How to Improve Your Restaurant via Prime Cost Percentage

Your restaurant’s prime cost is one of those necessary expenses that tell you about the health and happiness of your business’s profit margin. The better you understand your prime cost, the better you can streamline your operations to increase profits. Improving your revenue doesn’t always have to mean finding ways to increase sales; sometimes, you can reduce your costs instead.

Prime cost is a key metric, and there’s two aspects of it to consider: Bulk prime cost, A.K.A. what you spend on goods plus labor expenses; and your prime cost as a percentage of sales. Let’s break it all down.

Bulk Prime Cost

In general, prime cost refers to your cost of goods sold—the ingredients and products that you buy—combined with your labor expenses, meaning wages, taxes, benefits, discounts and insurance. Don’t confuse prime cost with conversation costs, which refers to manufacturing and overhead, like your utilities and kitchen equipment. Prime cost is all about what you spend on paying out your staff and buying foodstuffs to sell.

Now that you understand a little bit more about what prime cost is, you can begin to use it to your advantage. But what you really need isn’t your bulk prime cost: It’s your prime cost as a percentage of sales.

Prime Cost as a Percent

Prime cost divided by total sales: That’s the rate that really matters. It’s one of the most important key performance indicators, or KPIs, that you can leverage to improve profit margin.

Most restaurants average a prime cost between 74-76%. That leaves only about 25% of profit leftover to cover expenses, including rent, debt and of course what you ultimately take home. It’s no wonder this industry operates on such famously thin margins; most business owners don’t know how to streamline this KPI.

Ideally, aim to lower your prime cost below 60%. If you’re really ambitious you can aim for 55%. However any lower than 50% mostly likely means that you’re cutting corners, which isn’t sustainable long-term. You want to foster an environment that your customers want to come back to, a high-value experience that encourages their return. Don’t take shortcuts that will cheapen your business, because your overall profits will suffer in the end.

Lowering Prime Cost

Bulk prime cost changes a lot throughout the business year since business doesn’t stay steady through the seasons. That’s why looking at the number as it relates to sales is a more reliable indicator of whether or not your success is holding steady, improving or declining.

Use prime cost to plan out your budget. If you know certain seasons are slow, you can schedule fewer staff members during that time. Then when sales go down, your prime cost percentage won’t change too much. This is also why it’s important not to compare your bulk prime cost to that of other establishments, because the number doesn’t mean much in a vacuum. Your approach to sales, the ingredients you buy, how you manage your staff and other labor costs all vary which has a significant effect on bulk prime cost, so looking at it as a percent of your sales is much more valuable and gives you the full picture.

Track this number regularly to stay informed. With COVID-19 still rampant, you especially need to be able to adjust operations at the drop of a hat. The restaurant industry has taken a particularly significant hit throughout the pandemic, and it’s no more stable now. Regularly examining your prime cost percentage means that you’ll notice downturns before it’s too late, and course-correct if you’re flexible enough.

How do you adjust your prime cost percentage? Frankly, a lot of it is about planning—another reason why keeping track is so important. If you set a goal, a target to reach each year, then your weekly or monthly progress reports act like a roadmap. A good Point of Sale system watches over all the necessary reports for you, auto-generating the work so all you have to do is analyze the output and make adjustments as you see fit. For example, you can redesign the menu to lower COGS, promote best-selling items more effectively, raise prices or decrease portion sizes. However be careful; customers may not respond well to big changes like that, and it might not be worth what it does to overall sales. Learn more about optimizing your menu through Artificial Intelligence.

Whatever changes you make, if your sales stay the same then your prime cost percentage will improve. Schedule a demo with eatOS and we’ll show you how our Point of Sale system makes bolstering business operations easier than ever.

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