Your restaurant serves great food, you’re based in a brilliant location and customers are consistently coming through your door, so what could go wrong? Perhaps more importantly, ask yourself: is there something else you could be doing right? This is where restaurant metrics come in.
Restaurant operators often miss out on valuable insights and opportunities by running restaurants based solely on intuition. While great experience and industry knowledge is invaluable, if the only metric you use in planning out your restaurant strategy is your break-even point, there’s a lot of scope for improvement! Today we’re talking about the importance of six different restaurant metrics you really ought to know and how you can calculate them.
Food cost percentage
Food cost percentage is a commonly used restaurant metric and it’s fairly simple to calculate. Your aim is to work out the percentage of an item’s menu price taken up by the cost of the food required to make the dish.
Many restaurant operators try to run food cost percentage at 30% or lower. By doing so, you can be fairly confident that the costs of running your restaurant are covered off within your prices. However, aiming for a fixed percentage cost is not necessarily the best way to determine your menu prices.
If you become too fixated on meeting a 30% percentage target you could find that your dishes aren’t priced competitively. You might also attempt to cut corners with ingredients to decrease the food percentage cost and find that the popularity of a dish – and thus how much money it makes – decreases as a result.
How to calculate food cost percentage
To calculate the food cost percentage of a dish you find the cost of a single serving and work out what percentage of the item’s menu cost it accounts for.
For a bowl of soup the food cost percentage = cost of all ingredients / soup sale price
If the food cost for one serving = 92c and the sale price is $4.95 the food cost percentage = 18.5%, which incidentally, is why soup is frequently considered to be one of the most profitable menu items for restaurants.
When it comes to working out which dishes on your menu are profitable, food cost percentage is a great place to start, but calculating an item’s contribution margin can give you more valuable information to process. When you know the contribution margin of a dish, you can look at ways to push the best and worst performing items on your menu and even stage an informed menu refresh or reshuffle. So, what is this metric and how do you calculate it?
We’ve written before about how to use contribution margin to increase profits and strongly recommend reading the full post to get the most out of this metric. For now, you should know that the contribution margin is the amount of money each dish puts in your cash register.
This is useful because a dish with a high food percentage cost has the potential to earn you more money overall than a dish with a low food percentage cost, depending on how it sells. To work out an item’s contribution margin, you’ll want to know how often the dish sells in a fixed period (say a month) along with the food percentage cost to give you the net number of dollars the dish puts in the register over that period.
Let’s take a look at the cost of salmon linguine to see how this works…
The formula this metric is: Food Cost / Total Sales = Food Cost Percentage
or for example: Salmon Linguine % = Cost of all the ingredients / Sale price
$4.72 food cost / $17.95 sale price = 26.63% food cost
That looks like a dish that’s performing pretty well, right? What about if we compare it with a dish that has a higher food cost percentage?
The steak dish for example sells for $44.95 and has a food cost percentage of 35.6%, so for every steak sold you put $28.95 in the register compared to $13.17 for each salmon linguine. The steak has a higher food cost percentage but every sale of the dish earns you more in the register and looking at sales you note it sells more frequently than the salmon linguine, so it’s a better earner. It’s easy to see that knowing your contribution margins can give you direction on dishes to ditch, tweak or push.
Labor and prime costs
When costs such as rent or utilities increase, restaurant owners will often look to a metric known as the prime costs to make savings. The labor and prime cost is a changeable expense. It combines the total food costs and labor costs, and of course, the lower this is as a percentage of your turnover, the higher your profits will be.
Traditionally, restaurant owners have aimed to run prime costs at around 60% of turnover or less. If you need to increase profits, you may consider negotiating with food suppliers to decrease the cost of food, find cheaper alternatives or look to make savings on labor. At the opposite end of the equation, when food costs increase or legislation impacts things like the minimum wage or benefits you are required to pay to staff, it impacts on this metric.
To calculate this metric you must add the total cost of sold goods over a fixed period to your total labor cost, including benefits i.e. Prime cost = Labor + CoG
The Cost of Goods is calculated by taking an inventory at the start of the period, adding all purchases for the duration then deducting the inventory left at the close of the period.
Labor = Total Salaries + Total Hourly + Tax + Benefits + Holiday Accrual + Maternity/Adoption Pay + Sickness Pay + Medical etc.
Average cover spend per Server
Do you have a star server who’s great at pushing add-ons like sides, desserts and drinks? Maybe you suspect certain staff are underperforming and would like to give them some pointers on customer service and upselling? Working out your average cover spend per server can prove a great tool to help guide training and assess performance.
A server who is consistently achieving high cover spends is likely to have good menu knowledge and have a trick or two up their sleeves when it comes to pushing up check totals. Once identified, you might ask these star players to share their wisdom among the wider team and call upon them to help train new staff.
You may even want to buddy them up with someone who is totaling lower than average cover spends to help boost performance. And, if you have a few servers who seem to be underperforming, you’ll want to avoid scheduling them to work at the same time or you could see profits dip.
It is possible to monitor this metric by sorting POS totals for each server at the end of day and keeping a spreadsheet over a fixed period (say a month) then dividing the total sales by total covers. Of course, you may have some staff that work only on busier weekend days or those who work at quieter times. This is where the server management and report and analytics features of the eat app can make your life easier.
Overhead rates are often known as indirect costs. The term covers things like rent, utilities, business rates and use of tech. You will likely already have an idea of what these cost your business on a monthly basis, but do you know how costs break down to a daily or hourly rate?
It’s useful to know these figures as they can help you to determine profitable opening hours or help set the cost of things like private hire for events. At the most basic level, knowing your overhead rates will help you to set profitable menu prices by helping you to ensure the costs are covered off within your menu items.
If your overhead rates start to run higher than your takings during that opening period, you know there’s something amiss. Overhead rates are often described as ‘fixed’ costs because they stay the same long term. However, if you need to increase profitability, you may want to look at taking action such as renegotiating your rent or perhaps even changing premises.
To work out your overhead rate you need to work with the number of hours you are open over the course of a month and the combined indirect costs for that time.
The equation for overhead rate is:
Total Indirect (Fixed) Costs / Total Amount of Hours Open = Overhead Rate
For example: $10000 cost / 11am-11pm, 31 days in month 372hrs = $26.88 per hour
The daily and hourly overhead rate in a shorter month would therefore be slightly higher.
Percentage of repeat customers + average customer lifetime value
We all know customer loyalty is an important metric, but wouldn’t you like to have a measure of just how important it is for your business? According to research, returning customers account for up 51% revenue fine dining restaurants and 63% of visitors to family dining establishments.
Learn more about fine dining restaurant marketing.
Knowing the percentage of repeat customers who make up your own clientele gives you a good measure of how you’re living up to your diners’ expectations. If only a low percentage of guests are returning, you’ll want to look at the reasons why you’re not winning more customer loyalty.
Whether your restaurant is newly launched or established, improving your customer retention rate is a great goal to work towards and knowing the average lifetime value of a customer can be a great driver. If you can work out how much the average customer spends with you over their total visits with you, this can be useful for profit projections and give you a steer on how much you should spend on marketing. Knowing how much on average a customer spends with you will give you a steer on how much to spend on winning a new customer and help you to budget for incentives to turn new diners into repeat customers too.
If you write your bookings down on paper in a book, these metrics might prove rather tricky for you to unravel. Luckily, users of our reservation system can rely on our customer profiling to track customer visits and spending. The app can even help you to identify where you might be outperforming competitors by showing you what repeat customers are ordering. Perhaps a signature dish on your menu is establishing you as a firm favorite in the neighborhood or your gluten free chocolate cake has won you loyalty with allergy suffering customers? These kinds of insights may in turn lead you to consider additions or tweaks to your menu to cement your standing further.
How many of these metrics are you currently using for the benefit of your restaurant? Is it time you got a grip on a few extra figures.