Tag Archives: Restaurants

Marketing Metrics – Restaurant Industry

13 Dec

I have been working in the restaurant industry for four years now, so for my Marketing Information Management class, I decided to share an example of how to ensure marketing investments in your restaurant are worth the effort. Determining your return on investment is imperative to make sure that your investments are actually helping your company earn profits.

To demonstrate some marketing metrics, I am using a local restaurant and pub in the Lower Mainland which will remain nameless. This restaurant specializes in serving fresh, local ingredients by making contemporary twists to traditional home-cooked meals. The restaurant supports local wineries and food suppliers, and ensures high quality food by making all dishes from scratch every day. The company strives for excellent customer service, food and beverage quality and an up-beat atmosphere.

The restaurant and lounge capacity is 300 seats – 200 in the dining area, 100 in the pub area. Currently, the restaurant hires different bands to play from 9:00PM-12:00AM in their lounge on Friday and Saturday nights. The restaurant pays each band $400 to perform for three hours, regardless of the size of the audience.

Recently, this restaurant has been experiencing a loss in profits, and has six months to determine whether to continue operation or close down for good. Management has questioned if certain costs within the restaurant are necessary, and is particularly curious to find out whether the band investment is worth their time and money.

According to upper management, sales have increased by an average of $1000 on Friday and Saturday nights for the entire restaurant, but the company does not track day sales and night sales as separate entities. Instead, the restaurant relies on tracking sales for the entire day, and does not track sales or seats by the hour or section of the restaurant. For this reason, the restaurant is unable to determine whether the increase in sales occurs in the evening or the day time. There is a good chance that the restaurant is just seeing an increase in sales because it is a weekend.

One manager believes that hiring a band to play on Friday and Saturday nights is not worth a $400 investment, which is equivalent to $3200 per month, $38,400 annually. Due to the fact that sales have only increased by $1000 on each day for the restaurant as a whole, the band does not seem to be a main reason for people coming into the restaurant. In fact, if the band did not play, sales would most likely stay very constant.

Assuming the average selling price (ASP) or revenue per customer is $20, and the average variable cost (AVC) per customer is approximately $12.40, the contribution per customer is $7.60.

Contribution per Unit ($) = ASP ($) – AVC ($)
= $20 – $12.40
= $7.60

Taking this figure into account, we can determine the contribution margin with the formula below:

Contribution Margin (%) = Contribution per unit ($)/Selling price per unit ($)
CM (%) = $7.60/$20
CM (%) = 38%

In order to determine whether the band investment is generating a large enough return, the restaurant needs to calculate their Return on Marketing Investment (ROMI). ROMI can be determined by the following formula:

ROMI (%) = [Incremental Revenue Attributable to Marketing ($) x
Contribution Margin (%) – Marketing Spending ($)]/Marketing Spending ($)

ROMI (%) = [$1000 x 38% – $400]/$400

ROMI (%) = -5%

Based on this negative ROMI figure, it is recommended that the restaurant uses other metrics to support the fact that this marketing effort is not worth their time or money. According to Marketing Metrics, estimating incremental sales of a particular marketing effort is almost always used as a justification for marketing spending on that program. Incremental sales for this restaurant are estimated to be $8000 per month ($1000 x 8 band days). In order to calculate the sales lift from hiring bands every weekend, baseline sales are needed, which are equivalent to the expected sales without any marketing efforts. The estimated baseline sales for this restaurant are $220,000 per month.

Lift (%) = Incremental sales / Baseline sales
= $8000/$220,000
Lift (%) = 3.63%

Cost of incremental sales ($) = Marketing Spending ($) / Incremental sales ($)
= $3200/$8000
Cost of incremental sales ($) = $0.40

The calculations above determine that the restaurant is currently spending $0.40 per incremental sale, and experience 3.63% sales lift from hiring the bands to perform eight times a month. Due to the low sales lift and negative ROMI, it can be concluded that this marketing effort is unprofitable and should be discontinued immediately, especially if the restaurant is experiencing a loss in profits and is considering shutting down all operations.

Keep in mind that these metrics are only some of the many you can use to determine whether your marketing efforts are making a big enough impact on your restaurant sales.

For another blog post on restaurants, check out my post on Earls vs. Cactus Club!

– Linnea