RestaurantSentry.com Blog

Lowering Menu Item Costs

2012-01-09T10:32:00.000-07:00

I had a former co-worker of mine ask me if I thought lower beer prices would bring in more business. I responded "More business yes, but more business does not necessarily mean more money." What do I mean? Let me give you an example.
Let's say you currently are selling 24 ounce draft beers for $4. You sell an average of 800 a week or $3,200 gross sales. You also have an ideal cost of 83 cents per drink or 800 * .83 is $664. So you have a gross profit of $3,200 -$664 or $2,536.
In order to increase business, you decide to lower the price to $3 instead of $4. Now you make $2.17 per beer. In order to make the SAME amount of money that you were making before ($2,536), you need to sell 1169 ($2,536 / $2.17) beers. That is nearly 400 more a week to make the same amount. That doesn't include the extra labor, cleaning supplies, broken glasses, or any other expenses that would increase relative to selling more product.
Now lowering costs that much might not be what you want to do. Maybe you want to just lower the price to $3.75. So now you have a gross profit per beer of $2.92. To make the same amount of money, you need to sell 869 ($2,536 / $2.92). That is a 9% increase in sales to break even by lowering the price by a quarter. So in order to make it worth while, I would say you want a 30% increase in sales. So do you think lowering your beer price by a quarter would sell you 240 (800 * 30%) more beers? I think you would have trouble getting to the break even point. If you are lowering prices to bring in new customers or increase your customer base spending habits, I don't think lowering the price a quarter is going to inspire customers to create a facebook post or twitter message saying "Check out the new prices at XYZ Pub!".
Now what about bringing in new customers? Well that is the variable that can't be easily calculated. There are many questions which require an answer. What kind of clientele are you targeting? Will lowering prices bring in that type of customer? Will those new customers purchase other items that you are selling? Thinking about the questions could help you "hypothesize" about what additional sales you could expect.
Before you lower prices, I have given you a few things to think about. I also find that lowering prices doesn't really effect your current volume unless there is a drastic price reduction. In my opinion, the best way to increase your bottom line is to intice your current customers to spend more. Offer loyalty discounts, customer appreciation days, birthday clubs, email newsletters, reward customers for liking you on facebook or weekly/monthly drawings for prizes. Make sure you know you costs by using restaurant inventory software to track changes to your menu items.

Vendor Bidding

2011-09-06T18:17:00.000-06:00

For people looking to immediatly reduce costs, having vendors bid against each other could help. Some vendors just happen to get items at a cheaper price. Maybe they buy larger quantities of a certain item, or the buyer has a cousin at the food producer and negotiated a better deal, or there could be many other reasons.
What do you need to take advantage of this? Well you need to have vendors keep you up-to-date with their latest pricing. Then you need to keep track of the price changes. You could use a spreadsheet to help you but you will still have to find a way to maintain them by getting the information from each vendor then importing that data into your spreadsheet. There is restaurant management software to help you accomplish this. For instance, RestaurantSentry.com allows you to set an items purchase method to "best price" allowing you to generate purchase orders based on finding which vendor is charging you less and then order from that vendor. In addition, RestaurantSentry.com has a module to update a vendors pricing in one screen. It can even send a link to a vendor's e-mail and have them manually fill in the information for you. When the pricing is updated, you can order against all your vendors and get the best deal available.

What are advantages to this approach? If one vendor raises prices on an item, you just buy from a less expensive vendor. Be careful not to have too many vendors because this could effect the margin that you get from your vendors (more on that later).

How much will you save? That varies for every restaurant. Give the vendor a list of items and have him put in his best price and you could expect to see a 3-5% different in food cost. If your current vendor isn't giving you a competitive price, the savings could be more.

What are the disadvantages? The first is more work. The more vendors you have, the more checks you have to write, the more phone calls you have to make, and the more purchase orders you have to track.
The second disadvantage is that sometimes having a primary vendor that you do most of your ordering from could be more cost effective. Many of the large vendors work on margins. If they can make more on you by lowering prices they will. For instance, if you spend $50,000 with a vendor with a margin of 20%, they would make $10,000 on you. If they change the margin to 10% to get all your business, and now you spend $150,000, they now make $15,000 on you.

They only way to know what works is to try it. If you go with a primary vendor or bid accross multiple vendors you should still watch your costs. Having a price change report can help you with that. RestaurantSentry.com has that built in so monitoring these prices is a couple of clicks away. I would recommend that every quarter or so, you reach out to new vendors and give them an opportunity to win your business.

Good luck!

Menu Pricing Changes

2011-07-30T14:20:00.006-06:00

So you have had the same prices for 3 years and you know your costs have gone up. Do you raise your prices or keep them the same?

First thing that you NEED to do is get your plate costs figured out. If you don't know your plate costs, how could you possibly put a price on your menu? So take the time to figure that out first. Either use spreadsheets or restaurant management software.

Another factor you will want find out is your competitors' pricing. If you are selling a half pound burger with fries for 7.99 and down the street someone is selling the same type of burger with fries for 5.99, you might lose customers raising prices, unless your quality of ingredients warrants the price difference.

Normally plate cost is between 25 and 40 percent of your menu prices. There are always exceptions to this as well as many reasons why you would pick 25 or 40 percent. I advise people to try and keep their lease/rent around 8 to 10 percent of their net sales. So if your lease is 12 to 15 percent because you are in a high rent area, you will have to make up the difference with lower plate cost percentages. Also the value of the plate cost itself could dictate pricing. For instance, let's say you are selling a ribeye steak with asparagus, and you have a plate cost of $8. If you use 25% cost, you would be charging $32 for that item. Maybe you don't have any items over twenty dollars so your customer base most likely won't pay that. So if you price it at $20 you would sell more and be making $12 per plate. That could be worth raising your food cost percentage.

A psychological note, breaking the next highest dollar amount can put people off. I would be much more inclined to raise a price from $6.25 to $6.99 then $5.99 to $6.49. People tend to notice that change more. Customers do not like change in general. Raising prices will get noticed as well as taking items off the menu. Even if you sell an item once a week, when you take it off the menu you will hear from 20 people how they loved that item and ask you "Why did you take it off the menu?".

In closing I would say that changing prices isn't an exact science. You as the restaurant owner/manager need decide what is best for you and your customers.

Why counting stock is important

2011-07-13T20:42:00.000-06:00

Counting inventory is crucial, even if you do not have any specialized software packages. You can use excel or the free OpenOffice.org Calc. Finding a weekly food cost can help you detect if there is a problem.

For instance, if you have calculated your menu cost and you have a standard percentage markup for your menu pricing, you can use beginning count + receipts - ending count to find a total food cost for the period and compare that to your sales for that period. If the numbers fall in your desired range, then everything is going well for your operation, otherwise you could have some ongoing problems that won't correct themselves without intervention.

Let's do some quick math. So let's say you mark up all your menu items 4 times the food cost or 25% cost. You calculated your total cost at $4,000 and your sales for that period were $10,000. That means that you had a food cost of 40%. Much higher than your ideal food cost of 25%.

Why would there be that big of a difference? Many things could effect this number. Theft, waste, spoilage, couponing, or over portioning could be some of the culprits. Which one? How can you figure it out? You could start spot checking your high ticket items and make sure the numbers line up, but that would be very time consuming for you personally as well as costing you more money as time goes on.

RestaurantSentry.com can help you isolate problems much quicker. You can run an actual versus ideal report every week to see which items are giving you problems. From there you can find the exact nature of the problem, fix it, and get your food costs in-line with your ideal costs.

Let's consider tomatoes for an example. After running the actual versus ideal report, you see that you used 30 more tomatoes than you ideally should have. Now that you know what item is a problem you must find where the problem is. Maybe the cooks are putting four tomato slices on your turkey sandwiches when they should only put three. Maybe someone is walking out with a tomato everyday. You will find it easier to catch problems when you know what the problem is.

Golden Ticket

2011-07-06T14:37:00.003-06:00

Today restaurant marketing is about social media and coupon sites like Groupon and Restaurant.com. Those services are great, and I would never say ignore a tool that could potentially bring you some foot traffic. I am a huge technology geek so I am always looking for ways to use new technology, but I would caution you to really think about what the status of your business is and what needs improvement.

I think sites like Groupon are more helpful to someone who is just opening their doors and want people to know they are there. I have found that while Groupon can give a burst of customers, those customers aren’t necessarily the ones you want. You will never see many of the customers without offering another coupon. Also, existing customers that would come in anyways, now have access to a coupon. You really do not get to control who can use these coupons.

What’s the alternative? I’m a fan of a “grass roots” campaign. Let me give you an example. I wanted to increase my lunch activity. Most of my customers were coming at night and lunches were not as active as I would like. So I started a “golden ticket” promotion. I went to surrounding businesses (within 10 minutes) and asked them if they had heard of my restaurant before. If they had, I gave them a buy one get one half off coupon and thanked them for their business. If they had not heard of my business, I gave them a golden ticket which would provide up to six free meals for their coworkers. I received 3 out of 5 of these tickets back and of those I remember seeing more than half of them returning! Many of these new customers also frequented my establishment in the afternoon for drinks and appetizers.

You need to be specific with your terms, including when you hand them the coupon. I made the mistake of not mentioning that drinks and gratuity were not included (even though that was stated on the coupon) and one group of 6 were unhappy when they received a bill at the end. Also, make sure they know it is for people that actually come into the restaurant. I had a group of 2 that wanted 4 to go orders for the “others” back at the office. Visit businesses around 10:30 am or 11 am, that is when people start thinking about lunch. I would only give out what you can handle for a day. I found that most people came in the same day you gave them the coupon so you want to make sure you are staffed for it. Limiting the days they could come from Monday to Wednesday helped, and they also had to come before 2pm. You know your business so make the terms what you want them to be. When you are giving away free meals, people tend to be more flexible.

One advantage independent restaurant owners have is that they can really have a personality. The big franchises are the same from place to place, that is their business model. The independent can really use their staff to make people want to come in to see them. If you aren’t the friendliest person, send out your front of house staff to bring people in. If customers see a person that has fun working somewhere, they will be more inclined to stop in.

Since I enjoy technology, I would also suggest keeping track of the customers you visit in a customer relationship management software or in a spreadsheet. Tracking them is especially helpful if you have more than one person going out to visit people, this way they don’t go to the same businesses. You can also put a number or name on the back of each ticket so you know who came in and who you may go back and revisit.

The last piece of advice I have on the promotion is to make sure that when these groups of people come in, they are taken care of. The last thing you want is to give away 6 meals and then have them leave angrily because the kitchen took too long with their food or for any other reason. If you as the owner/manager were not the one who gave them the ticket, go over and introduce yourself and tell them how much you appreciate them coming in. Personalize the experience, this is something the chains do not do a good job with.

Each restaurant has unique circumstances and/or situations that make where to spend marketing dollars a difficult decision. Hopefully this article gives you some more information to base your decisions on.