Tag Archives: gross profit pricing

Creating a manageable menu

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Two of my favorite shows are Restaurant Impossible and Gordon Ramsay’s Kitchen Nightmares. If you haven’t seen them, and you’re in the restaurant business, you’re missing out on a lot of free lessons.

Gordon Ramsay is a bit of bully. He likes to push people’s buttons. I think one of his other shows, Hell’s Kitchen, is just a stage for him to berate future chefs for ratings and money. Robert Irvine is a bit more respectful, but still tough. That said, I still think those two show are the most important shows on television for current and would-be restaurateurs.

If you watch Kitchen Nightmares or Restaurant Impossible, you’ll notice a reoccuring theme with many of the failed restaurants Ramsay or Irvine help; large, unfocused, unmanageable menus. I’m not sure what it is about the restaurant business that turns an average cook into an overbearing, pretentious egomaniac chef or restaurant owner that thinks they can stick something on a plate no one has ever heard of before and people will pay them $50 a plate to eat it, but I wish they made a pill to cure that disease. At the very least there should be therapy available to help these people realize that if a world renowned chef like Gordon Ramsay can be humble enough to cook simple food with quality ingredients, then they should be also.

Enough with the whining. I’m starting to annoy myself.

What I really want to talk to you about, is how to create a manageable menu for your own restaurant. There are three main factors I think you should concentrate on when you are putting together your menu.

  1. Your limitations
  2. Your customer’s desires
  3. Your financial needs

Notice that nothing in that list refers to ‘what you want’ to serve. To tell you the truth, it’s not important what you want to serve. For more on that, check out Don’t give your customers what you want.

Your limitations

First things first. Something you’ll see in a lot of independent restaurants is owners or chefs trying to do the impossible by offering a larger selection than their equipment, facility, ability or staff can handle. You need to realize that these things limit what is possible out of your restaurant. You can’t just go and write your dream menu without considering the factors that will affect your ability to produce the food on that menu.

Your menu selection needs to be limited to only the number of items that you have the equipment to cook. It also needs to have items that spread the work load across the different stations and equipment in your kitchen. If you have 10 different saute items, and only 4 burners, you’re going to keep a lot of people waiting for their food. People NOT being served quickly, means that tables aren’t turning, and you aren’t serving as many people during your rush that you can. In most restaurants, at least 80% of the day’s revenue comes from the rush periods where you are putting through as many people as you can possibly serve. If your huge selection means you can’t serve as many people during a rush, then you won’t make as much money as you could.

Your menu should also be limited to only the number of items you have the storage room to store ingredients for. If you’re working with a two door reach in cooler and a top loading, three foot wide deep freeze, you’re not going to be able to offer all those fun creative dishes you learned to make in culinary school. Limited storage space means limited menu. You can make the most of your storage space by getting multiple orders per week, but even then, you’ll have to watch your space. There has to be a spot for everything, and stuffing more things in a cooler or freezer than was meant to be in there means you don’t have quick access to it in a rush, which means slower service and less money as we’ve already covered.

Your ability may be the first limitation you want to consider. Just because you are the best at cooking whatever it is you think is your specialty, doesn’t mean you’re good enough at teaching other people to produce it to your high standards enough to feed a huge angry mob. It also doesn’t mean that people are going to think whatever you’re cooking is as good as you do. You need to be honest with yourself and work within your limitations. Cook what you KNOW how to cook, not what you’ve seen other people cook. If you’re not an expert on everything on your menu, it will show. Maybe your customers won’t know how to verbalize it and let you know that your food really stinks, or maybe they’re just too nice to say it, but it will still show in the ever decreasing number of guests you’ll serve.

Your staff is another limitation you have to take into account when creating a menu. You can’t produce haute nouveau cuisine with minimum wage cooks. Every market is different for hiring talent. Every manager and chef is limited by their own ability to find qualified help. If you can’t find help that can make a two egg hollandaise in a job interview, then you don’t need to have hollandaise on your menu. Limit your offerings to what your staff is qualified to prepare.

Your customer’s desires

If you want a menu that works, it has to work for your potential customers. Whatever idea you have about introducing some new, awesome cuisine to a market that hasn’t seen it yet, forget it unless you have tons of marketing cash to educate the public with. People rarely eat what they don’t understand. I know you think your idea is different, and the food you want to bring to the area is soooo good that people just HAVE to love it, but you’re most likely just projecting your tastes on the general public. Unless you have tens of thousands in marketing dollars to educate a new market enough to create an interest in a new type of food, you’re not likely to bring them in. People try new foods based on buzz. When it starts to get popular, people try it. When it gets to be the “in” thing to eat, people try it. Until your target audience knows about the food you’re going to serve, they won’t have an interest in it. How can they, they don’t even know what it is? Find out what your customers want, not what you want them to eat. Make your menu about them.

Stick to foods your customers are familiar with. A good place to start is at the local farmer’s markets and grocery stores. See what meats and produce the markets carry. Those are the things people in that area buy. Those are the ingredients they know and are comfortable with. If you can find items that are even grown locally, all the better. If you have to have everything flown in from some exotic far away place, people in your area aren’t likely to know what it is or even care. Sure there are some adventurous people out there like me that love to try anything new and interesting they can get their hands on, but we are the exception, not the rule. I checked my ego long ago to make myself realize that it’s not about me, it’s about whoever I’m feeding.

Once you’ve made it about your customers and figured out what they want, create a signature item in each menu category. These signatures items should speak to your unique selling point, and really communicate to your customers what you are all about. I also suggest that you make them the highest gross profit items in their respective categories.

Your financial needs

You’re wasting your time if you’re not making money, so naturally a manageable menu is one that gives you enough money to pay your bills. While I’m not going to go into detail about pricing in this article, I am going to make the obvious point that you’re in business to make money.

When creating a menu, you need to consider how much every item on your menu costs to make. How much does every person who walks through your door cost you in overhead to serve? How much profit do you need to make for this restaurant venture to be worth your while? These three financial considerations combine to give you the information you need to set the prices on your menu. From there, you just have to keep your price points competitive for the market, and make sure your food offers a good value for what it is. Your food doesn’t have to be “the best”, but it does have to be worth what you’re charging.

Pricing your menu by a budgeted food cost isn’t an effective method of ensuring you will collect enough money to pay the bills. You need to consider every cost of running your business including the rent, insurance, utilities, equipment, maintenance, small wares, labor, taxes and benefits to name a few. All together, the other costs of running your business make up a lot larger part of your financial picture than your food costs do. You have to estimate all these, determine how much you need from every customer to cover these, and price your menu based on all the costs of doing business, in addition to profit.

Creating a manageable menu is just the first step in rolling out a new restaurants menu. Read our article on how to roll out a new restaurant menu to get a great step by step guide on getting your menu from conception to implementation.

I hope this article gives you a couple things to think about before creating your menu. Just keep in mind that big menus equal big waste, big theft, big product costs, big ticket times, and big service issues. Less is more. A small focused menu that accurately conveys who you are and what your restaurant is about will make more money than any big menu. I only have to bet my reputation that I’m right, you may have to bet your business you’re not wrong.

“Anything worth doing, is worth paying someone else to do.”

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This is one of my favorite quotes. Maybe because I’m the one who made it up.

It could also be that I love this quote because it deals with another major reason for failure in the restaurant world, and really, in every industry. Most managers don’t know how to delegate. That is a simple, but true, observation from years of seeing managers and owners struggle to scratch out a profit (or more commonly not make a profit), while losing their personal lives to their businesses.

I messed up by not listing this as one of the biggest reasons restaurants fail in one of my best posts, The biggest mistakes restaurants make, and why they have a high failure rate. Yep, big oversight on my part.

I’m sure you’ve heard horror stories about 60, 80 or even 120 hour weeks restaurant owners are forced to work. They’re married to their businesses, and have to be there from open to close. They have to make sacrifices if they want to succeed, they can’t have hobbies or spend time with families. Their restaurants wreck their marriages and ruin their lives.

Well, I’m here to tell you that it doesn’t have to be that way. While I freely admit that long hours and no free time are the norm for independent restaurant owners, I also maintain that this scenario usually does not yield a successful, profitable restaurant. Profitable restaurants are run by owners and managers that know how to delegate. If it were mandatory for owners to be in their restaurants all the time to make them successful, multi-store chains wouldn’t exist. In reality, they thrive. Every one of those multi-store chains started out as one restaurant. Every single one of them. The difference between them, and the majority of restaurants out there, is that the people who owned them realized that they couldn’t do everything themselves if they wanted to be successful. They needed to create systems to make sure the work got done, and got done the same way every time, whether it was by them or by someone they paid to do it. Only by freeing themselves from the everyday rigors of running a restaurant were these entrepreneurs able to grow.

If you’re a restaurant owner, or a future restaurant owner, I want you to ask yourself a few questions.

  • “If I am washing dishes, who is watching the till?”
  • “If I’m cooking the food, who is building relationships with my customers?”
  • “If I am filling in for servers, who is spreading the story of my restaurant?”

You can’t spend your time performing tasks you can pay other people to do, and still have time to build your business. As an owner, marketing is the most important job you have. You have to have your time cleared to build relationships with your customers whether it’s by shaking hands, or by designing new service techniques that reinforce your unique selling point. Your time needs to be spent concentrating on ways to build communication and emotional bonds with your customers, not making the family’s “secret tomato sauce”.

If you are spending your time performing everyday tasks in your restaurant that other people could be trained to do, you are likely in the group of struggling restaurateurs that work long hours, have no social life, and are barely making a profit.

Learn to delegate. Build systems to do the things you do, so you can concentrate on the one thing that actually makes you money in your business, marketing.

Anything worth doing, is worth paying someone else to do.

The biggest mistakes restaurants make, and why they have a high failure rate

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The restaurant business is tough. Everyone in it knows it. Everyone looking to get in it ignores it.

The cold fact of the matter is that opening up a restaurant may be one of the worst investments you could make with your money. That’s a horrible, sobering statement coming from someone like me who’s in the business of helping restaurants succeed, but it’s the truth. Most restaurant fail. Oh, the failure rate isn’t the “90%” you may have heard from friends and family, but according to Cornell University, and the National Restaurant Association, 60% of restaurants fail within the first three years of operation. After five years, the number might be as high as 75%.

Uggghh!

Why the hell would anyone want to get into this business with a failure rate like that? Risk and reward my friend, risk and reward.

As with other high risk investments, opening the right kind of restaurant in the right kind of market can pay off very well financially. Some of the better chains can see average net profits approaching, and even exceeding 30% of sales. That’s a great return! While the risk of opening a restaurant is huge, the reward can also be huge. If you happen upon the right concept, and manage it well, you could see your investment paid off in 3 years or less, and have lots of residual cash flow to boot.

Certainly there has to be some sort of magic formula you can follow to make sure your restaurant gets these incredible returns, isn’t there?

Unfortunately….. no. There is no magic formula. Experienced operators have businesses go belly up every day, and just as often, novices open up with no clue of what they’re doing, and make a killing. While experience does give you a better chance of succeeding in the high risk world of restaurant ownership, I’m going to give you some points of consideration even more important than experience.

These are the top reasons why restaurants fail.

1) No unique selling point

Your customers need a reason to come to you instead of your competition. While I know you’d love to think that your food is so good that people will line up out the door to eat it, you’re mistaken, just as millions of mistaken restaurant owners before you who are now out of business.

Good/great food and/or service is NOT a unique selling point. “Isn’t that the reason people go to great restaurants?”, you ask? No, it’s not. Now, I don’t want to understate the importance of great food and service, but it isn’t the reason someone is going to try your restaurant. Having great food and/or service is not a UNIQUE selling point. While you may honestly believe that your food is better than your competition’s, I guarantee you your competition thinks the same thing, and they are telling everyone they know. This means that your profession that your food is better sounds just like the message of every one of your competition. THAT is not unique. If you don’t believe me, just step back and listen to all the other restaurants out there. They make a lot of the same claims, don’t they?

If you want to offer something truly unique, you need to move past food and service. Yes, you need to have great food and service, but by having great food and service, you are only meeting the minimum expectations of your customers. You are not giving them a reason to eat with you that your competition isn’t claiming as well. What you need is something original to sell. Something other than the best food or the best service. Your need a UNIQUE selling point.

Sonic offers “nostalgia” with their 50’s style drive-in and car hops.

Burger King offers “accomodation”. “Have it your way!” they tell you.

Applebees markets themselves as “Your favorite neighbor”. They put up local memorabilia when possible, and build in smaller towns. They use stained glass fixtures and tacky decor you might find at that old couple’s house next door.

Hooters sells “sex” with cute waitresses in tight tops and shorts.

A truly unique selling point isn’t the best food or service. It’s an emotion you offer to people, whether it be nostalgia, accomodation, sex or something else. People remember emotions long after they remember food and service. If you make a real, emotional connection with your customers, they will remember how you made them feel for decades to come, long after they forget what they ate and who waited on them. Food and service can support a unique selling point, they just can’t be a unique selling point.

2) Too large of a menu

This is a VERY common killer of independent restaurants. As an independent operator, you’ll get pressure from customers to have certain items on your menu. You’ll also have pressure to keep certain items when you make a menu change. You’ll get requests. You’ll get complaints when you change things.

You have to realize that this is all part of the process. YOU CAN NOT PLEASE EVERYONE. It’s a waste of time to even try because you’ll lose your own identity in the process.

Large menus create several problems within an operation:

  • Large menus lack focus. When you try and offer EVERYTHING your customers like, you aren’t giving them more choices and more reasons to come back, you are confusing them. They don’t know what your specialties are, what you supposedly do well, what they should order, and how to describe you to their friends. If your message is focused and easy to convey, more of your customers will convey your message.
  • Large menus take longer to order from. The more choices you have on your menu, the longer it takes each table to peruse that menu, and the longer it takes for them to order. For every minute they are NOT ordering, you are NOT making money for the seat they are occupying. Take this statement to heart if you want to be successful in the restaurant business: You will only ever be as successful as your peak period of service. 80% of revenue, and 100% of profit is made during peak periods. Anything that limits your ability to serve customers and collect money during your peak periods is limiting your potential for profit.
  • Large menus require more inventory items. The more items on your menu, the more ingredients you need to buy to make those items, and the more items you’ll have on your shelf. Every item on your shelf represents a possibility for loss. It can be stolen, it can be mishandled, mis-prepped or stored incorrectly and spoiled. The less inventory items you have, the less waste you’ll have. The less waste you have, the more profit you’ll have.
  • Large menus require more equipment and personnel to produce. The more items you have on your menu, the less opportunity your staff has to cook multiple orders at once. Less multiple orders means more burners, grill space, fryer grease, and hands are required to produce the same number of dishes. All these additional tools cost you money.
  • Large menus mean longer ticket times. When you have too many different dishes cooking at once, and less multiple orders in the same pans, it means more time to produce whatever is being ordered. Beyond the fact that Americans are no longer willing to wait 45 minutes to have their dinner prepared for them, you should be thinking about how long ticket times limit your ability to process people through your dining room. The longer it takes to serve each table, the less tables you can turn during peak periods.

It is inherent in people to assume that somehow offering people more will make you appealling to more people. It’s just not true. When you try to be all things to all people, you end up being very little to very few. People need to know what you’re about. Keep your menu focused.

3) All talent and no brains

So you can cook. Your food is fantastic, and everyone you cook for confirms it. You’re ready to open a restaurant then, aren’t you?

NO!

Not to burst your bubble, but a lot of people are excellent cooks. Many of them have original ideas and fantastic food that no one has ever offered in a restaurant before. That doesn’t make them, or you, a good candidate to open a restaurant.

Owning a restaurant isn’t about cooking. It’s not about having good food. While those things are components of a good restaurant, they are not the reason for it’s success.

Once you have the perfect menu for your market, knowledgable staff to serve your market, a trained line to reproduce your food, and plenty of booze to ply your guests with, you’re 1/3 of the way there. “WHAT?”, you say? “That’s it! I’ve got all the pieces in place! I’m ready to go!”. No, you’re 1/3 of the way there.

What most new restaurant owners don’t realize is that having good food and service is only 1/3 of the battle. The other 2/3rds include marketing their restaurant and managing their restaurant. We’ll talk about marketing after this, but managing is a very important piece to the puzzle that most new restaurant owners overlook. Beyond making good food and selling it to people, you need to know how to collect data and analyze your business to make sure you have the necessary information to run a profitable business.

You need to know:

  • How many people I’m feeding each day/shift/hour
  • What items they’re buying, and how many of each
  • What gross profit those items are contributing
  • What those items should have cost me to sell
  • What my actual cost of selling those items is
  • What my labor is compared to my budget
  • How many labor dollars I spend per sales dollar
  • How many labor hours I spend per sales dollar
  • What I purchase each day, and how to categorize each purchase for analysis
  • What my sales are compared to what they should have been
  • What my profit and loss is for EACH WEEK

That’s a lot of things to worry about, and that’s only the tip of the ice berg. There are many other managerial concerns. This is why I’m telling you that your great ideas for a menu, and incredible talent for cooking will only get you 1/3 of the way to operating a successful restaurant.

4) Poor pricing strategy

Strategy? Yes, strategy. You need to have a method for pricing your menu. You can’t just look at what everyone else is charging, and charge the same. The financial picture of your business is different than every other business out there, and you need to have a pricing strategy that takes your unique financial situation into account.

When considering pricing strategy, I first need to tell you what is being done out there now, in restaurants all over the country, even the world, because the point of this article is to tell you what mistakes everyone else is making.

The predominant method to pricing menus in the food service industry is to use a budgeted cost percentage to formulate prices that will yield that budgeted percentage when the sale of all your different items is taken into account. This method assumes that if you sell X dollars of food, and Y percentage of those dollars go to pay for the food, then you will get Z profit.

The major problem with this pricing method is that most operating expenses within a restaurant do not fluctuate as a percentage of sales. The rent of a restaurant is not always 5% of sales. If sales are down, the percentage goes up, if sales are up, the percentage goes down. Simply achieving a target food cost percentage does not guarantee that a restaurant will make the profit they priced for.

The common sense alternative to pricing by a target percentage is pricing according to the markup you need to cover the expense of doing business, leaving you with a profit you find acceptable. This method is called pricing by gross profit dollars. The basic principle of this method states that you can assume, through calculation, how much every person that walks through your door will cost you to serve, and that with this number you can price your menu to yield an average gross profit greater than the cost necessary to serve every person who walks through your door, in addition to your needed profit. Adjusting these prices according to market price points yields a gross profit that will cover your operating costs, your product costs, and the profit that you decide you need to make for this venture to be worth your time.

Pricing by gross profit is the only method of pricing that takes into account every cost of operating a business, including profit.

5) No marketing skill

This may be the biggest restaurant killer of them all. I’ve talked to hundreds of restaurant owners in my day. I have yet to meet ONE that didn’t underestimate the importance of marketing. As I stated earlier, marketing is 1/3 of the reason you succeed or fail. I may even have to give marketing the extra 1% of the 100% possible when splitting reasons for success into 1/3rds, and say that it is even more important than good food and service, or management skill.

If I have a catch phrase about marketing, it’s this:

“No matter how great your food is, if no one knows, it won’t sell.”

The worst fallacy I see new restaurant owners buy into, is that they can market their new restaurant through “word of mouth”.

Yes, word of mouth marketing is fantastic. New customers are more likely to act on the recommendation of a past customer than they are an ad by you. That much is true.

The problem with assuming word of mouth marketing is going to make throngs of people do the Tennessee Waltz through your door is that when you’re new, NO ONE KNOWS ABOUT YOU! You CAN’T depend on word of mouth marketing until you’re established!

For this reason, a marketing program driven by “word of mouth” marketing for a startup restaurant is a recipe for failure. You need a better plan.

While I won’t go into great detail as to what that plan should include in this post (you can certainly pay me to tell you though), I will tell you that the absolute best marketing tactic you can employ in any retail business or restaurant, is to gather contact information from EVERY person that comes through your door, and market to them. Marketing to existing customers represents an exponentially greater opportunity for increased sales than spending dollars trying to reach new customers. These existing customers are a better source for new customers than any marketing method out there targetting people who haven’t been in your restaurant and aren’t already familiar with your product.

6) Bad negotiation skills

Most new restaurant owners don’t know what they SHOULD be paying for the services necessary to successfully operate a restaurant. That’s a problem.

Every vendor out there, whether they be a food distribution company, point of sale software provider, chemical company, paper goods, linen, liquor, beer or wine distributor, or a credit card processor, has clients who get great deals, and clients who get taken advantage of.

Normally, the difference between a vendor giving you a good purchase rate, and taking advantage of you, is your knowledge of the goods your buying, and what other people are paying for them.

Two thing are a given in negotiating a purchase contract:

  1. If you don’t know what other people are paying for the same goods you’re buying, you’re not getting the best price
  2. If you aren’t making your purveyors COMPETE for your business, you aren’t getting the best price

While there are other negotiation tactics to consider when trying to get premium pricing from a vendor, these two are the most important to remember.

Know this. There is a sucker in every negotiation. If you don’t know who that sucker is, it’s you.

I realize there are other important factors to operating a successful restaurant. These are the six that immediately come to mind while writing this article. I see these six problems in most restaurants and food service ventures I see fail. Keep these six in mind, and maybe, just maybe, you won’t become one of the majority of restaurant owners that fail.

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

Do’s and don’ts for startup restaurants – vol. 2

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Do:
Concentrate your marketing efforts and dollars on people who already know you.

Don’t:
Try to be all things to all people. Find your niche.

Do:
Incorporate a few “signature” items into your menu. Having items that your competitors don’t have gives your customers a reason to come to you instead of them.

Don’t:
Depend solely on word of mouth marketing. Word of mouth marketing only works AFTER a lot of people know who you are.

Do:
Update your prices at least 3 times per year. Small, incremental price increases are likely to go unseen by your customers. Wait too long, and you’ll have to significantly increase all your prices at once, which WILL be noticed. Those frequent small increases are better for cash flow than occasional big increases.

In a chain restaurant, will a unit that has skewed product sales towards higher food cost menu items have a higher food cost?

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Yes, more sales of higher food cost items will yield a higher overall food cost. That doesn’t mean that it’s a bad thing though. A low food cost isn’t what makes you profitable. A high gross profit is, meaning that making $4 gross profit on a $7 sales is better than making $3 gross profit on a $4 sale, even though the food cost for the first instance is higher (43%) than the second instance (25%). No matter the food cost, making $4 is better than making $3. The only exception would be if that $7 item resulted in significantly higher expenses or labor that ate up that extra $1 in gross profit, which isn’t likely.

You CAN’T use food cost percentage as a factor in pricing out your menu, or deciding what items you’d like to sell. Food cost percentages are a management tool, not a pricing or strategic tool. You want a product sales mix that yields you the most gross profit, despite the food cost.

What food cost percentages ARE important for, are to help give you a first line of defense in stopping theft and waste, but to go along with your actual food costs, you have to have ideal food costs to compare them too. If you don’t figure what your food costs SHOULD have been, you have no idea if a high food cost is bad because of theft or waste, or good because your sales mix has changed to higher cost, higher gross profit menu items. High food costs alone don’t mean there is a a problem. They could mean just the opposite. Start a system for figuring ideal food costs, so you can compare your actuals to them to know if there is really a problem, or if your product sales mix has changed.