage, preparation error, customer returns)
- Implement FIFO (First In, First Out) inventory management
- Use inventory management software for real-time tracking
- Create "rescue" menu items from excess ingredients
- Partner with food rescue organizations for surplus
Reducing waste from 4% to 2% of COGS on $100,000 monthly revenue saves $600/month or $7,200 annually.
Technology Investment
Smart technology improves efficiency and reduces costs:
- POS systems: Track sales, inventory, labor costs in real-time
- Inventory management: Reduce waste, optimize ordering
- Online ordering platforms: Lower commission equals higher profit
- Kitchen display systems: Improve accuracy, reduce ticket times
- Scheduling software: Match labor to demand precisely
- Customer relationship management: Increase repeat business
Revenue Optimization
Increasing revenue improves margins even with fixed costs:
- Expand hours: Lunch or late-night service if demand exists
- Add revenue streams: Catering, meal prep, merchandise
- Increase average ticket: Through upselling and menu engineering
- Improve table turnover: For dine-in operations
- Maximize online ordering: With low-commission platforms
- Implement loyalty programs: Increase visit frequency
Monitoring and Adjusting
Key Metrics to Track Weekly
- Prime cost percentage: Should be 55-65%
- Food cost percentage: Target 28-35%
- Labor cost percentage: Target 25-35%
- Average ticket size: Track trends and work to increase
- Revenue per labor hour: Measure staff productivity
- Table turnover rate: For dine-in operations
- Online ordering percentage: Growing channel importance
Monthly Financial Review
Conduct thorough monthly analysis:
- Compare actual vs budgeted expenses by category
- Analyze menu item performance and profitability
- Review vendor costs and renegotiate when possible
- Assess marketing ROI by channel
- Track seasonal trends for better forecasting
- Identify cost-saving opportunities
Action Plan for Improving Margins
Immediate Actions (This Week)
- Calculate your current profit margins using the formulas above
- Identify your highest-cost expense categories
- Analyze commission costs if using third-party platforms
- Review menu pricing for obvious profit opportunities
- Implement basic waste tracking
Short-term Actions (This Month)
- Conduct complete menu engineering analysis
- Evaluate switching to lower-commission platform (like Platesready)
- Negotiate with top 3 suppliers for better pricing
- Optimize staff scheduling based on demand patterns
- Implement inventory management system
Long-term Actions (This Quarter)
- Complete financial analysis and set profit margin goals
- Redesign menu for optimal profitability
- Invest in technology to improve efficiency
- Develop comprehensive waste reduction program
- Create systems for ongoing financial monitoring
The Bottom Line
Improving your restaurant's profit margins requires attention to every aspect of your business, but the highest-impact changes often come from reducing your largest expenses. For restaurants doing significant online ordering, platform commission is frequently the difference between profit and loss.
By switching to a 5% commission platform like Platesready, the average restaurant can improve net profit margins by 15-20 percentage points. Combined with menu engineering, waste reduction, and operational improvements, you can transform your restaurant's financial performance.
Ready to take control of your profit margins? Start by calculating where your money really goes, then focus on the biggest opportunities for improvement. For most restaurants, that starts with platform commission fees.