Contribution Margin

[cpif]

I’m working on revamping our menu based on the contribution margin concept this time. Right now it’s the basic Appetisers, Salads, Pizza, Pasta, etc. I’ve sat through a couple of seminars (few years ago, memory fuzzy) where they’ve talked about the ‘dogs’ ‘plowhorses’ ‘stars’ etc. and menu placement of those items. Does anyone else do this?

I have a spreadsheet and just filled in my ingredients, menu cost and contribution margin. Can’t remember where I got the sheet template (from a show or a supplier) and the formula for the CM (per menu item) is Total Sales - Food Cost / # Sold. It’s also giving me a Popularity Percentage.

If I’m understanding this concept correctly, I’m to take the items with the highest CM and place those on the menu in the key spots to really boost those sales. Am I on target?

Thanks!

 

[Piper]

cpif:

If I’m understanding this concept correctly, I’m to take the items with the highest CM and place those on the menu in the key spots to really boost those sales. Am I on target?

Thanks!

Contribution margin is one thing to consider when deciding what items to promote, but it can’t be the only thing. Remember we’re not trying for a one-time transaction in this business, we need to build a customer base.

Besides contribution margin (which still certainly plays a factor) you need to promote items that you know will keep people coming back. You don’t want to promote an item that’s only “so-so” and leave your rockstar on the sideline because it has 50 cents less contribution margin.

Beyond those two, you should also consider volume potential. Will promoting a high contribution item result in 3 extra sales per week where promoting a lower CM item will result in 100 extra sales?

Would you rather promote a lobster pizza and have a $20 contribution margin that 2 people will buy, or a Cheesy Bread item that has a $3 contribution margin that you will sell hundreds of?

While contribution margin is a factor in menu design and selling, I wouldn’t make it the only factor.

One of the most important things I’ve learned in this business is that we have to sell people what they want to buy - not what we want to sell them.

 

[Jennifer]

Piper’s right on. And a menu revamp is also the ideal time to reevaluate pricing and overall sales mix.

Try adding two more columns to your spreadsheet:

• Last month’s sales of each item
• Price

Comparing CM and volume will make some choices obvious, and raise more questions about others:

High CM/high volume = definite rockstar

Low CM / high volume = could be a rockstar in disguise, or a serious dog

• Depends how low the CM is and how high the volume is
• Consider a price increase?
• Keep as-is to drive volume?
• Try building package deals around it to capitalize on its popularity while boosting ticket size? (I highly recommend reserving some prime real estate on your new menu to promote a profitable package deal, btw.)

Low CM / low volume = Why would you keep it?

High CM/low volume = Take a closer look. Would some extra promotion bump up the volume? What’s the cost of carrying any special ingredients to make it? Would it sell better at a slightly lower price-point? Is it worth keeping?

 

[josh]

One big factor that is not captured by contribution margin is labor. if you make an item from scratch and it is very labor intensive it may have a higher contribution margin but may also have a high labor cost to produce.

The other thing to keep in mind is the CM strategy typically favors higher priced menu items because they typically have higher CMs. You want to make sure this doesn’t start changing the way setup and price your menu in an effort to create a higher CM and overprice yourself in the market.

Josh
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