The restaurant industry has a very high gross profit margin, usually in the range of 65 – 75%. The cost of getting the food onto the diner’s plate is typically only about 25% - 35% of what the meal costs the diner.

Despite this, the ABS reports that restaurants have an average net profit of just 3.8%. Why are restaurants with such high gross margins producing such low net profits? The answer lies in fixed costs. Costs such as rent, financing, and utilities are largely (or entirely!) the same irrespective of how many meals a restaurant serves.

However, labour is the largest cost for any restaurant, and labour costs are also largely fixed. Indeed, labour costs often do not vary at all by reference to the number of meals served. Staff generally must be given at least a minimum of hours per work shift – you can’t get an experienced cook, barista, or waiter to just pop in for a couple of hours when the restaurant is busiest.  Thus, a lot of the staff in any restaurant are idle or underutilized much of the time.

In a competitive market, restaurants cannot do much to improve their profitability by raising prices. Likewise, they can’t do much to improve profitability by cutting costs because these are largely fixed….and, given already high gross margins, the last thing they should do is to cut down on portions, food quality or understaffing leading to damaging their reputations.

So, how can a restaurant increase its profits most safely and quickly?

Capacity Utilization

Given that such a large % of the costs of a restaurant are fixed costs the overwhelmingly best way to increase profits is to better utilize the capacity of the restaurant. If a restaurant can serve more meals without adding to fixed costs, then there is a very large profit made from every extra meal served.

The principle of capacity utilization can be seen daily at work in most restaurants. At 6pm the staff are there; the tables are set ……and the tables are largely empty. Come back a couple of hours later and the place is (hopefully!) full. Likewise, if you visit on a Tuesday night you are likely to have no trouble getting a table but for Friday and /or Saturday nights….you had better book.

In a restaurant, every empty chair represents foregone high-margin revenue!

Demand Generation

Putting things crudely, the key to improving the profitability of a restaurant is “getting more bums on seats”. There are many ways to generate more demand. Most of them require some investment in customer acquisition. Examples include:

• A local marketing campaign,
• a live band to lure pundits off the road,
• inviting some influencers in to try your product, and
• leveraging social media reviews, etc.

However, all the above require an investment of time (and often expertise) which most restaurants just don’t have. They also do not tap into what is possibly the most powerful driver of demand…pricing.

The airline industry has similar dynamics to restaurants - an empty chair is a foregone revenue. The airlines understood their marginal cost of filling a plane seat that would have gone empty is incredibly low. They need the two pilots whether there are 20 guests flying or 50 guests flying. The air hostesses travel with the plane for the day. They do not jump out if the plane is half full. Because of this, airlines utilize dynamic pricing to manage demand. You can bet that the random person sitting next to you on any given flight paid a very different price.

Perhaps because it is largely comprised of relatively small businesses the restaurant industry has been very slow to adopt the dynamic pricing practices used by airlines and many other industries with similarities to hospitality. 

Applying dynamic pricing to a restaurant requires sophisticated technology which was simply not available prior to the advent of Eatclub.

Dynamic Pricing for Restaurants

EatClub works on the same dynamic pricing principles used by airlines. There are a minimum number of staff in a restaurant even during low demand periods resulting in large untapped capacity. The staff numbers and fixed costs (like the rent and electricity) cost the same, regardless of how many seats are utilized. Because of this, having tables filled during low-demand periods, even at a lower price point, add strongly to profits.

EatClub has created a system where restaurants can isolate time periods of as little as 30 minutes and reliably attract customers at those times. If the average restaurant took all of the times they lost money (the variable cost of operating outweighed revenue) and turned them into break-even or profitable times, their net profitability would dramatically increase.

This is what EatClub does. This is how we help the hospitality industry!

Co-written by Les Szekely, Partner at Equity Venture Partners & Pan Koutlakis, co-founder & CEO at EatClub