Tag Archives: gross profit pricing

What should you pay a manager?

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One of the most frequent questions I hear soon-to-be, and existing, restaurant owners lament, is how much to pay a manager.

“Most” owners asking this question are working owners. After being in the business for awhile, owners start to realize that they can’t be in all places all the time, and still be able to market their business. Working “in” their business keeps them from working “on” their business. Eventually, many of them decide to hire a general manager or assistant managers. Inevitably, the same question always comes up, “What are the industry averages for manager pay?”

Much to the chagrin of the person asking the question, the correct answer to that particular question is, the industry averages are of no use to you in determining what to pay your manager.

Reinforcing and explaining that point is the intent of this article. First, I need to discuss why industry averages are of no use to you in determining manager pay. Then, we’ll discuss what you should be doing to determine what to pay your managers.

Why shouldn’t industry averages be used to determine the pay for my managers?

Every restaurant has a unique financial situation unlike any other restaurant, even if those restaurants are the same concept. Your profit and loss statement looks like no other. The combination of your rent, labor, sales, even cost of goods can be completely different from the same concept in a different location, with different employees, even if you are both McDonalds.

Industry averages are just that, “averages”. They combine figures from small 200 square foot burger huts run by 3 employees, with that of a $1.5 million per year quick service giant with 40 employees. All the numbers from thousands of operations that are nothing like each other are lumped together to create industry averages. While these averages are great to illustrate trends in the industry, and to even compare your own restaurant against and alert you of a potential problem that needs further investigation, they shouldn’t be seen as a guide to use to determine pay. Your operation is different than any other, and more importantly, you are located in a market that is different than the market of most or all of the restaurants used in those averages.

Setting your pay based on industry averages could very well yield a situation where you are drastically overpaying, or underpaying, that employee for that job in your market. You could end up losing money for your decision, or worse, losing a great manager.

What should I do to determine what a manager should make?

Ask yourself these questions:

  1. What are the businesses paying that I am competing with for employees?
  2. What can I afford to pay?
  3. How easy is the job?

Good managers are hard to come by. Landing a great manager is probably going to require you to pay that person more than they can make somewhere else for equal work. To take the first step in figuring out what to pay a manager, you need to figure out what other restaurants in your market are paying. Those are the restaurants your potential manager will be comparing you to. Find similar concepts in the same town and look for their help wanted ads. Call the restaurants themselves and ask to speak to someone about hiring. Pretend you are in the market for a job, that you are an experienced manager, and ask what the potential for earnings are. You won’t always get a straight answer, but if you approach enough restaurants, you’ll get a good idea what everyone else is paying. The key to this being an effective strategy is to only approach businesses in your market. You are competing for employees with the other businesses those employees are likely to go to for a job. Any business too far away for that employee to drive to work to, is completely worthless for information purposes. You aren’t competing with them. You may however, be competing for employees with businesses other than restaurants that are in your market.

The second step to figuring out what to pay a manager is calculating what you can afford to pay. It doesn’t do you any good to go out and get the most incredible manager in the world, and have to pay him/her a $1,000,000 a year if your business only brings in $500,000 per year. You have to be able to afford the manager.

A good “rule of thumb” for management pay, is to keep all combined management salaries (including GMs, assistants, bar managers, chefs, sous chefs, etc.), including their taxes and benefits, under 10% of your gross sales. This is a common figure used in many business models across many industries. As with any rule of thumb, there are exceptions though.

In some instances, a restaurant can have “working managers”. These are managers that fill a position usually filled by hourly employees, in addition to having management duties. When calculating whether your salaries are affordable or not, you should only include the portion of a working manager’s salary dedicated to management duties as part of that “10%”. For example, if you have a shift manager who is also a server, calculate how much you would have to pay another server without management duties to fill the server part of that managers role. Then, subtract what you would pay that server from the manager’s actual pay to calculate how much of the working manager’s pay you should contribute to your “10%” calculation.

Another exception to the rule you might find is in particularly profitable operations with simple business models. These businesses may not have to pay out 10% of their gross sales to attract high quality managers. In their case, they just have to offer higher pay than the businesses they are competing for employees with. Lucky them.

Some restaurants will run into the dilemma of not having a large enough budget for managers when they only use 10% of their gross sales. One option to come up with a more attractive compensation package for these restaurants is to offer a profit sharing bonus structure based on sharing any profit above the minimum profit the restaurant budgets. While the 10% rule of thumb should normally include taxed AND benefits, a profit sharing bonus structure gives you a little flexibility because it is based off potential profit above the budgeted profit. Any part of this “extra profit” is affordable for you to share because it requires the restaurant to be profitable before there is any sharing, and it also requires that you already make the minimum profit you’ve budgeted for. This also incentivizes the employee to earn you more money so they can make more money themself. You can find more detail about this type of bonus structure in a download from our webstore titled “Bonus plan”.

 Based on the 10% rule of thumb, you should have a good idea now what you can afford to pay a manager.

The last consideration is the complexity of the job you are hiring a manager for. Not all manager positions are equal. In a restaurant with a working owner who does all the marketing, bookkeeping, hiring and firing, a manager’s job may be fairly simple. They might just be there to watch the floor and help count the registers. You should adjust what you’re offering accordingly, and you should also be very forward about the complexity, or simplicity, of the job when you are interviewing potential managers. You want applicants to be comparing you to other management positions knowing full well what you expect in a manager.

Other factors that make a manager’s job more complex or simple include:

  • How organized your business is
  • The hours you expect from a manager
  • The flexibility needed from the manager
  • Whether you are a working owner or “hands off”
  • Staff turnover and the resulting demand on the manager
  • Whether there are “re-structuring” tasks to be done and whether or not the manager will help
  • Whether the manager is also helping market the restaurant
  • How much work is required of the manager “outside” the restaurant itself, like catering events or participating in expos and festivals

Just as you would expect yourself, the more you require from a manager, the more you will have to pay that manager to keep them happy. Creating a job description for a manager is a great way of communicating all that you expect from that manager, so you can be up front during the interview process and give them the necessary information to compare a management job with you to a management job with your competitors.

If you do your part by figuring what others in your market are paying managers, what you can afford to pay, and whether your manager position is harder or easier than the ones you are comparing it to, you should be able to come up with a reasonable salary for a manager that keeps them happy and you profitable.

Reading suggestion – The Chef's Commandments

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I just finished reading my pre-publication, review copy of The Chef’s Commandments: Maximize your kitchen’s profitability by J.A. Mendez from Pineapple Publications. Good read.

To be honest, I have to tell you that I was interviewed for this book, and the publisher used some of my blogs and articles for content, so I may be biased. Either way, I suggest picking up a copy of The Chef’s Commandments for yourself. The author, Antonio, has done a great job of packing a lot of useful information about operating a successful restaurant into a 138-page book that only takes a few hours to read.

 Pre-order your copy here.

Antonio’s book delves into food cost control, marketing, menu creation, safety, sanitation and even managing employees. While it isn’t an “in-depth” study of any one of these topics, it does a lot to focus you in the right direction, so you know what areas of your restaurant or food service you should be looking at to obtain more profit.

 At $15.95, this book is a steal.

 Chefs Commandments cover

 

I almost forgot. This book is the first of a series, so keep your eyes out for the next installment in The Chef’s Commandments: Happy Cooks, Happy Customers – A chef’s guide to employee management.

How can I use gross profit pricing for a new restaurant?

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When opening a new restaurant, you are going to have to make assumptions about all your expenses and your head counts regardless of whether or not you price by gross profit. Since you will already have those assumptions, it only makes sense that you set prices so that you will collect enough markup (gross profit) from each of those assumed customers to cover all the expenses you are assuming.

 

Since you won’t have “real numbers” to work with in your startup, it will be important that you create your budgets conservatively. Set realistic expectations for traffic and for expenses, based on your/your advisor’s experience and averages in your area. You’ll need to be doing all this regardless of whether or not you price by gross profit. Pricing by gross profit simply guarantees that if you bring in the customers you assumed, and you keep your expenses down to where you assumed, that you will at least make the profit you budgeted for.

 

Without pricing by gross profit, you are simply guessing at whether or not there will be enough markup to cover your expenses. Pricing by a budgeted cost percentage doesn’t take into account the other expenses of the restaurant.

 

In short, budget conservatively and use your assumptions on customer counts and expenses, along with accurate recipe costs to price by gross profit in a startup.

 

Brandon O’Dell

O’Dell Restaurant Consulting

web:  www.bodellconsulting.com

blog:  http://blog.bodellconsulting.com

email:  brandon@bodellconsulting.com

office:  (888) 571-9068

Quick tips – Update your menu often

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You can greatly improve your cash flow by adopting a policy of smaller, more frequent price increases instead of waiting for a year or longer before raising prices a larger increment.

Use this simple example to catch my drift:

Chicken tenders $5.99 from January 2008 – January 2009
Price raised to $6.99 after January 2009
4000 orders of chicken tender sold during whole year
$23,960 in sales for year

Chicken tenders $5.99 from January 2008 – March 2008
Chicken tenders $6.29 from April 2008 – July 2008
Chicken tenders $6.49 from August 2008 – October 2008
Chicken tenders $6.79 from November 2008 – January 2009
Price raised to $6.99 after January 2009
4000 order chicken tender sold during whole year, 1000 order per quarter
$25,569 in sales for year

By not waiting to raise the price, you gain an additional $1,609 in profit for the year off one menu item. You also help mask the price increase by doing it incrementally. Your customers are much less likely to notice $.20-$.25 increases compare to a $1 increase.

Who is the target market for your restaurant?

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This may be the most important question you can answer when designing a restaurant concept. It is definitely the most important question to answer when creating a marketing plan.

One of the biggest mistakes restaurants make is trying to appeal to everyone. If you think that your target market includes everyone, you are setting yourself up to fail. If you want to be successful in any business, especially the restaurant business, then you need to define who it is that is most likely to buy your products, and focus your concept to appeal to that defined market.

First off, let me tell you what a target market or target demographic is and what it isn’t.

A target market IS the portion of the population most likely to buy what you are selling.

A target market ISN’T the portion of the population you want to sell your food to.

Do you see the difference? You must realize that your target market picks you, you don’t pick it.

When creating a plan to market your restaurant, focus on these points.

    1. Realistically define what type of person is most likely to enjoy what you want to offer.
    2. Assess whether that particular demographic works or lives in large enough numbers within 3 miles of your location to support your concept.
    3. Make sure your marketing is communicated in a manner that demographic can understand, and broadcast via a medium that demographic uses.

 

 

Here is how you use those points to build your marketing plan.

Point 1: Realistically define what type of person is most likely to enjoy what you want to offer.

This isn’t the time to be politically correct. You need to examine gender, age, race, religion, income, background, prejudices and sexual orientation among other things if you want to get a clear picture of who you should be marketing to. No matter who you want as a customer, kosher Jews and Muslims aren’t going to eat at your BBQ joint. Lower income Asian families aren’t going to eat at your bistro, and upper income, white yuppies aren’t likely to visit your diner in the hood. If you have a “quiet” atmosphere, don’t expect to attract families of any type. If you have a “noisy” atmosphere, don’t expect seniors.

Until you throw political correctness out the window and truly define exactly who is most likely to eat what you offer, in the atmosphere you are offering it, at the price you are charging for it, you aren’t ready to move on to the next step.

Point 2: Assess whether that particular demographic works or lives in large enough numbers within 3 miles of your location to support your concept.

Once you know who it is that is truly most likely to buy your food, you’ll need to consider whether or not they live or work in large enough numbers in your area to support your business. This is a feasibility exercise. With this point, you are determining whether or not it is even possible for your idea of a restaurant to make it in the location you are considering.

If your concept appeals to low income seniors on a fixed budget, you shouldn’t be putting it in an upscale shopping center surrounded by neighborhoods full of high income families. You also don’t want to open a bistro appealing to high income white people in the ghetto. While these examples seem obvious, I’ve seen many restaurant make the mistake of putting their concept in an area where their target market does not live or work in great numbers.

A good rule of thumb is to only consider the initial 1-mile and 3-miles radius around your restaurant when evaluating the presence of your target market. Whatever the sex, age and income of the persons most likely to eat your food, those persons need to be living or working in great numbers within a 1 to 3 mile radius of your restaurant. The closer the better.

On to the next point.

Point 3: Make sure your marketing is communicated in a manner that demographic can understand, and broadcast via a medium that demographic uses.

Email marketing isn’t going to produce customers for a breakfast diner appealing to seniors. Radio ads on an easy listening radio station aren’t going to bring in 20 and 30 year old hipsters. If you haven’t defined who it is most likely to buy your food, it’s not likely you are using marketing mediums most likely seen/heard by your most likely customers.

In marketing, you must use the language your target market understands. Speak your target market’s language and only create offers that target market values. $10 off a meal isn’t going to attract high income middle aged married couples, but a complimentary bottle of wine with any food ticket over $50 might. While any demographic appreciates a good deal, each demographic has a different set of values. What is valued by middle class high school kids won’t be the same as what is valued by humble German country folk. The language each of these groups understands will also be different.

Communication with your potential customers is just as important as communication with your employees. If you are speaking a language your customers don’t understand, or designing offers your target demographic doesn’t value, then your marketing will be a big waste of money. If your current marketing isn’t working, there is a good chance you’re doing one of these two things.

I hope I’ve driven home the importance of defining your target market. Marketing can be an expensive undertaking, but if you define exactly who it is you should be marketing to, you can greatly reduce the cost involved in reaching the customers most likely to eat at your restaurant. With the right approach, you can not only compete with chain restaurants with big marketing budgets, you can beat them.

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
Office: (888) 571-9068

Who's in charge of your restaurant?

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Charlie said….. Marla said….. Patrice said…..

He said, she said. It’s a game that gets played in a lot of businesses. Not having a defined “pecking order” that is understood by every person in your organization can lead to a lot of unneccessary headaches. Here’s a quick lesson about avoiding this business pitfall.

Who is in charge when you’re not in your restaurant? Who is your second when you are/aren’t there?

Every good business structure includes a management tree. At the top is the owner(s). Just below, the CEO or General Manager. Underneath may be assistant managers, shift supervisors, trainers, tenured employess and new employees. Any which way the hierarchy of your restaurant shakes out, it’s very important that your entire staff understands who is in charge at any given time.

Not having a set chain of command leads to confusion. To a new employee, any person in your business is someone to be obeyed and learned from. As I’m sure you know, different employees of yours have different methods for doing the same thing. One may be better, one may be worse. Either way, the only way things should be getting done is yours. This is only possible with accountability through creating a chain of command that allows you to police your systems and correct errors within the system.

When creating a system of hierarchy, avoid this one common mistake; do NOT give equal, shared authority to two different employees. Sharing authority equaly creates stalemates and sets you up to lose track of who is accountable when the wrong decisions are made. He said, she said.

Create a management tree. Don’t split authority. Hold your staff accountable.

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
Office: (888) 571-9068

Are your dirty bathrooms scaring customers away?

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The bigger a city gets, the more small restaurants with great food and dirty bathrooms there are it seems. I noticed this phenomenom recently when visiting Kansas City from Wichita, Kansas. In Wichita, we have a shortage of independently owned, small, interesting restaurants. There are a load of chains here, and plenty of restaurants to choose from, but most independents are either simple Mexican, Chinese or burger joints.

I visit Kansas City quite often, and while it isn’t a huge metropolis like Chicago or New York, it does have it’s share of small, interesting, independent restaurants. The type of restaurants I like to eat at. To that point, Kansas City scores big. What I have noticed though, is a serious lack of cleanliness in these small restaurants. Bathrooms are normally smelly and not stocked. Furniture and fixtures are in disrepair, menus have food stuck on them, and glasses are often dirty. I’m not sure if it’s my poor luck or not, but I seem to have an easier time finding scary restaurants I’ll never go back to than truly impressive ones.

Its these experiences that have inspired me to write a blog about cleanliness. Cleanliness is an area of running a restaurant that is often ignored by small restaurant owners, but ranks very high in importance to customers. A small restaurant owner tends to spend as much or more time at their business as they do their home, and it leads them to sometimes overlook the cleanliness of their business as they would their home. While they don’t feel they live/work in filth, they do get complacent about every day tidying up and small project cleaning which tends to build up after time.

Bathrooms in particular get overlooked in small businesses. Paint gets old and dirty. Floors are mopped with the same mop used on the greasy restaurant floors. Mirrors are broken and never fixed. the hot water doesn’t work, and soap/towel dispensers aren’t kept full. Disinfectants are used regularly to clean toilets and sinks, and the bathroom ends up smelling like a porta-potty.

While you may see a bathroom as more of a necessity (and maybe a nuisance) than your customers, it’s their opinion of them that matters. They have to be able to make it out of your restaurant feeling clean enough to touch bread before putting it in their mouths. They’re the ones who don’t want to have to leave and go somewhere else if they have to do something in the bathroom that requires them to sit down.

One thing that independent restaurant owners can learn from chains, is how important it is to keep a clean bathroom. McDonalds has one person on every shift designated to keep the bathrooms clean. They make hourly forays into the bathrooms to clean up excess water. Mop up any “spills”. Replenish soap. Empty the trash. Make sure paper towel dispensers are full. They wipe down a dirty toilet if necessary, and basically do everything they can to make sure their customers know they will always have a clean, stocked restroom to use. Without having any studies to quote, I’ll bet a significant portion of McDonald’s business is gleaned from people who stop just because they know they can use the bathroom there. A very successful regional convenience store named Quiktrip also applies this philosophy. Their bathrooms are always clean, and they are rewarded with residual business from people stopping to use the bathroom. This policy builds respect from their customers, and a reputation as a clean, upstanding company.

You may feel I’m overstating the importance of cleanliness, but I assure you I’m not. I would suggest asking yourself all these questions on a daily basis, and take a hard look at how your business may be scaring away customers because it’s just too dirty.

Is there plenty of toilet paper in my bathrooms?
How about paper towels and soap?
Do my bathrooms smell?
Is there buildup on sinks or toilets?
Are the bathroom walls clean?
Are there holes in the walls or ceilings?
Are there missing tiles in the ceiling or on the floor?
Is anything in the bathroom broken?
Is there graffiti on walls or stalls?
When is the last time the bathroom has been painted?
Are the colors and finishes attractive?
Do my toilets and/or urinals leak?
Is there ever standing water on the floor?
Do the appropriate doors lock when they’re supposed to?
Do my bathrooms offer enough privacy for each individual in the bathroom?
How often do I have the bathrooms checked on?
Is there an employee on every shift assigned to keep the bathrooms clean and stocked?

Answering these questions and remedying the situation should provide you with bathrooms that even the pickiest customer will be satisfied with. Take pride in your bathroom’s cleanliness. Sure employees hate cleaning bathrooms, but it has to be done. If you have to, offer the person who cleans them each night a free meal. Do what it takes. Your efforts will be rewarded.

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
Office: (888) 571-9068

O’Dell Restaurant Consulting Webstore!

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O’Dell Restaurant Consulting would like to remind you of our online webstore! In our store, you’ll find lots of on-site, email and telephone consulting service packages to help you solve the most pressing problems in your business. You’ll also find some great Microsoft Word, Excel, .pdf and graphic file restaurant tool downloads, some available for only $5 each!

Whether you’re searching for help solving labor issues, trying to lower your food costs, wanting creative marketing and menu ideas, or you just need someone to talk to, you can find it in our webstore! If you have already visited, but haven’t been back lately, make sure to check in and see if there is anything new!

Here it is……….. O’Dell Restaurant Consulting Webstore
http://www.bodellconsulting.com/webstore.html

Thank you for your time, and check the webstore often. I will be updating it with new downloads and services frequently.

Pricing food – Why you’re doing it wrong and how to fix it

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One thing I’ll never forgive formal culinary schools for, is teaching new impressionable would-be chefs to use a budgeted cost percentage to price food menus. Chain restaurants share an equal responsibility for perpetuating this bad practice by focusing their managers on food cost percentages without letting them in on the secret that the cost percentage is a management tool, not a pricing tool.

Though most culinary programs teach many different methods for pricing food, every culinary student seems to emerge from the Culinary Institute of America or Le Cordon Bleu believing in the world of restaurants, all they have to do to be profitable is serve great food and deliver a 33% food cost, or is it 25%, or 35% or 30% or 19%? The truth is, hitting a budgeted food cost does nothing to guarantee there will be enough money left over from the sale to pay for things like labor, rent, insurance, linens, smallwares, uniforms, utilities, taxes, etc, etc, etc. Hitting that cost percentage really means nothing. Further, not hitting it only means, “I should give things a closer look.” It doesn’t mean there is a problem. On the contrary, a high food cost could mean you’ve been selling a lot of high cost items that contribute more gross profit per sale. Are you going to make more money selling 50 hamburgers priced at $6 that cost $1.50, or 50 lobsters priced at $30 that cost $15? As long as there isn’t a significant increase in the overhead of serving the lobster, gross profit dollars win every time. You don’t want to sell the item with the 25% cost and $4.50 gross profit, you want to sell the item with the 50% cost and the $15 gross profit. Rather than comparing the food costs, you should be comparing the gross profits from each item. Obviously, if you have $15 left over from the sale after paying for food (gross profit) compared to $4.50, you’re going to have a lot more money to pay your overhead and turn a profit.

If you want to create prices in your restaurant that guarantee you’ll have enough dollars left over after paying for food, you’ll need to make three important considerations:

  1. Market price point – What does your market consider a fair price for the food you are preparing, served in the atmosphere you offer?
  2. Menu item cost – I know I said you shouldn’t use cost percentages. That doesn’t mean you don’t include the cost of the food into the price. You need to keep up-to-date recipe dollar costs for every item on your menu, and use those costs to figure into your pricing.
  3. Needed gross profit – What does every person who walks through your door cost you to serve? You have a lot more costs to cover than just food. That’s just a fraction of the picture. You must consider every expense of running your business when pricing menu items, including the profit you need to make.

I guess now the question is, “How do I price by gross profit?”.

I’m glad you asked.

Market Price Point

You can’t throw prices out there, whether based on cost percentages or gross profit, without considering what your market is already paying for those products elsewhere. Just like your potential customers, you must consider what other operations are charging for the same type of food, or even the same dishes, that you are offering. If you are going to charge more for the same dish than your competitor down the street, you have to be able to justify your price with added value. Added value could be larger portions, more exotic ingredients, better atmosphere, better location, live entertainment or something else. It could also be the promise and delivery of a unique selling point that your competition doesn’t have.

Whatever your prices, they must offer value to your customers. If your customers don’t feel your food is worth what you’re charging, you won’t have enough of them to make money no matter your pricing method.

Menu Item Cost

How much does each menu item cost you to make? Ingredient costs go up all the time. When is the last time you updated your menu item costs? Without knowing exactly what a menu item costs you to make, and how many dollars you need to add on to the price to pay for the ingredients, you can’t possibly come up with prices you KNOW are going to make you money.

The easiest way to track recipe costs (menu item costs) in my opinion is with Microsoft Excel spreadsheets. While there are many commercial food costing and inventory programs out there that will help you cost out your items, many use costing formulas based on valuation methods I don’t endorse, or require too much input to keep prices up-to-date. Some do have the capability of linking directly to broadline vendor’s invoicing systems to update prices automatically, but most smaller vendors don’t have this capabibility and you’re still left doing a lot of extra manual input. For my money, there is nothing simpler, less time consuming and easier to use than Excel spreadsheets. That doesn’t mean you shouldn’t use other inventory and costing tools. Any effort you make toward calculating recipe costs and inventory is going to pay off. Even the more expensive softwares will make you money in the end.

Don’t make the mistake of getting lazy with your recipe cost tracking. Many operators only price out menu items when they’re making a menu change (which are normally too few are far between). Between changes, they don’t see how the cost of ingredients is impacting certain menu items, and without that information they don’t have the urgency to make the necessary pricing changes needed when they are needed.

Needed Gross Profit

This is the most important consideration in setting menu prices. You must know what your guests cost you to serve. Without knowing what they cost you to serve, you can’t know how much money you need from each of them to pay all your bills and make a profit.

Look at your financial picture this way. Your food costs make up anywhere from 20-35% of your financial picture in most restaurants. Depending on your labor costs, your food cost could be the largest expense of running your business, and it needs consideration when forming menu prices. BUT…… What about the other 65-80% of your financial picture? It’s not all profit. Most of that picture is expenses other than food cost, and if you’re lucky a little profit left over. Doesn’t it go to reason that you have to include those costs in your pricing? Of course it does. Without knowing those costs are covered, you can’t know you’ll make money.

Before you can know how to add gross profit into a menu price, you have to know how to calculate it. Here are some explanations to try and illustrate how to calculate a needed gross profit per person. The needed gross profit per person is what you add to your recipe cost to arrive at a menu price. Unlike the menu price, the needed gross profit per person is a fluid number. Since it is important to keep menu items within the price point of your market, you will likely have to increase the gross profit you add to some items, while decreasing it on other items. It’s only important that the end result gives you an average gross profit per person that delivers enough gross profit to pay the bills.

You can start to calculate your needed gross profit by looking at your financials and customer count records. It’s best to use financials from months where you achieved as many of your financial goals as possible to establish your needed gross profit numbers. You can use an average of all months by using a year-end profit and loss statement. From your P&L, you need to find how much all your operating expenses for the year were without including product costs. This is your overhead. To this, you’ll add the ideal profit you should have made during that time period.

Total expenses for year – product costs + ideal profit = Total needed gross profit

Once you know how much gross profit you would have needed to collect during the last year to make the profit you should have made, you have the beginnings of your pricing method. Before we go any further, you need to take into consideration any inflation or cost increases you can assume for the following year. Operating costs will always go up, and you need to price for those cost increases. If you’re smart, you’ll re-price your menu every 3-4 months to make sure those costs are covered, but that is another article. To be on the safe side, I add a 5% cost increase into the total needed gross profit to come up with a target for the next year. With the ever increasing cost of gas, you could either add in a higher buffer, or do what I suggest and evaluate your pricing every 3 to 4 months. It’s much better to do regular, small increases to some menu items than annual large increases to all of them.

Total needed gross profit x cost plus increase (105%) = Total needed gross profit (adjusted for next year)

Now that you have your new needed gross profit, it is very easy to figure out how much of it you’ll need to collect from each person to cover all your expenses. That is, assuming you track how many people come into your restaurant. If you don’t, you need to start doing it now, and you’ll need to estimate how many covers you did for the previous year. Estimate low to be on the safe side.

To find out how much you need to collect from each person, simply divide your total neeeded gross profit for the upcoming year by your total customer count for the last year.

Total needed gross profit ÷ previous year customer count = Needed gross profit per customer

This number is simply the amount of gross profit you would have had to collect from each of last year’s customers to achieve your financial goals for the upcoming year. What this gives you, is a target gross profit to collect from every person this year to achieve profit. That profit will be achieved if you can meet or exceed your customer counts from the year before, or you can exceed the gross profit average per customer.

Gross profit per customer  x customers per year = Actual gross profit

If you can exceed your total needed gross profit per year with your actual gross profit, and you do a good job of controlling your expenses, you will exceed the profit you budgeted for.

Remember in all this that your budgeted food cost percentage hasn’t entered into the equation once. You are adding the actual cost of your menu items to the needed gross profit per customer to come up with a selling price. That’s all it takes.

There are a few other things to consider though. Your needed gross profit per customer is collected from a few different sources. You don’t have to mark up every menu item by your needed gross profit. Your needed gross profit per customer is collected by combining gross profits from everything a customer buys. The markup on entrees, appetizers, desserts, soft beverages, alcohol and merchandise all contribute to gross profit. If you need $7 in markup from 30,000 customers per year to make your total needed gross profit, you have many different avenues to get it from and don’t have to mark up every menu item by $7.

Another factor that majorly affects these averages is your customer count.

If you’ve determined that you need $7 gross profit from each of 30,000 customers that walks through your door to reach your total needed gross profit, then you can also reach that number ($210,000) by serving more customers at a lower gross profit markup. If you could double your covers to 60,000, you could theoretically collect $3.50 in markup from each to collect the same total gross profit. Whenever considering cover changes however, you must also consider how serving more people will change your overhead. If you serve twice as many people, some of your expenses will also increase. They WILL NOT however, increase exponentially. Additional customers are always cheaper to serve than your primary customers, as they are the ones you are covering your fixed costs with. Add your additional expenses to your year end numbers and start over calculating your needed gross profit.

I hope I’ve laid out this method in a way that you can understand it. While it isn’t complicated, it does go against the principles being taught in classrooms, chains and kitchens all over the country. If you have followed along well though, you can see how this pricing method takes into consideration every cost of doing business, and leaves no guessing as to what you need to do to make money. This method of more effective planning could do a world of good for your profitability. Try it out. If you need some help, give me a call.

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
Office: (888) 571-9068

How to teach in 10 easy steps

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One of the primary reasons that some businesses training programs work, and some don’t, is in the method their managers and trainers use to teach new skills. This seems to be especially true in restaurants and food services, due to the prevelance of leaders without formal educations. Sorry if that offends anyone, but it’s true.

While proper teaching technique is not something that comes naturally to everyone, it is easy to learn following a simple multi-step procedure.

    Write procedures on paper for whatever skill is being taught.
    Distribute written procedures to anyone being taught.
    Review the written procedure with the person(s) being taught.
    Answer any questions or concerns about the procedure.
    Confirm the person’s comprehension.
    Demonstrate the procedure to the person being taught.
    Observe the person demonstrating the procedure to you.
    Identify any wrong steps in the person’s procedure.
    Re-demonstrate the procedure specifying the correct.
    Repeat the Observe, Identify and Re-demonstate steps until the person is able to perform the procedure error free at least three consecutive times.

You can commit this process to memory through repitition yourself. Simply memorize the first words of each of these steps until you do. They should help you remember the step that each of them represents.

Write, Distribute, Review, Answer, Confirm, Demonstrate, Observe, Identify, Re-demonstrate, Repeat.

This method will work to teach pretty much any skill or process, but you have to have the patience to repeat the Observe, Identify and Re-demonstrate steps until your student has the skill mastered. As with anything, practice makes perfect.

This technique should not only be used to teach new skills, but also to correct any procedures performed incorrectly by an employee or student. A steadfast resolve by yourself and your managers to use this technique will result in greater compliance to existing procedures by employees, and increased speed of implementing new procedures.

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
blog.bodellconsulting.com
brandon@bodellconsulting.com
Office: (888) 571-9068