The attitude that creates the most risk for your business is forgetting the math, i.e. taking too long to understand the relationship between price and cost. Understanding this relationship can be one of the factors in making your burger restaurant a profitable business or not. Pricing is not such a complicated science, although there are several factors that play a role in price formation.
In small businesses, it's very common to see entrepreneurs multiplying input costs by 2 or 3 in order to guarantee a certain profit. However, this practice can lead to business short-sightedness on the part of the entrepreneur, who may have the false impression that they are making a profit of 100 or 200% when in reality they are ignoring direct and indirect costs, which, if neglected, can negatively affect the financial health of the business. Just as a real reference, restaurants that make a very good profit achieve margins of no more than 30%. In summary, our intention in this article is to give you some basic direction on how to start pricing in the right way.
Management Concepts
First of all, we need to keep three important terms in mind: Competition, COGS and profit margin.
Competition: It is essential for any business to monitor its competition. Entrepreneurs must have a thorough knowledge of their competitors' products, the prices charged, This knowledge includes the quality of the inputs, the quality of the end product, how it is advertised, its differentials and weaknesses. As a result, this knowledge will provide insight into what is feasible or not in the market and in the region of the business.
CMV stands for Cost of Goods Sold. COGS is basically the sum of the costs of producing and storing goods until they are sold. This data is essential for calculating and measuring your profit.
Profit margin is the percentage added to the total costs of a product, thus forming the final selling price and defining the percentage of profit the company will make on that sale.
Technical sheet
First of all, it's important to list the input costs for each recipe and each item on your menu. To do this, we use an indispensable tool in the professional kitchen called technical sheet, In it, we detail the exact amount of each ingredient in the recipe, and when we add it all up, we have the real cost of the recipe.
Let's understand:
First of all, you have to list the items in your recipe: bread, hamburger, cheese, mayonnaise, tomatoes, lettuce, sauces, etc. and list how much everything you use to make this snack costs. In this case, it's essential to invest in a precision scale to know the exact measurements and prices!
For clarity, see the example below:
Above is part of the technical data sheet, in addition to which there are also details of the equipment and preparation required, the method of preparation and comments. The technical sheet also allows for the standardization of products by giving instructions on quantities, order of preparation and assembly of recipes. In the example above, we see that our hamburger came to an input cost of R$13.44.
The preparation of snacks certainly involves much more than the ingredients, there is the consumption of electricity, gas, and that's all a cost. In addition to our burger, we're going to offer a soft drink and we'll certainly be selling it cold, so it will be stored in a refrigerator that consumes electricity, and you may want to serve it with ice, which will be stored in a freezer or produced by an ice machine, both of which consume electricity.
Now, let's move on to the second stage of our pricing process, and for this we're going to introduce two more concepts: Fixed costs and variable costs.
Fixed costs is an expense that remains the same regardless of the number of products sold - that's why it's called this. Regardless of your turnover, these bills will always be there.
Examples of fixed costs are: employee salaries, rent, internet, telephone plan, cleaning, accountant.
Variable cost are the expenses that vary according to your turnover, your production.
Examples of variable costs are: taxes, Ifood and app fees, freight costs, credit card fees, maintenance of your equipment, water, gas, electricity.
Now that we know the fixed and variable costs, we need to know how much these costs represent as a percentage of your Hamburgueria's average turnover.
To calculate your average turnover, add up 6 or 12 months and divide by the same number of months. If it's a brand new business, estimate your turnover.
Invoice for example: 20 thousand reais per month
Average sum of fixed costs: 5 thousand reais
The percentage is the most important piece of information, so using a simple rule of three, let's calculate how many percent these figures represent within the turnover.
Fixed costs:
20 thousand = 100%
5 thousand = ?%
5×100 = 500
500 / 20000 = 0.25 which corresponds to 25%
Similarly, as an example, let's consider that we have calculated variable costs corresponding to 9% of our turnover. This gives us 3 important pieces of information:
Average turnover = R$ 20 thousand
Fixed costs of 25%
Variable costs of 9%
Now why is this information so important?
With this data we can find the overall profit multiplier, known as the markup.
O markup, a magic number,is a multiplier index applied to the cost of a product to form the final selling price, taking into account its profit margin and the unit cost of production.
Markup formula
To find out this figure for your burger restaurant, let's follow the example, considering that we want to make 25% profit.
Markup = 100/ 100 - (25% + 9% + 25%)
Markup = 2.43
You multiply this figure by the cost of producing all the menu items. This will guarantee a profit of 25%, but taking into account all fixed and variable costs.
In our example, our burger had a cost of R$ 13.44, multiplying this by the markup (2.43) shows us that we should sell the burger for R$ 32.78 to maintain a profit of 25%, now considering all its costs.
And that's where market research comes in: you'll have a basis for deciding whether to maintain your price, whether you need to lower your production costs or your profit margin, or whether there's a market for you to increase your margin and thus make more money.
In this calculation we consider it as if all sales were made by credit/debit card, i.e. as if all sales had the “machine discount”. If your business is already up and running, you can have a weighted average card rate. To do this, you need to know the average number of cash and card sales.
Although pricing is relatively simple, we recommend hiring a gastronomic business consultant to help with this process.
If you have any doubts about the equipment and structure of your kitchen, talk to one of our experts. Schedule a visit to our factory and visit our experimental kitchen where you can test all the equipment with the help of our corporate chefs.
