Why Restaurant Owners Must Understand Value and Volume To Be Succesful
Value and Volume are two sides of the same coin. And in business, it is all about 'coin'. The more you mint, the better.
The restaurant business is an interesting one where achieving consistent profitability is tricky, with several expense streams and just the one revenue stream - the menu.
The menu is essentially a product list, similar to any other business with multiple products. Smart restaurant owners will analyse their menus with a toothcomb and conduct a thorough 'product profitability analysis' to ensure their menu is making them money every night.
Essentially, product profitability analysis should look at two things:
Volume: In simple terms, this is the answer to the , 'how many units of product X did you sell?'
Value: Which basically translates to margins. In other words, 'how much profit did you make by selling one unit of product X'?
Which brings us to a very basic framework - the Value vs Volume matrix.
Each and every item on the menu can be and should be classified into these four boxes. For this two pieces of information are crucial:
Costs on each menu item so we can get exact profit margins on each item (if the restaurant owner cannot access this, they really are in the wrong business).
Number of units sold per menu item per day.
HOW IS THIS INFORMATION USEFUL?
This information is not just useful, it is critical. Here are the four segment-based strategies a restaurant owner would adopt.
These products on the menu contribute to the bulk of your revenue and profitability. Look after them carefully. From your end, the strategy has to be on customer experience and consistency. When a customer orders the same dish in two weeks he/she has to experience exactly the same things that delighted them in the first place.
2. High Potential
These menu items are hugely profitable. If only they sold well. The most obvious strategy with these products is the use of the 'today's specials' board. The waiting staff must also be trained to sell and recommend these products. If you can afford to shave a bit off the margins, do it and get the number of unit sales up. These items are your silent winners, where you will realise the biggest jump in profit from.
3. Crowd Pleasers
The polar opposite of 'High Potential' - they sell extremely well but are not very profitable. In some cases, margins can be negative which then becomes a huge contributor to lack of profitability. The restaurant owner needs to exercise extreme caution with these items. It calls for a close look at the pricing mechanisms and cost analysis. Pull the lever that works best and increase the margins on the product. Customers can be price sensitive and hence increasing prices is always a tricky proposition. It is then imperative to look at supplier rates and ingredient costs very carefully.
They are called losers for many obvious reasons. They are not profitable and they are not popular either. Why then are they on the menu? No, seriously!
If promotions and specials don't help in improving the item's unit sales and pricing / cost management don't improve the profitability of the item, then why on earth is it on the menu?
Printing a menu costs the business. If you have two pages worth of menu items that fall under this bracket and nothing you do can move them to any of the other quadrants, then please do yourself a huge favour and remove them from your menu.
This type of analysis needs to be performed regularly to keep on top of the burgeoning costs and forever challenged sales numbers. So why do restaurant owners not do this? The two most common reasons are lack of analytical skills (you will be surprised how many restaurant owners don't) and lack of time (this is the big one!)
If you run a restaurant or are planning to start one and want to know more about how this could benefit you, give me a call and I would be more than happy to chat.