Menu Engineering: Profit Margin and Mix

Menu Engineering: Profit Margin and Mix

Your menu may be the single most profitable piece of your business.  Have you thought carefully about what’s on it? By thoroughly assessing the profit, cost and popularity of your menu offerings, you may discover that you could be running a leaner operation with far fatter revenues.

Trim it down

Streamlining is the first step in determining how effective the heart and soul of your restaurant—its menu—really is. It’s likely that 20% to 30% of your menu may not even need to be there—items that may be losing you money and costing you extra to inventory the ingredients for. How do you find out what can go? Welcome to the science and art of menu engineering.

Assessing profit

The first steps in menu engineering are analyzing the gross profit and the popularity or “mix” of the items on your menu.  There are several approaches to how this can be done. For larger menus, start with a single section first; for smaller menus, begin with what you consider to be the menu’s top 10 items. Whatever your breakdown, carefully track food costs and sales for these items over a one-month period, using whatever method you can keep up with consistently. There are a number of software options for tracking that we’ll address in future articles.

Your gross profit margin for each item will be its sales price minus its food costs. For some difficult dishes, labor cost might also need to be factored in to determine profitability.

What’s in the mix?

Now look at how popular the items in your sample are. Their ranking is the “mix” in our analysis, a measure that will determine what an item’s overall contribution is to the restaurant’s revenue.  In menu engineering parlance, a popular item that delivers a high profit margin is generally known as a “star”, while a menu item that doesn’t sell many units and has a low profit margin is a “dog”. There are items in between, known as “workhorses” and “challenges”.

Increasing performance
Take a good look at your menu mix. For the time being, the stars should probably be left alone—they’re already performing well. Though, we’ll come back to these and test small increases.  But the dogs need to be addressed immediately. Can you increase the profitability of these deadbeat dishes by increasing their price or decreasing their cost? It’s worth a try. But if you experiment briefly with tweaking either of these variables with no success, let the dogs go.

Now on to the less cut-and-dried categories on the menu: the workhorse and the challenge. The workhorse items are fairly popular, but need a higher profit margin. The first task is to see if there is a way to reduce the dish’s cost, without ruining what customers like about it. Sometimes, that’s a matter of substituting a lower-priced ingredient—a different cheese or a less expensive cut of meat. Here’s where the art of your chef will make the difference in how happy your customers will be with the change. Or you could opt to raise the price of the dish. We’ll address pricing and how dish naming, menu placement and competition can affect it in upcoming articles.

The challenges on your menu could become stars or dogs, so roll up your sleeves for some experimentation. At present, these are items that are profitable but not very popular. You could change the way the dish is prepared, plated or named, or create a whole new dish, which may make the core ingredients more appealing.

When it comes to streamlining your menu and increasing the star quality of your dishes, get ready to be creative and ruthless. With the first steps of menu engineering, you’ll know where your cost margins and mix stand, so be realistic about the underperformers and prepare to cut the dead weight immediately and lower costs or increase prices on the dishes that could be perform better.

Check back soon for more in our Menu Engineering series.

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