Effective Menu Pricing Strategies: Understanding Margin vs Markup

What is the key difference between a profit margin and markup?

Profit margin and markup—two terms that often trip people up, even seasoned restaurant owners! It's easy to get them confused, but at their core, they represent different perspectives on your profits.

Profit margin is the percentage of your selling price that you keep as profit after deducting costs. Markup, on the other hand, is the percentage increase you add to your cost price to arrive at your selling price. So, both deal with profit, just from different starting points.

Imagine you sell a burger for $20, and it costs you $8 to make. Your profit margin is 60% (($20-$8)/$20 100), meaning you keep 60% of what the customer pays. Your markup, however, is 150% (($20-$8)/$8 100), meaning you've increased your cost price by 150% to reach the selling price.

What is a profit margin?

Profit margin is all about what portion of your revenue lands in your pocket as profit. It's expressed as a percentage, and a crucial point to remember – it can never exceed 100%. You can't keep more than what you take in! Take, for example, a cafe in Melbourne selling avocado toast for $15, with the ingredients and associated costs totaling $6. The profit margin is 60%. This means for every dollar of avocado toast sold, they keep 60 cents as profit. This helps businesses understand how efficiently they're converting sales into actual profit.

Let's say you're selling a bowl of laksa for $22. The cost to make each vibrant, flavourful bowl is around $7, leaving you with a $15 profit. To find the profit margin, you divide the profit ($15) by the selling price ($22), then multiply by 100. This gives you a profit margin of approximately 68%. Similarly, a cup of flat white, priced at $4.50, with costs at $1, yields a profit margin of around 78%.

How to calculate profit margin?

1. Calculate profit: Subtract your cost price from your selling price (e.g., $22 - $7 = $15).

2. Divide by selling price: Divide the profit by the original selling price (e.g., $15 / $22 = 0.68).

3. Multiply by 100: Multiply the result by 100 to express it as a percentage (e.g., 0.68 * 100 = 68%).

Eats365's robust reporting features simplify this process. Instead of manually crunching these numbers, you'll have at-a-glance insight into margins across all menu items, empowering you to make informed pricing decisions swiftly.

What is a profit markup?

Profit markup shows how much you've increased the cost of a product to arrive at its selling price. Unlike profit margin, markup can exceed 100%, especially in industries like hospitality. A markup of 200%, for instance, means you're selling an item for triple its cost. For example, a pizza costing $5 to make and sold for $15 has a 200% markup. This indicates that you've added twice its cost on top to get to the final selling price.

Consider that $22 laksa again. With costs at $7, the markup is around 214% (($22-$7)/$7 * 100), meaning the selling price reflects a significant increase over its cost. This is common in hospitality, reflecting factors like overhead, service, and desired profit levels. Comparing this to our flat white, with a $1 cost and a $4.50 selling price, reveals an even higher markup of 350%. This difference highlights how markups can fluctuate across various menu items, even within the same establishment.

How to calculate profit markup?

1. Calculate profit: Find the difference between the selling price and cost price ($22 - $7 = $15).

2. Divide by cost price: Divide the profit by the cost price ($15 / $7 = 2.14).

3. Multiply by 100: Multiply the result by 100 to get the percentage markup(2.14 * 100 = 214%).

Eats365's recipe costing features could help streamline this process. By meticulously tracking ingredient costs, you can accurately determine cost prices, aiding in precise markup calculations for each menu item.

Should you use margins or markups?

There's no single right answer to whether margins or markups should be your go-to metric. Each offers valuable insights, and it often makes sense to consider both when setting prices. While some industries might favor one over the other due to more consistent cost structures, hospitality benefits from the nuanced perspective of both margins and markups.

Senario 1: Setting prices with profit margins

Pricing for a specific profit margin allows for dependable profit forecasting. If you aim for a 65% profit margin, and your average dish cost is $8, your expected revenue per plate is approximately $22.86. This approach becomes tricky with low-cost items. A cafe aiming for a 70% profit margin on their $1 coffee would result in a price that's likely too low for the market. That's why a flexible approach incorporating both margin and markup can be useful.

Senario 2: Setting prices by profit markup

Conversely, let's say you're aiming for a 200% markup across the board. Applied to high-cost items, like that pasta dish, you'll need to calculate the selling price which would total $24 ( ($8 * 200/100) +$8). If you aimed for a 200% markup on the $1 coffee, the selling price would be around $3 . Whether this pricing aligns with your market and customer expectations is a critical consideration.

Unlock Profitable Menu Pricing

Mastering profit margins and markups is crucial for thriving restaurants. By leveraging Eats365's integrated recipe costing and powerful reporting features, you can effortlessly calculate and set optimal prices. Discover how our restaurant POS system can provide real-time insights to boost your profitability. Enquire with Eats365 today to transform your menu pricing strategy!