Starting a restaurant is exciting, but it also requires smart planning to make sure you’re profitable.

One crucial tool for this is financial modelling, especially when it comes to menu engineering. In simpler terms, it means using numbers to decide which dishes to keep, change, or remove from your menu. Let’s dive into how financial modelling can help you craft a profitable menu for your restaurant.

Understanding Menu Engineering

Menu engineering is the process of strategically designing a restaurant’s menu to highlight high-profit and popular items while minimising the presence of low-profit or low-popularity dishes. It is one of the simplest ways to use financial modelling to allow restaurants to cut costs and maximize efficiency. The goal is to increase the overall profitability of the menu by making data-driven decisions about item placement, pricing, and promotion.

The Role of Financial Modelling in Menu Engineering

Financial modelling helps restaurant owners analyse the performance of individual menu items based on cost, price, popularity, and profitability. By constructing a financial model, you can gain a deeper understanding of how each dish contributes to the overall financial health of your restaurant.

Key Components of Financial Modelling for Menu Engineering

1. Cost Analysis: Calculate the cost of each menu item, including ingredients, preparation time, and overheads.

2. Revenue Analysis: Track the sales of each menu item to determine its popularity and contribution to total revenue.

3. Profitability Analysis: Determine the gross profit margin for each item by subtracting the cost from the price.

4. Contribution Margin: Evaluate the contribution margin, which is the selling price minus the variable cost of an item. This helps identify items that significantly contribute to covering fixed costs and generating profit.

Steps to Use Financial Modelling for Menu Engineering

Step 1: Collect Data

Gather data on each menu item, including:

• Ingredient costs: Detailed breakdown of all ingredients and their costs.

• Sales data: Number of units sold for each item over a specific period.

• Preparation and overhead costs: Labor, utilities, and other operational expenses related to each item.

Step 2: Build the Financial Model

Construct a financial model that includes:

• Cost per item: Sum of ingredient and preparation costs.

• Revenue per item: Selling price multiplied by the number of units sold.

• Gross profit per item: Revenue minus the cost of goods sold (COGS).

• Contribution margin: Selling price minus variable costs.

Step 3: Categorise Menu Items

Use the model to categorise menu items into four quadrants based on their popularity and profitability:

• Stars: High profitability and high popularity. These are your best-performing items.

• Plowhorses: Low profitability but high popularity. Consider ways to increase their profitability without sacrificing sales.

• Puzzles: High profitability but low popularity. These items may need better marketing or placement on the menu.

• Dogs: Low profitability and low popularity. Evaluate whether these items should remain on the menu.

Step 4: Optimise Menu Design

Based on the analysis, make strategic adjustments to your menu:

• Highlight Stars: Place star items in prominent positions on the menu, such as the top right corner, where customers' eyes naturally gravitate.

• Revamp Plowhorses: Increase their profitability by adjusting the portion size, substituting ingredients, or slightly increasing prices.

• Promote Puzzles: Use marketing techniques to boost their popularity, such as specials, promotions, or improved descriptions.

• Eliminate Dogs: Consider removing or replacing items that do not contribute to the menu’s profitability.

Step 5: Test and Iterate

Implement the changes and monitor the performance of the new menu. Collect data continuously and update your financial model to reflect the latest trends and customer preferences. Regularly reviewing and iterating your menu based on financial data ensures that it remains optimised for profitability.

Benefits of Using Financial Modelling for Menu Engineering

1. Increased Profitability: By focusing on high-margin items and optimising low-margin items, you can significantly boost your restaurant’s overall profitability.

2. Data-Driven Decisions: Financial modelling provides concrete data that helps in making informed decisions rather than relying on intuition.

3. Improved Customer Satisfaction: Highlighting popular items can enhance customer satisfaction and increase repeat business.

4. Efficient Inventory Management: Understanding which items are most and least popular helps in better inventory management, reducing waste and optimising supply orders.

5. Competitive Advantage: A well-engineered menu can set your restaurant apart from competitors by offering a balanced mix of high-profit and high-demand items.

Conclusion

Financial modelling is a powerful tool that helps you create a profitable menu. By understanding the costs, sales, and profitability of each dish, you can make smart decisions that benefit your restaurant. Regularly updating your model and adjusting your menu keeps your business profitable and competitive. If you’d like to use financial modelling for menu engineering and watch your restaurant thrive, get in touch with us and we’ll assist you in building one. You can also keep an eye out of our events and workshops here.