Increasing profit margins

I heard a veteran restauranteer’s theory for increasing profit margins. He raised lower-priced menu items more than the higher-priced menu items. Why? He believed that the customers who ordered the high end menu items were there for an evening dining experience, not a quick affordable dinner. The high-end customer would probably order appetizers, wine and desserts. These were the customers that he wanted back regularly. The customers who ordered an entrée salad, chicken or pasta were less likely to order the “extras.” Thus, to increase his bottom line, he needed to increase his margins on these entrees since they were often the only purchase for these tables. The higher spending customers purchased more items, so the profit margin was already higher on these tables. His fixed cost for serving the table was the same no matter what the bill was, so increasing profit meant increasing base revenues on single sale items.

The same strategy can be used for pricing wines. The mark-up on popular wine offerings should be around 300%, but only 200% on less popular selling wines in the moderate- and lower-priced categories.

For restaurants catering to wine enthusiasts, moderate wine mark-ups of only 150% on the more expensive offerings would be notable to consumers who spot the good deals. This can be a powerful marketing tool, offering high value wines at uncommonly reasonable prices. Since wholesale prices are typically a 67% of retail prices, this still 150% still leaves room for a reasonable (73% of retail or 100% of the restaurant’s cost) profit margin. The goal is to build a stable, loyal, and regular following of restaurant patrons, especially those who spend more on wine, appetizers, and desserts.

There are other industry practices that a restaurant can do to increase profitability. Focusing on increasing wine sales, some proven techniques include:

  1. Put wine offerings on the food menu, especially wine-by-the glass selections. A separate wine menu is less effective for selling.
  2. Offering different sizes of by-the-glass portions can increase wine sales (3oz, 5oz, and 9oz for example).
  3. Offering tasting samples (2-2.5oz portions) increases wine sales 18-47% according to Cornell Research.
  4. Offering half-bottle options is also a good way to sell higher priced wine selections.
  5. Remove the $ sign from the menu and wine list.
  6. Promote wine-food pairing recommendations in the menu and by waitstaff.
  7. Use table tents to promote 5 wine selections. (A study by Cornell Research found that including 5 selections increased wine sales much more than single wine promotions or 3 wine promotion table tents.

Subtle nuances are powerful. These changes may not seem like much, but research shows and experts agree that they can have big impact on your bottom line.