Restaurant revenue management

1. Restaurant revenue management
Every restaurateur understands the importance of keeping food costs in line. Food and
labor are the controllable costs compared to rent, utilities, insurance and the other
expenses associated with operating a restaurant. The reason it is critical to control food
costs is because, when combined with payroll, these expenses account for 60 to 70
percent or more of total revenue.
Contribution Margins
Food cost percentage remains the most commonly used metric for assessing effective cost
controls (and bonuses!), but it's actually contribution margin which should serve as the
driver for creating and designing a menu—contribution margin equals the dollars you put
in the bank.
A simple question should make the distinction clear: Should a restaurant sell steak for
$45 that costs you $18, or an entree salad for $12 that costs you $2. While the food cost
percentage of the salad is 17% compared to 40% for the steak, the steak will contribute
$27 to gross revenue as opposed to $10 for the pasta. Contribution margin then is based
on the dollars you take to the bank.
Designing a Menu
There is much more to creating a menu than most people realize. One of the greatest tools
that is typically overlooked might mean the difference between a profitable restaurant and
a liquidation sale. This tool, along with techniques for utilizing it, is known as menu
engineering. Quite simply, it is the process of selecting, costing, pricing and evaluating
every item on the menu.
Make no mistake, menu engineering is never a substitute for accurate purchasing,
inventory management, vendor relations, standardized recipes or any of the other basic
kitchen controls that can negatively impact your costs. It does, however, provide two key
bits of information regarding a menu item: its profitability and its popularity.
Menu engineering is as simple as taking a proactive planning approach in recipe design,
allowing for more accurate pricing decisions to be made. It is a method of evaluating
every item on your menu relative to its present contribution to the bottom line and not
necessarily food cost percentage.
Tracking the Popularity of Menu Items
While a menu item's contribution margin tells us how many dollars each individual sale
contributes to the cash register, you need to know how popular each item is to determine

2. the total dollars it contributes to the restaurant's revenue. For example, a popular item
with a high contribution margin is a "star" while an unpopular item with a low
contribution margin is a "dog." Menu engineering, therefore, takes each menu item's
contribution margin and its popularity into account to determine into which of four
categories it falls: star, workhorse, cash cow or dog.
Take Action Based on the Results
Keep the stars and dump the dogs. That's Restaurant Management 101.
Ingenuity is now required to deal effectively with cash cows and workhorses. Start with
the cash cows. These items are higher in profitability but lower in popularity. The trick is
to make them more popular. There are many ways to accomplish this including changing
the preparation (e.g., beef tenderloin with blue cheese may be more popular than beef
tenderloin with mushroom sauce, but still just as profitable), updating the menu name or
description, or revamping the plate presentation to make the dish look and sound more
appealing to the customer.
Workhorses are a menu's popular items that have less-than-ideal profit margins. The best
opportunities to increase menu profitability are found with these. The key with
workhorses is to re-engineer the menu item to reduce its cost while at the same time not
reducing its popularity. The simplest solution is to increase the price of the dish, but this
is not always practical and may negatively impact its popularity.
An alternative might involve substituting a single, relatively expensive ingredient for a
one that is less costly, such as using bacon instead of prosciutto. Or it might involve
substituting one cut of meat for a less expensive one, knowing that the preparation is
what makes the dish popular. It could be as simple as using a less expensive garnish, or
none at all.
Controlling Costs is Key
Now it's easy to see how this information allows for the proactive management of a
menu. From collaborations with the kitchen to making small changes with prices, menu
engineering can be utilitized to effectively manage a key aspect of your food costs and
put money in the bank!
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