Contribution Margin

Can higher food-cost drive higher profits? Yes!

Restaurant owners are constantly schooled on "food cost." Has to be 30%... 33%... whatever. But is it true?

Many even price menu items based on food cost and advertise items with the highest profit margin. 

Example: Food cost is $3. Sell for $10. That makes food cost 30%.

And certainly, the natural inclination is to promote products with high-profit margins. I’m not going to argue that, but there is another side to this coin. 

What about a menu item with a 50% food cost?

Would it make any sense at all to promote that dish?

Say you have three dinner items on your menu:

  1. Steak - 50% food cost
  2. Salmon - 40% food cost
  3. Chicken - 30% food cost

So, looking at it that way your profit margin is:

  • 50% on steak dinners
  • 60% on salmon
  • 70% on the chicken

You have exactly 100 guests tonight, and they'll order whatever you want them to. Which dinner will you sell them? Steak sells for $30, salmon $20, and chicken is $15.

Contribution Margin

Turns out one-hundred steak dinners gets you $1,500 in gross profit. Salmon drops $1,200 to the bottom line. And chicken dinners will give you $1,050. 

So, oddly enough… the highest "profit-margin" dinner actually has the lowest overall profit.

Don’t fixate on profit-margin. Be aware though, of "contribution-margin" and sell people what they want to buy, at a price that moves plenty of it.

P.S. If you find these tips helpful, please do me a favor and share this with someone you think would also benefit from it.  It’s the best way you can show me you like what I’m doing. Thanks!

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