Over the past several months, food costs have shot through the roof as a result of soaring inflation. In fact, according to federal data, producer prices for food are up 13% just in the last year. On top of that, restaurants are paying 10% more to keep their staff during ongoing labor shortages. These days, determining what needs to change to manage costs and eke out a profit has become mission critical for restaurant operators everywhere. Those changes, more often than not, are going to start with your menu.

When it comes to menu changes, many restaurant owners and operators have the knee-jerk reaction of raising prices to offset inflation. While this may be necessary, it shouldn't be the first or only course of action. Poorly executed price increases have the potential to backfire by confusing or deterring guests.

While restaurant menu improvement has a lot to do with numbers and pricing, it also has a lot to do with emotions—that is, the emotions of your guests. Understanding what your guests want and finding the most cost-effective way to give it to them is the key to building the most profitable menu possible. This can be achieved through restaurant menu engineering.

Understanding what your guests want and finding the most cost-effective way to give it to them is the key to building the most profitable menu possible.

What is menu engineering?

Menu engineering is the process of designing your menu to maximize profitability. To do this, you must first assess how well your current menu items are selling and how much profit potential each item has. After that, you can plot those items in a menu engineering matrix: a graph that shows where your menu items stand according to their popularity and profitability. Then, with this data, you can determine A) what can be kept (and featured most prominently), B) what should be modified, and C) what needs to be eliminated altogether.

Here is a step-by-step guide that takes into account every aspect of your menu, so you can be sure you are getting as much profit as possible.

Step 1: Assess each menu item's popularity.

Possibly, the most valuable data you need to know as a restaurant operator is how well each item is selling in comparison to the rest of your menu. Understanding how guests are spending their money at your restaurant is accurate feedback on how guests feel about your menu. After all, everyone votes with their dollars.

Specifically, you'll want to find how many units of a menu item are selling over a particular period—month, quarter, or even year. You should be able to easily pull this data from your POS's product mix (PMIX) report. When running this report, make sure you are comparing similar items. For instance, you'll want to get separate reports for food, beverages, and desserts. And you may even want to break your reports down even further by breakfast, lunch, and dinner (if you serve more than one meal). Or by different courses of a meal like appetizers, sides, and main dishes for food—or alcoholic and non-alcoholic beverages. Whatever categories you decide to use, they should make sense for your type of restaurant.

Step 2: Determine profit margins for every recipe.

Next, you'll want to know exactly how much profit every single dish, dessert, or drink brings in. This is important because popular items that yield little profit could be giving you the perception of profit while costing you more money than anticipated.

To make sure every item is profitable and accepted by guests, your food costs should generally be between 28% and 32% of food sales for full-service and limited-service restaurants. But there are exceptions to the rule. Upscale full-service concepts specializing in steak and seafood could see food costs as high as 40%, while some gourmet pizza restaurants might get them down to 20% or less. Depending on the menu item, the competition in your area, and the value of your restaurant's brand, you'll want to set your menu prices somewhere between 2.5 and 5 times higher than your food costs.

You can calculate your food cost percentages manually or leverage cutting-edge restaurant inventory software like MarginEdge, Craftable, COGS-Well, or BevSpot. These platforms enable you to easily manage food costs, track inventory, and analyze the profitability of your recipes and overall menu. Best of all, they integrate with top restaurant POS systems like SpotOn Restaurant to give your operation a complete solution when it comes to orders, restaurant management, invoice management, and menu engineering.

Step 3: Identify profitability with a menu engineering matrix.

A menu engineering matrix is a grid that puts each of your menu items in one of four categories—star, puzzle, plow horse, or dog—based on their popularity and profitability. To easily see where each of your menu items falls, take our menu engineering worksheet for a spin. Just add your menu items, along with the number of units sold in a month and their profit margins and the worksheet will automatically place them in their appropriate category.

Step 4: Modify items to maximize profit.

Now that you have the data behind the overall profitability of each item, it's time to explore how you can adjust your menu to bring in more profit. When doing this, one word of advice is to set aside your personal feelings and trust that the data accurately represents your guests' feelings about your menu.

Data-driven decisions are the most profitable ones.

Stars: High Popularity | High Profitability

Items that fall in the Star quadrant are loved by your customers and make your restaurant lots of money. For the most part, you should keep these recipes and prices the same. When looking at your Stars, try to identify any similarities. Are most or all of them comfort food? Are they of a particular ethnic origin? Where do these items fall on the flavor spectrum—spicy, sweet, savory? Are they vegetarian or meat-based? Answers to these questions will give you deep insights into what guests like about (and expect from) your menu and guidance on future items that could bring in more profit.

Plow Horses: High Popularity | Low Profitability

Your customers are happy with your Plow Horses but they aren't making you much money. Consider raising their prices so that they are roughly 3 to 4 times the amount of their food costs. Or, if you notice guests often can't finish these in one sitting, try decreasing their portions. Just beware that it's not advisable to both raise prices and decrease portions at the same time. Another strategy for making Plow Horses more profitable is to identify high-cost ingredients and replace them with a cheaper comparable option or find less expensive sourcing. Just be careful you're not altering the taste to the point where guests won't want to order them anymore.

Puzzles: Low Popularity | High Profitability

Puzzles are well-engineered for profit, but for some reason just aren't selling. Compare these menu items to your Stars and Plow Horses to see if they are in line with the flavor profile and branding that your guests already like. See if there are any ingredients that you can add that'll make these dishes more appealing. Or, on the flip side, consider removing elements of the dish that may not match the overall target profile. If you find a Puzzle that doesn't align with your restaurant's brand or flavor profile, don't be afraid to take it off the menu completely.

Dogs: Low Popularity | Low Profitability

Dogs are your lowest-performing dishes or beverages when it comes to popularity and profitability. Maybe they are staples that you've had around for a while, but have lost their appeal and are suffering from the recent rise in food costs. Or perhaps, you and your managers like these dishes, but your guests don't. Admitting that some dishes just aren't working is tough, but what's even tougher is taking a loss from these items month after month. If you're looking to downsize (and simplify) your menu, Dogs are the first place to start slashing. Consider removing them altogether or, at the very least, modifying them to align with your more popular items.

Step 5: Get your menu in front of guests.

Once you've analyzed and modified your recipes and pricing (perhaps you've even removed a few or several items), it's time to display your menu in a way that will be the most profitable. In today's day and age, that means showing it off boldly at your restaurant and online. Here's the fastest and most-effective way of making this happen.

Establish your brand.

Your brand represents how guests feel when they interact with your restaurant. If you haven't already, work with a restaurant design expert to create a logo system, brand color palette, and unique font suite. A good designer can also develop your printed menu with wayfinding so guests can see your Stars and easily navigate your menu. Or, to avoid printing menus altogether, consider moving your entire menu online and giving guests access to it through customer-facing displays and QR codes.

Update your website.

Your website should be the first place your guests go online when they want to learn about your restaurant, view hours of operation, or order takeout and delivery. That's why it must be up-to-date, branded, and connected to your online menu (more in the next point.) Getting a branded website doesn't have to be labor-intensive though. After answering a few basic questions about your needs, SpotOn Website can have your SEO-optimized (Google) website up and running in as few as 2 business days. You can even get custom photography of your restaurant and menu items. And it has its own easy-to-use dashboard that allows you to make changes anytime you want. It's probably the easiest and most cost-efficient way of keeping your website current.

Plug in online ordering.

Online ordering is critical to making the most profit with your menu. Not only does it enable customers to order takeout and delivery from anywhere outside your restaurant, but it can also allow guests to access your menu in-house through QR codes at their tables or near your entrance.

Also, when your online ordering integrates seamlessly with your restaurant POS system, guests can easily order and pay from your newly-optimized menu right from their phones with just a couple of taps. Even if you already have online ordering in place, you can take advantage of your POS's data analytics tools to improve its profitability.

Menu engineering is profit engineering.

Although inflation and food costs are out-of-control, your restaurant doesn't have to be. With precise menu engineering, you can identify what items are specifically driving profit, change your menu for a better ROI, and display it in a way that promotes more engagement from your guests. As the restaurant industry shifts and advances in this technological era, menu engineering is the secret ingredient to harnessing the art and science of your greatest profit potential—your menu.