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Restaurant Profit Margin: What Is a Good Profit Margin?

September 29, 2020
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Joshua Weatherwax
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What is a restaurant without a good profit margin? Failing, most likely.

Unfortunately, this is the very scenario that many restaurants find themselves in. You can't run a successful restaurant without a healthy profit margin. But, what is a good restaurant profit margin and how do you get one?

We'll help you understand restaurant profit margins and share some ways to improve yours. Follow this guide and get on the path to greater restaurant sales and bar profitability.

How Much Do Restaurant Owners Make?

On average, restaurant owners make between $30,000 and $155,000 a year. The restaurant size, type, location, and other factors impact the restaurant owner's salary. For example, the owners of a high-end eatery in New York and a dive bar in Alabama will see very different salaries. As a rule of thumb, the owner of a restaurant usually takes less than 50% of the annual profit.

How Much Money Does a Restaurant Make?

The average monthly revenue for a new restaurant under 12 months old is $112,000. New restaurants cost between $95,000 and $2 million to open, so this revenue is often not enough to turn a profit. Revenue also varies greatly depending on the size of a restaurant, location, and concept. Look at restaurants of similar size and geographic location to get more insight into your restaurant's revenue.

Are Restaurants Profitable?

Yes, restaurants are profitable, but they have low profit margins. Profitability depends on many factors including the size and type of restaurant, as well as economic ones. It takes an average of two years for a new restaurant to turn a profit. Unfortunately, 90% of all restaurants fail within the first five years. This is due to a lack of funding or planning for the slower first few years.

Average Restaurant Income

The average restaurant makes around $112,000 each month in its first year. This may be higher or lower for your business, but is ideally at least 2%-6% higher than your total expenses.

Average Restaurant Profit

Profit varies by restaurant, but the average restaurant makes 2%-6% more than it spends. Restaurants with lower overhead or startup costs can see larger profits, but there are many factors that influence this. Geographic location has a major impact as buying habits, competitor pricing, and cost of living vary greatly. Knowing your business and the area it's in are paramount in achieving a profit. Concept also matters as a martini bar and dive bar have different intended customers and their prices match those customers.

Average Restaurant Profit Margin

The average restaurant profit margin is 2-6%. Profit margins in the restaurant industry are notoriously low. Taking steps to keep this number stable or growing is necessary for a restaurant's long-term survival.

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How Do Restaurants Make Money?

Like all businesses, restaurants make money by selling more in product than they spend. This requires keeping prices high enough to more than cover the cost of goods sold and labor costs. Together they make up a restaurant’s prime cost which gives you a figure to target when optimizing profit. 

The key to running a profitable restaurant lies in proper inventory management. Calculating inventory variance helps eliminate waste, track unused ingredients, and maximize profit.

Most Profitable Restaurants

Some types of restaurants are more profitable than others. Here are five of the most profitable types of restaurants and what makes them successful.

  • Bars. In the restaurant industry, there's no business with higher margins than bars. This is because the markup on alcoholic beverages is much higher than on food. Beverages see a profit margin of 60-70%. Bar owners use their pour cost to determine optimal alcohol pricing and maximize profit. Wine profits are also higher than most other beverages.
  • Diners. Breakfast places are one of the few types of restaurants that continues to see increased traffic. Millennials may shun other eateries, but diners seem to be immune. Even better, the ingredient cost for breakfast food is very low allowing for greater profit margins.
  • Food Trucks. Food trucks have low overhead since they don't pay rent. They also have limited menus which help keep food cost low.
  • Delivery-only. With no dine-in or takeout options, these virtual restaurants keep overhead very low. More restaurants than ever are taking this approach, particularly in big cities where real estate is at a premium.
  • Pizzerias. There's a reason most cities have a pizza place on every block. Demand for pizza has always been high in the U.S. and the ingredients for pizza are fairly simple and low-cost.

How to Increase Restaurant Profits

There are many ways to increase your restaurant profit margin. Here are some steps you can take without risking losing customers.

  • Rework recipes. If your ingredient costs are high, take a look at what goes into each dish. Cheaper ingredients are often as tasty as their expensive counterparts and can increase your profit per plate.
  • Shrink the menu. Menus become bloated over time. Look at what you offer and what actually sells. If there's a large gap, it's time to cut some offerings and increase profit. This is called menu engineering and all restaurants should do it regularly to avoid large menus.
  • Upsell as often as possible. Make sure your employees are properly trained in upselling techniques. When multiple customers are convinced to buy more expensive food and drink, the profits add up quickly.
  • Start a loyalty program. Regular customers like to feel like they matter to your business. A loyalty program makes them feel more engaged and thus more likely to continue coming back.
  • Put the customer first. This should be obvious, but treating your customers well pays dividends. Studies show that satisfied customers are more willing to pay higher prices than customers who felt that service was just okay. Treat each customer like they're the most important and you'll see a great return.
  • Try specials. Push dishes that have higher margins or that use ingredients that you have too much of. You can do the same with drinks and offer a happy hour.
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Watch the Money Flow In

Now that you've got a better grasp on restaurant profit margins, you can make smarter moves to maximize yours. Whether you own a 50-seat Italian restaurant or a small food truck, optimizing your profit margin is the key to success. You can try new bar promotions, changing recipes, and giving the best service. You can also adjust your beer pricing, wine bottle pricing, and wine by the glass pricing. These are all great ways to increase the bottom line and set you apart from your competitors.

Staying on top of inventory is also a vital part of maintaining your profit margin. BinWise can take the guesswork out and get you back to driving profits.