Restaurant profit margins: How to scale vs. grow your restaurant business

If “vs.” in the title threw you, you’re not alone.

Crocodile and alligator. Cyclone and tornado. Guarantee and warranty … The list goes on. There are lots of words we use interchangeably when in reality they mean different things. “Scale” and “grow” are no exception, and the same is true for “revenue” and “profit.”

If you're still skeptical, here’s what we mean: It’s possible to grow without scaling and increase revenue without boosting profitability. It all comes down to how the cost of doing business affects your profit margins. If you’re still scratching your head, it’s all about to become clear.

In this blog, we’ll explore:

Ready to boost your bottom line? Let’s get started!

What is my restaurant profit margin and how do I calculate it?

If you have higher profit margins, that likely means your revenue is high and costs are low, reflecting a robust total sales volume and efficient operations — particularly when it comes to minimizing waste and optimizing staffing levels.

Different types of profit margins give you a more nuanced look into your business. Let’s get into how to calculate them and find out what they’re trying to tell you.

Gross profit margin

Gross profit margin often shows whether you’re selling enough of your product at a price point high enough to generate a profit. If your gross profit margin is slim, it’s possible that your product is expensive to produce relative to the amount of money you make from it. Here’s how to calculate it:

While gross profit margin can be a helpful measurement for investors and analysts, it’s not particularly useful on its own. It’s important to look at additional metrics to get the whole picture.

Operating profit margin

Here’s the formula:

In addition to understanding how well your products are priced or how robust your sales are, operating profit margin can help you understand how efficiently your business is running. If your operating profit margin is slim, it’s possible your operating costs are high and another look at your budget might be in order.

Net profit margin

Here’s how to calculate it:

You’ve probably noticed that each formula calculates a percentage instead of a dollar amount. That’s because a percentage makes it easier to:

• Make more informed decisions: Sometimes dollar amounts look good on paper but don’t necessarily provide the context you need. For example, a $75,000 profit may seem like a success. But if that dollar amount represents a profit margin of just 2%, a mere 1% jump in costs could put you at risk of going into the red.

• Measure your profitability against industry benchmarks: Since industry performance indicators are expressed as percentages, understanding your profitability as a percentage will make it easier to see where you stand in relation to your peers. Speaking of which …

What’s the average restaurant profit margin?

While there’s no single golden number, the average restaurant profit margin ranges from 5-10%. There are multiple factors that influence that average, including the type or types of restaurants you run:

If your profit margin doesn’t fall within the typical average, don’t worry. While restaurant industry averages can act as a guidepost, they aren’t necessarily the final word in performance. Different types of restaurants don’t always fit the same formula, and depending on your business model, your profit margins might look different.

For example, a healthy profit margin for a single mom-and-pop QSR may be too small for a larger FSR group relying on cash flow for expansion. That’s why understanding benchmarks alone isn’t enough. It’s also important to work with an attorney or accountant to decide what margins and goals are right for you.

Why are restaurant profit margins so low?

It’s no secret that restaurants come with a lot of operational and overhead expenses, many of which are variable and hard to control (we’re looking at you, food costs). This makes high profit margins difficult to attain.

For starters, springing for quality ingredients is crucial to delivering great food that will keep customers coming back for more. Real estate is another costly line item, no matter how lean your operation may be — even ghost kitchens need space to work. Add the overhead costs of buying professional equipment and fixing it fast — a broken freezer or walk-in cooler isn’t a repair that can wait until the weekend coffers are full —and you’ve got an expensive month on your hands.

To afford your growing spend column, your menu prices have to be competitive, and there’s a lot of competition in food service with no signs of slowing down. According to the National Restaurant Association, 45% of restaurateurs expect more intense competition in the future.

Ready for the good news? Any restaurant owner, including you, can take simple steps to increase their profit margins. One way to get there is through scaling your business.

Scaling vs. growing: What’s the difference?

Let’s say you have a diner with a profit margin of 6%. You’re ready to open another location (congrats!) but want to make a few changes the second time around. Changes like implementing a dining room designed to help servers take fewer steps, adopting a mobile POS to help increase table turnover rates and nixing slow-selling menu items that are expensive to make. After implementing these ideas, your second location boasts a profit margin of 8%.

You’ve spent less than you normally do to generate a specific amount of revenue. You’ve scaled your business.

Let’s say you open a second location that operates identically to the first and turns a profit margin of 6%. You’ve managed to grow your business and your revenue, but not your profitability. It costs just as much to turn a specific profit at your second location as it does the first.

Now that we know scaling grows your profit margin, let’s get into actionable ways to do just that.

How to scale your restaurant: 6 tactics

The simplest method? Increase revenue and cut expenses. We know — that’s a lot easier said than done. Read on for six ideas to help you get started.

1. Train your team to upsell and cross-sell

While it’s far from a new trick, it is one that’s well worth mentioning: Training your team to make recommendations is one of the quickest and simplest ways to start boosting revenue. Whether it’s sharing how a side of maple bacon goes perfectly with the buttermilk pancakes or why the large queso is a better deal than the small, guests will appreciate smart suggestions that enhance their dining experience. And most importantly, your average ticket value will increase.

Even better? The right POS system can equip your team with insights that will make upselling and cross-selling easier. With data at their fingertips on which items are sold most frequently together — and even who purchases them most often — your team will be empowered to tailor menu suggestions and special offers in real time.

2. Drive repeat business through rewards and loyalty programs

Here’s a fact you might not know: You need to get a new customer to dine at your establishment four times before it joins their shortlist of places to eat. As for your current loyalists, you want to 1) shorten the interval between visits and 2) incentivize them to spend more when they come in. Building a successful reward and loyalty program is the key to inspiring new regulars and keeping your old ones.

If that sounds intimidating, it’s easier than you might think. You can create a loyalty program using data that gives you a window into who your customers are and what their preferences might be.

How? A powerful restaurant POS system keeps track of customers who place similar orders each time they dine with you. It also shares data on how frequently diners visit and how much they tend to spend.

Knowledge is power — especially when it comes to your customers. With more of it at your disposal, you can target premium customers with personalized loyalty rewards to bring them back more often. You’ll also be equipped to lure in less frequent visitors with discounts on popular or new items. It all comes down to data.

3. Reach more customers with online ordering

If your restaurant isn’t online, you’re missing out on some serious dough (pun intended). But don’t just take our word for it: The digital food delivery market is worth $14 billion in Canada and a whopping $352 billion in the US.

Inviting guests to place orders through your website or app — or even a third-party delivery service like DoorDash or UberEats — can help boost your reach and sales without increasing your restaurant’s footprint or adding additional employees.

Your kitchen staff is already on, but there’s no need for a hostess to seat those takeout/delivery guests or for servers to tend to them. Online ordering is all but human-free — and a valuable new revenue center you can easily add to your restaurant.

The right POS system makes it simple to develop a user-friendly online ordering system on your website or through a mobile app and partner with popular third-party delivery services. Don’t forget to apply the upsell/cross-sell tactic to your online offering too, so you can automatically suggest additional items or upgrades during the digital ordering experience. Crave-worthy images of recommended beverages, sides and desserts that complement the main dish? Your online customer won’t be able to resist.

4. Consider a hybrid business model

Want to increase sales but don't want to increase your labor costs? You might consider adopting a hybrid business model. If you’re not familiar, a hybrid approach allows restaurants to operate differently based on their most profitable times of day.

Let’s say traffic is steady during lunch and dinner but drops off later in the evening. Instead of staying open to capture any night owls that happen to drop by, you could choose to stop dine-in service at 9 pm, keep the kitchen staff on and let your online ordering system accept takeout orders until midnight. Now, you can cash in on late-night customers searching for quick and easy meals to curb their cravings — without paying more staff to do so.

A hybrid model also gives you the freedom to make strategic, operational changes that cut down your reliance on labor, reduce food waste and spoilage, and capture customers you may not have otherwise been able to reach with your existing model.

With a wide range of ways to order and dine as part of the hybrid model, you’ll also need to offer customers various ways to pay. Be sure to look for a payments provider that offers both in-person and online payments so you never miss a sale whether it’s your full A-team roster on the floor or your late-night skeleton crew.

5. Streamline processes from front to back of house

Fewer steps = better customer experience and more loyal customers. One way to achieve that is rethinking your layout to improve your capacity to serve more guests per shift while reducing customer wait times.

Consider taking a page from Chef Kevin Lee’s playbook: The designated area to drop dirty dishes is right where you enter the kitchen, so servers can ditch empties immediately, then hit the server station where they can refill sodas or ice. After empties and refills, on the way toward the kitchen exit (a different door), they can pick up new dishes or takeout boxes before heading out to the dining room. That’s more speed and less traffic.

If redesigning your floor plan isn’t in the cards at the moment, a mobile point of sale system can work wonders in helping front-of-house staff turn more tables in fewer steps. No more time-consuming pileups at the shared server station — they’ll be free to roam from table to table without interruption.

For your back of house, a kitchen display system (KDS) can enhance kitchen efficiency — keeping guests happy, staff from getting burnt out and operations running smoothly, even if you’re relying on a lean team. A POS with a KDS helps automate the timing of orders going into the kitchen, optimizing the sequence of prep work, cooking and plating. While these process changes might seem small, they’re the key to empowering your restaurant to do more with less.

6. Adopt an integrated solution

When faced with choosing restaurant technology, it’s tempting to select various best-in-class platforms for each area of the business. But cobbling together disconnected solutions that were never designed to work with other systems can actually cause inefficiencies that erode your profitability — the very problem you adopted tech to solve.

There’s a better way. Look for integrated restaurant management solutions with flexible applications designed to serve single- or multi-location businesses, wherever you operate: online, offline, onsite, on the go, curbside or tableside.

The bottom line? Secure, comprehensive solutions will enhance the customer experience and simplify how your restaurant runs, protecting your profitability and priming you to scale.

How Heartland can help

If you’re in the market for payments and POS technology that boosts efficiency and provides service you can count on, we’ve got you. Heartland’s battle-tested solutions include the tools you need to scale: self-service kiosks, tableside ordering and payments, and mobile and online ordering with intuitive order balancing — it’s all here.

Our modern restaurant POS systems come with flexible hardware configurations, powerful software and 130+ integrations designed to help you supercharge your restaurant operations. And that’s not all:

• Get in-depth, real-time data and custom reporting to help improve your menu, promotions and staffing

• Tap into built-in customer loyalty and intelligence features to improve service and encourage repeat visits

• Count on 24/7 support via text, chat, email or phone, so you can get the answers you need when you need them

• And so much more

Whether you decide to grow or scale, technology that’s flexible enough to keep up can help you improve efficiency and profitability. Interested in hearing more about how Heartland can help your restaurant business? Tell us a bit about it and we’ll provide personalized software and hardware recommendations to fit you best.

Disclaimer: The information provided in this document does not, and is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Information provided may not constitute the most up-to-date legal or other information, and readers of this information should contact their attorney to obtain advice with respect to any particular legal matter, in the relevant jurisdiction. All liability with respect to actions taken or not taken based on the contents here are hereby expressly disclaimed. All trademarks and service marks contained herein are the sole and exclusive property of their respective owners.

---

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us