By Allison Tetreault, Foodable Industry Expert
It’s no surprise that menu engineering is a big topic these days. However, it wasn’t always that way. In fact, according to Google Trends, the term didn’t even pop up until 2007:
That year, Hospitality Review released an article on menu analysis that went into detail about how to use the BCG Matrix, a well-known method for calculating product “growth-share” since the 1970s, to analyze your menu for profitability and popularity.
Restaurant owners have been running with this idea ever since.
Whether you’ve been engineering your menu since the dawn of the BCG Matrix, or whether you’re a newcomer to menu engineering, these tips will help you become an expert menu engineer.
And if you want to follow along in Excel, download this free menu engineering worksheet and add your numbers in to see how much menu engineering can impact your restaurant.
1. Know how to cost your menu.
Contrary to popular belief, menu costing is not menu engineering. However, it is the first step to getting the granular data you need to start a menu engineering analysis, and downright necessary for calculating food cost percentage and contribution margin, arguably two of the most important restaurant metrics… well, ever.
If you want to learn how to cost a menu, you’ll need to determine your food cost for each menu item:
cost of each ingredient + cost of purchasing = item food cost
Cost of purchasing not only includes the price you paid for the item, but any delivery fees, interest, return charges, or other expenses related to purchasing inventory (excluding labor costs).
Here’s an example: If an onion costs $0.25 + $1 for delivery ($1.25) and each onion yields eight slices, the onion cost for a dish that includes two slices would be $0.30. If you’re making tomato soup, your menu item food cost might be one stick of butter ($1) + 2 slices white onion ($0.30) + 3 tomatoes ($2) = $3.30.
The more specific you can be about your item food cost, the better you’ll be prepared for the next two metrics.
2. Calculate food cost percentage.
Calculating food cost percentage requires you know exactly what you’re paying for when ordering food, which ingredients match with which recipes, and how much each ingredient costs (which you now have after the past section).
Food cost percentage can be a benchmark that you track on a weekly, monthly, or quarterly basis. It’s a good way to identify trends in your menu engineering. However, it is not the end-all be-all to restaurant success, and there is no perfect food cost percentage number.
menu item cost / menu item price = food cost percentage
You can determine each menu items’ food cost percentage, or your total food cost percentage, for a certain amount of time, depending on what your goals are. I usually suggest that restaurants look at their menu on a quarterly basis, and switch it up based on the data they see at least four times a year.
3. Find out how much each dish is really contributing to your bottom line.
Now, it’s time to figure out whether these dishes are contributing actual profits to your restaurant. We do this by calculating contribution margin.
menu item sales - food costs = contribution margin
Contribution margin is an efficient way to measure profit, analyze how sales affect net income, and ultimately explain how different factors of your food business react to changes. It’s basically the net amount of dollars you take to the bank.
Examined together, food cost percentage and contribution margin can be used to make important business decisions.
For example, say you have two menu items: a sirloin steak for $20 that costs you $10 and a pizza for $10 that costs you $3. The food cost percentage is 50 percent for the steak and 30 percent for the pizza. However, the contribution margin for the steak is $10 compared to $7 for the pizza. So it seems like you’re making more money on the steak, although the item could be priced higher to net you even more.
4. Measure menu item popularity (beyond amount sold).
Your menu engineering worksheet will pit contribution margin and amount sold. You’ll see profit (contribution margin) and popularity (amount sold) separated into different quadrants.
To calculate amount sold, just add together the amount of times a menu item was sold in a certain time period. This should be easily picked up in the sales reporting of your point of sale system.
So, let’s go one step further. Let’s see what percentage each menu item is contributing to your overall item popularity:
individual menu items sold / total menu items sold x 100 = menu item popularity
How many times did someone buy that tomato soup, that pizza, or that sirloin steak in the past quarter? How about compared to last quarter? Menu item popularity is a good indicator of a dish’s perceived value, and might be a sign that you’re already marketing this item well on your menu.
5. Determine an “average” to gauge your success.
Now that you have all of this data, it’s a good idea to step back and gauge how you’re doing so far. What do you want to base your endeavors off of? You’ll need to collect information on each menu item to determine whether their profit and popularity is high or low.
You could say, hey, if the profit is about $0, then it’s high. That way, you’re breaking even.
However, I think it’s best to go one step forward and customize your menu engineering efforts to your effort. Calculate average contribution margin, and if a menu item’s contribution margin is higher than that, then it’s high. Same for popularity: if your menu item sold more than the average amount sold in a certain timeframe, then it’s high.
Those numbers would look like this:
sum of all item contribution margins / number of menu items = average contribution margin
sum of amount sold / number of menu items = average amount sold
This may seem daunting, but luckily, powerful spreadsheet systems like Excel can do formulas like this in one click.
6. Create your menu engineering graph.
Now, it’s time for the fun part. You have all of this data; now it’s time to visualize it.
Graph contribution margin on the Y axis, and amount sold on the X axis. You should see each of your menu items’ separate out into four quadrants: top right are stars, top left are puzzles, bottom left are dogs, and bottom right are plowhorses.
Seeing where each menu item lies on this graph is very helpful for you to determine the next change you need to make to your menu.
For example, those stars on the upper right part of the menu? Don’t touch them! They’re hot! You don’t want to mess with those successes.
But those dogs? You could probably axe them. Or price them in a different way. Or change up their ingredients. Or just market them differently.
There are many strategies for how to use menu engineering to make important decisions about your menu design; you decide what the most important direction is for your restaurant.
7. Understand why menu engineering is so important.
With this data, you can make more data-backed decisions about your restaurant; and the great thing about data is, nobody can argue with it.
As the data changes—and it will quarter by quarter and year by year—you may find your priorities change as well. Maybe you don’t want to focus on raising sales but instead want to focus on lowering costs. Whatever your “theme” may be, make sure your menu sticks to it.
Guests looking at your menu are mostly ready to buy. Why not use menu engineering to make sure they’re more likely to buy your most profitable menu items? There is always room for improvement — on your restaurant's profit, and on your restaurant’s menu design. Run an agile restaurant that focuses on adapting to trends in the market by continually testing new menu designs.
Want to know how to use the data from your menu engineering efforts to make decisions about your restaurant menu design? Start here with Restaurant Menu Psychology: 5 Principles of Guest Behavior.