Many businesses underestimate the potential increasing your gross profit margin has when it comes to maximising profits. You might typically think you need a fancy new marketing strategy to gain more customers and thus increase the money your company generates. But a small increase in your gross profit margin could mean a bigger increase in your net profit.
In this blog, we’ll explore gross profit and how it relates to your inventory. We’ll also take a look at how you can calculate your gross profit margin, and five ways you can increase it to boost your overall profit.
What is gross profit margin?
A gross profit margin is what remains of your sales income after you’ve taken out the cost of products you’ve sold or services you have offered customers. Put simply, it’s a big indication of how efficiently your business produces and sells its products and services.
When you remove operating expenses for your sales income (think rent, office supplies) the amount you are left with is what is known as your net profit. Therefore, your gross profit margin represents the proportion of sales income you can keep for your business after your direct costs have been deducted. If you have a low profit margin, you have less chance of making a net profit - as your direct costs might be too high.
Read more: 3 ways to cultivate a strong company culture in your restaurant
How to calculate gross profit margin
Calculating gross profit margin isn’t as hard a task as you might think. To do so, simply begin by finding your gross profit, which is:
Gross profit = Revenue - Cost of goods sold (COGS)
Once you’ve identified this, divide the gross profit by the total revenue, then multiply by 100 to get a percentage.
Gross profit margin (%) = (Gross profit / Revenue) x 100
Let’s look at an example to better understand how it works:
If your restaurant earns £50,000 in sales, and your COGS are £20,000 your margin would be: (£50,000 - £20,000/ £20,000) x 100 = 60%.
Read more: Restaurant manager duties and responsibilities: Leading teams, driving success
5 ways you can increase your gross profit margin
Take a look at the five ways you can increase your restaurant’s gross profit margin below:
- Increase your average order value
One way you can increase your gross profit margin is by encouraging customers to spend a little more each visit. You can do this by suggesting add-ons, offering bundle deals (e.g., meal combos or upsized portions), or introducing loyalty rewards that incentivise repeat purchases. Even a small uplift per transaction can significantly improve overall profitability when multiplied across hundreds of sales.
- Optimise pricing using value and elasticity
Ensure you are also reviewing your menu or product prices regularly. Instead of simply raising prices, assess customer perception of value. Premium items or signature dishes may justify higher prices, while low-margin products might need adjustments or removal. Using menu engineering or price elasticity analysis helps you maximise revenue without alienating customers.
- Improve product mix and merchandising
Focus on promoting high-margin items. This could mean redesigning menus to highlight profitable dishes, positioning top-sellers more prominently online, or creating specials around cost-effective ingredients. Training staff to recommend profitable options can also increase sales of items that boost your bottom line.
- Streamline operations to cut hidden costs
Operational inefficiencies - from food waste to over-ordering - eat into gross profit. So ensure you take care of yours. Regular audit supplier invoices, monitor portion control, and invest in staff training to reduce mistakes. Introducing kitchen management software or inventory tracking tools can help ensure ingredients are used efficiently, reducing unnecessary spend.
- Negotiate smarter and lock value in contracts
Strong supplier relationships can directly impact your profit margin. Aim to negotiate bulk discounts, explore seasonal sourcing, and review contracts to avoid price hikes. Locking in favourable terms or diversifying suppliers can protect your business from sudden cost increases and give you greater control over your expenses.
Start smarter. Manage better.
See how Nory helps restaurant teams run seamlessly with its hospitality management software - get in touch to schedule your free demo today.
Gross profit margin: FAQs
How often should I review Cost of Goods Sold (COGS) and pricing?
Your pricing strategies should be reviewed and adjusted on a regular basis - at least once a quarter. But this frequency will depend on market conditions, your competitors, as well as the type of customers that visit your establishment.
Does lowering price ever increase gross profit margin?
No, lowering the price of an individual product does not necessarily increase your profit margin. Put simply, decreasing price lowers the margin of the COGS and ultimately decreases the revenue part of the gross profit margin formula. The only case where this might happen is if the lower price leads to increased sales volume - as customers are encouraged to buy more of the product.
How does technology integration help increase gross profit?
Integrated technology solutions, like inventory management systems connected to your POS, streamline operations, reduce waste, and improve forecasting accuracy. This leads to more informed purchasing decisions, better stock control, and ultimately, higher gross profit margins.