Restaurant Sales Mix – Contribution Margin

Restaurant Sales Mix – Contribution Margin

Restaurant Sales Mix - Contribution Margin

Restaurant Sales Mix – Contribution Margin

This is the concluding Part 3 Restaurant Sales Mix – Contribution Margin of the 3 part series.

Click if you did not read Part 1 or here for Part 2.

In Part 1, we learned about the components of a sales mix being menu item mix, meal periods and market segments. We also saw how restaurant seat capacity plays such an important role in not only revenue generation but also profitability.

In Part 2, we looked at the powerful concept of a Buffet spread which is central to optimizing sales mix in a restaurant and which is a popular approach adopted by hotel restaurants. In the process we learned how this approach boosts restaurant profitability.

In thus concluding part, we will look at how sales mix delivers incremental revenues and more importantly sustainable profits through the phenomenon of Contribution Margin. We will, along the way, address the pricing concept of average check and other profit related elements.

CONTRIBUTION MARGIN

Contribution Margin is a powerful principle that will allow you to focus on and optimize both hotel and restaurant profits.

What is Contribution Margin?

Contribution Margin is simply Revenues minus (-) Variable Costs.

Contribution Margin is based on the principle of the extent of contribution a revenue item makes to total profit. It recognizes that to earn revenues, both fixed and variable costs will be incurred. However, a change in revenue or sales quantity will only affect the variable costs. Fixed costs remain unchanged irrespective of sales or revenue quantities.

Let us illustrate this with an example:

Type of Restaurant: 24 Hour All Day Dining / Coffee Shop

Restaurant Seat Capacity: 200

Table Turnover: (February 2018) – 3 times turnover Refer to section on Table Turnover

Turnover: (March 2018) 5 times turnover

Average Check: $25 (February & March 2018)

Service Charge: NIL

Variable Costs Per Cover: $2.50

FNB Revenue: (200 x 3 x 28) x 25 = $420,000

In the above example, the Contribution Margin will be calculated as:

February 2018

(200 x 3 x 28) x $25 = $420,000 FNB Revenue

Variable Costs: (200 x 3 x 28) x $2.5 = $42,000 Variable Costs

Contribution Margin = FNB Revenue – Variable Costs so,

$420,000 – $42,000 = $378,000

FOOD & BEVERAGE COVER

Food and Beverage Cover is one of the two basic ingredients of revenues (the other is Average Check). The Food and Beverage Cover can also be called the quantity element of revenues (the Average Check is called the price element).

Food and Beverage Cover calculation is closely linked to guest patronage, number of guests consuming meal, number of meals being consumed and so forth. In simple terms, it normally represents number of guests who have had a meal during a meal period. So, you could say that number of guests is equal to number of covers. There are some exceptions and some situations to be considered in the calculation.

Normally, it is the practice of every hotel or hotel group/chain to have their own definition of a Food and Beverage Cover although all of them follow the above principle in some way or other with some variation.

Remember the following formula:

Restaurant Revenues = Food & Beverage Covers X Food & Beverage Average Check

AVERAGE CHECK

The Average Check is one of the two basic ingredients of revenues (the other is Covers). The Average Check can also be called the price element of revenues (the Covers are called the quantity element).

This is made clear by the following formula:

Restaurant Revenues = Food & Beverage Covers X Food & Beverage Average Check

What does the Average Check represent?

The Average Check represents the average of all the menu items of food and beverage that were sold during the period for which it is calculated. In other words, all the a la carte and buffet menu items over all meal periods and market segments are totaled in quantity (Covers) and then multipled by the price (Average Check) to arrive at Food and Beverage Revenues.

The Average Check is influenced by the Sales Mix which has gone into the Food and Beverage Revenues.

MEAL PERIOD ANALYSIS

Why is it critical to know and analyze these meal periods?

There are two paths to restaurant revenue growth. The first one was Table Turnover which we saw in Part 1 (insert link) of this 3 part series on Restaurant Sales Mix. The second path is meal period analysis. This is actually very closely related to table turnover ratio seen earlier. In fact, we can go as far to say that the optimum path to restaurant revenue growth is a combination of both these factors.

But what then is meal period analysis?

It is a study of data and information on what contribution each meal period in a hotel or resort’s restaurant outlets is making. This of course depends first on the type of outlet.

Meal period analysis requires accurate identification of specific meal periods that are applicable to each of a hotel or resort’s restaurant outlets. Generically, the standard meal periods for a city hotel are breakfast, lunch, snack, dinner, supper although this is more applicable to a Coffee Shop.

Having understood factors which affect table turnover and meal period analysis, how then are these considered powerful operationally as well as from a point of view of financial analysis tools. How do these actually contribute to restaurant revenue growth.

As we saw earlier in the module, revenue contribution in restaurants is made by two key elements – food and beverage covers (number of guests) and the average food & beverage check. These are also known as the quantity (or volume) and price contributions. The formula, if you remember is:

Restaurant Revenue = Food & Beverage Covers X Average Food & Beverage Check

When the above formula is applied for each meal period, these become the building blocks of a revenue estimate. However, this revenue estimate is on the assumption that each guest or cover is based on a turnover of one. If we are to assume different table turnover ratios for different restaurant types and meal periods, then we need to multiply the earlier revenue estimate with this ratio to arrive at the final revenue estimate.

For example, taking the earlier formula further:

Restaurant Revenue = Food & Beverage Covers X Table Turnover Ratio X Average Food & Beverage Check

An alternate way of calculating restaurant revenue is:

Restaurant Revenue = Restaurant Seating Capacity X Table Turnover Ratio X Average Food & Beverage Check.

One very important aspect to remember in using Table Turnover ratio is that the ratio must be accurately applied. When applied to full seating capacity, the factor will be less than when computed based on covers.

So, the approach is to estimate revenues assuming table turnover ratio is 1 and then multiplying actual cover count (or seating capacity) with the table turnover factor (number of times a table is turned over) to arrive at the final estimate.

This is why table turnover and meal periods in tandem are such powerful elements of budgeting or forecasting restaurant revenues.

New Hotel Revenue Projection

Another area of financial analysis where table turnover and meal period are used together is for new hotel revenue projections. This is done by actually applying table turnover ratio to the full capacity of the restaurant.

Moreover, table turnover can be generically used to determine various other factors like manning requirements, supplies etc.,

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Buffet Power in a Restaurant Sales Mix

Buffet Power in a Restaurant Sales Mix

This Part 2 of a 3 part series is on Buffet Power in a Restaurant Sales Mix.

Buffet Power in a Restaurant Sales Mix

Buffet Power in a Restaurant Sales Mix

Click here if you did not read Part 1.

In Part 1, we learned about the components of a sales mix being menu item mix, meal periods and market segments. We also saw how restaurant seat capacity plays such an important role in not only revenue generation but also profitability. We will now look at a concept which is central to optimizing sales mix in a restaurant and which is a popular approach adopted by hotel restaurants. In the process we will learn how this approach boosts restaurant profitability.

The Buffet Philosophy

No Restaurant Sales Mix analysis whether it be of menu item mix, meal period or market segment is complete without an analysis into whether menu items are a-la-carte dishes or a buffet spread. A-La-Carte dishes are single menu items sold separately. In a traditional menu list, each menu item priced separately is thus an a-la-carte menu item. The most popular and common offerings of restaurants are individual menu items or a-la-carte items. Hotel restaurants often offer buffet spread apart from a-la-carte ordering.

A buffet spread is a bundle offering which brings together the following generic menu items which are also available a-la-carte:

  • salad
  • soup
  • entree
  • dessert

The above is a generic buffet composition for lunch or dinner. There can be more items added to the above depending upon what the selling strategy is. But these can be considered basic.

Rationale for Buffet

Why are buffet spreads offered?

Apart from the obvious reasons of ease of access to the customer or guest, quick turnaround, visual attraction, more choices, unlimited quantity, there is a powerful principle at work relating to a Restaurant Sales Mix.

Buffet Power in Revenue Contribution

A buffet which is well conceived of and priced attractively is a major contributor of revenues to a Sales Mix.

Let me give you an example of what this means.

ILLUSTRATION

Lunch Buffet in a All Day Dining Restaurant (Coffee Shop)

Items included are: salad, soup, entree, dessert.

Individual prices of a-la-carte items included in buffet:

  • salad $3.50
  • soup $4.50
  • entree $11.75
  • dessert $4.75
  • Total of a la carte items (without taxes): $24.50

Now, assume that the buffet spread is priced at $20 (without taxes).

Let us list the advantages of this strategy:

  • Most obvious one is the saving of $4.50 (this amounts to 18% discount based on a la carte total and more than 20% based on the buffet price)
  • Instead of selling the salad, soup, entree, dessert individually, in one shot, all items have been sold through a buffet offering. This has (as said before) powerful implications for the Sales Mix.
  • Not all guests who choose buffet spreads consume every part of the meal. Some may just have the entree and dessert or the soup, entree and dessert and similar combinations which do not include all the items. This has implications too. The most immediate effect is that revenue contributions are higher when a buffet is sold than when individual a-la-carte items are sold. Simply put, revenues are higher with buffets sold. Apart from this increased revenues, there is a strong impact on margins and profitability.
  • With a buffet laid out, the restaurant outlet can operate with less number of service employees. This again reduces labor costs and boosts restaurant profitability
  • With a buffet laid out, there is less movement in and out of the operating equipment (plates, dishes, chinaware, glassware and so forth) between restaurant and the kitchen. This brings down breakages thereby also boosting profitability of the restaurant.

It is quite obvious that a Sales Mix that shows individual a-la-carte items sold (not all of them all the time) is less effective than a buffet sold. As said before, the buffet is like a bundle.

The McDonald’s Meal Combo model

Although McDonald’s is a fast food outlet serving pre-portioned and processed food and is different from a hotel restaurant outlet (primarily the all day dining restaurant), the Sales Mix principle involved in the Meal combos sold by them is similar to the buffet spreads offered in hotel restaurants.

By selling Fries and a Soft Drink bundled into a Meal combo with the entree that is the Burger, McDonald’s has successfully boosted revenue contributions by optimizing their Sales Mix.

Buffet Power and Contribution Margin

The increased revenue contribution from a buffet sales mix compared to individual a-la-carte items is clear from the above illustrations. But that is not the only benefit. A huge factor that boosts margins and profitability is that when the buffet is sold as a bundle, the additional variable costs for the revenues achieved are lower thereby increasing profitability.

Buffet Power in Restaurant Sales Mix Profitability

Finally, the most powerful implication on Sales Mix of the buffet spread offering is that more buffets sold in a particular meal period result in higher profitability (owing to better contribution margins as seen earlier) than compared to individual items on a-la-carte basis.

Table Turnover

One related factor in a revenue contribution from a sales mix is the concept of a table turnover ratio. Table Turnover Ratio is a simple ratio which measures the number of times a table in a restaurant is turned over during a particular meal period. In effect, how many number of times the same table in a restaurant is sold.

Obviously a high turnover ratio means higher incremental revenue for the restaurant.

In the concluding Part 3 of this 3 part series on Restaurant Sales Mix, we will examine the powerful concept of Table Turnover Ratio and its application in restaurant meal period analysis.

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Leveraging your Restaurant Sales Mix?

Are you leveraging your Restaurant Sales Mix?

Restaurant Sales Mix

Restaurant Sales Mix

Restaurant Sales Mix is the foundation on which restaurant revenues are generated. While profitability concepts between a hotel and a restaurant are broadly similar, they are not the same. A restaurant’s profit model is different from a hotel’s in the sense that the former has to deal with higher direct variable costs per u it than the latter. The foundation of restaurant profitability can be found in its Sales Mix. What is a Sales Mix?

A Sales Mix is the combination of products and services that a restaurant offers. Note the word “combination.” It is not simply the total number of products or rather menu items to be specific that are in offer. It is how each menu item combines with others that is key. You may ask what the difference is between total number of menu items and combination of menu items. This will be explained shortly. However, before that, it is important to note the similarities between the hotel (predominantly rooms department) and restaurant profit model. Hotel room revenues are generated on the foundation of market segments while restaurants depend on sales mix for their revenues. In fact, in one department of restaurant revenues too, market segments play an important role.

Sales Mix is not merely the foundation of revenue generation but is also the fulcrum for restaurant profitability. In the parts 2 and 3 of this Restaurant Sales Mix post, we will examine how profitability is also significantly influenced by a well thought out sales mix which is in sync with customer expectations and tastes.

COMPONENTS OF SALES MIX

So, what are the components of a restaurant Sales Mix? There are three components – Menu item Mix, Meal Period Mix and Market Segments.

Menu Item Mix is the foundational component considering that a restaurant’s primary offering is about menu items. You could say that the menu item is the smallest product offered. This mix is thus about how many different combination of menu items that are on offer within a food and beverage category.

Meal Period Mix, while still dealing with menu items per se (other than the concept of Buffet), categorizes menu items based on different meal periods in a day. The most popular meal periods are breakfast, lunch, afternoon tea, dinner and supper. Each meal Period is at a different time of the day.

The third major component of Market Segments is mainly related to the Banquet or Catering function of a restaurant. It targets the profile of a catering customer into market segments like local group, local individual and so on. A restaurant may or may not have this component.

The primary purpose of the components of the Sales Mix is to classify menu items (the smallest offering) into various customer target profiles and use those profiles to tailor offerings. The profile of a customer coming in for breakfast is different from lunch and similarly for dinner.

SEAT CAPACITY

One of the most critical elements of a restaurant revenue generation strategy is the Seat Capacity of the restaurant. Knowing the maximum number of seats in a restaurant is critical to keeping the restaurant full over different meal periods. Again, the seat capacity plays a different part for each meal period and more so if some of the meal periods have a buffet offering. Buffets are fully discussed in Part 2 of this Sales Mix post.

Seat Capacity plays a huge part in the profitability of a restaurant too. The current volume of covers served that is being achieved by a restaurant is always compared with the Seat Capacity. At the time of designing and conceptualizing the restaurant, it is very important that demand estimates be accurate. It may mean the difference between a largely empty restaurant (too high Seat Capacity) or one that is always full (too low Seat Capacity). This has repercussions for the stakeholder return in investment too.

Don’t forget to read Parts 2 and 3 of this Sales Mix post for powerful elements affecting the profitability of a restaurant.

If you liked this post, share it with your friends or colleagues who may benefit from it.

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Losing money in operation? 3 Ways to know

Losing money in operation? How would you know?

What is meant by losing money?

Losing money in business

Losing money in business

1. Break even point
Every business wishes to continue earning revenues, incurring manageable expenses and retaining good profits. So, sustaining revenues over a period of years is critical as this is the top line (as it is known in the hospitality industry). However, what if you are not able to sustain revenues or your expenses are spiralling out of control. All this will have a negative effect on your bottom line. But, within your operation, you would certainly like to identify the business volume (or even revenue dollar level) at which your revenues and expenses draw level. In other words, you are breaking even. While total expenses are technically the correct way to determine break even, using fixed expenses is a powerful way of determining that break even level. Moreover, knowing your break even point allows you to determine whether your operation has potential for future revenues and profit growth. Hence, losing money means: are your revenues covering at least your fixed costs?

Why is this so critical?

2. Fixed costs
Fixed costs are those which will be incurred irrespective of your business volume. In fact, fixed costs will be incurred even if you had zero volume! This is why your revenues should cover at least your fixed costs. Why not variable costs? Variable costs are determined by your business volume. They will exist only if you have business volume. For example, if for some reason, your hotel occupancy is zero on a given day (there are not guests in your hotel), that would have no effect on your fixed expenses which would continue to be incurred. It is only variable costs which are related to business volume which will change when business volume changes.

3. Revenue Potential
Break Even point is a level of your business volume when your fixed expenses are equal to your revenues. For example, in the case of the rooms operation in a hotel, knowing at what occupancy %, your fixed expenses level with your revenues is critical. This is because it indicates whether there is room to grow revenues further. Break even tells you whether your revenues have potential to grow beyond your fixed costs. This is why knowing whether you are going to be earning profits is so important.

Check your monthly revenues versus your monthly fixed costs on an ongoing basis. This will indicate potential for earning profits. Your owners will be watching this closely.

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5 Myths about Numbers

5 Myths about numbers

 

5 Myths about financial analysis

5 Myths about financial analysis

The reasons why numbers are  considered outside the realm of an individual with a non-finance background are the myths that surround it.  Moreover, the fact that the phrase “financial analysis” sounds very technical contributes to these myths to complete the aura of mystery.

Finance professionals and those with finance background have not helped the cause any by refusing to demystify financial concepts.  Perhaps, in their way of thinking, they hold the power of this knowledge and hence are reluctant to share it.

Financial Analysis can mean different things depending on how broad or narrow an interpretation of the definition we choose to take. From a broader perspective, financial analysis can mean the process of evaluating businesses, projects, budgets etc of a business venture that is currently in operation.

Myth 1
You need a Degree in Finance to understand Numbers!

While by no stretch of imagination is financial analysis a generalized area or body of knowledge, it is equally true that it is not something which requires a full degree in Finance to understand and utilize.  The concepts underlying numbers are quite simple and while a few of the terms need to be digested, a lot of the work can be achieved through logic and common sense.

Myth 2
You need to be an Accountant to understand Numbers

While it is true that an Accountant by virtue of being the individual tasked with the primary responsibility of producing financial statements tends to understand numbers more quickly, it is definitely not true that one has to be an accountant to understand and utilize numbers. This ease of understanding for the accountant comes from the umbilical cord connection between accounting (books of account) which are the source for production of financial statements.

However, any Business Manager who is responsible for results can pick up concepts of numbers without knowing any technical aspects of accounting and in fact it is true in most industries, that the head of the unit is a non accountant who is responsible for the results and performance of the unit. Again, it is important the accountants make an effort to lift the veil that surrounds the concepts and make them simple to understand for those not from a finance or accounting background. This is a responsibility that many of them unfortunately fail to carry out resulting in a deeper fear in the minds of the non-finance people.

Myth 3
You need to be a wizard in Math to carry out Analysis with Numbers.

This is another of those classic myths.  Since a major part of the financial analysis exercise deals with numbers and figures, people immediately jump to the conclusion that you need to be some kind of wizard in Math to carry out effective numbers analysis.  This is as far from the truth as the first two myths which dealt with having a finance or accounting background.

While again, numbers and figures do behave in a certain manner and understanding those behaviors makes the analysis that much more impactful, it has nothing to do with math per se.  I will even go as far to say that if you can do basic addition, subtraction, multiplication and division and have a working idea of percentages you are good to go.

Myth 4
People with non finance background cannot be good at Numbers

This myth is purely the result of the handiwork of accountants and people with finance background who have resolutely refused to cede what they consider their territory. However, as I said earlier, more business unit heads are those from a non-finance background and thus this in itself blows the myth that they cannot be good at financial analysis since they are responsible for the performance and results of their unit.  You have to remember that the accountant merely produces the financial statements from the books of account, he does not hold singular rights or for that matter mastery over their output.

I have regularly come across business unit heads with a non-finance background who have a very healthy head for finance and financial analysis and by virtue of this have actually performed excellently. It is something that can be emulated with a bit of effort and support from the accountants/finance people.

Myth 5
You need to go through difficult technical terms for understanding Numbers

The last of the five myths and a big one at that is that you need to go through complicated technical terms before understanding numbers.  While it is true that there are technical terms to be understood and used in analysis, they are by no stretch of imagination insurmountable and definitely not out of bounds for non-finance people.

As an accountant and finance person myself, I can without hesitation say that a good chunk of the understanding will come from logic and common sense and knowing cause effect relationships.  In fact, I would go as far as to say that knowing cause effect relationships will de-mystify financial analysis a great deal and I will be actually using this approach to do just that in this blog series

So, fasten your seat belts (as opposed to putting on life jackets which will frighten all and sundry), this ride may be bumpy but I promise it will be exciting and at the end of it you will be as savvy in financial analysis as any of your esteemed accounting or finance colleagues. I promise it will not give rise to sleepless nights or hair pulling or head bashing.

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Restaurant Performance Snapshot

Restaurant Performance Snapshot

The vital statistics of a restaurant operation

Do you know the vital statistics of your restaurant operation? If your boss happened to ask you to provide a big picture overview of your restaurant operation, would you be able to cover the most important metrics of your operation?

Restaurant Performance Snapshot

Restaurant Performance Snapshot

Your restaurant operation is affected by many key elements which I call the Profit Triggers. These triggers impact your restaurant performance in a big way. In other words, these profit triggers contribute to your restaurant revenues, profits and related indices in a major way.

This blog post will look at four major categories of performance indicators for your restaurant operation which you must absolutely be on top of. A Restaurant Performance Snapshot format is also provided which you can download and customize for your needs.

The four major categories of performance indicators for your restaurant operation are:

  1. Performance
  2. Revenues and Profitability
  3. Statistics
  4. Forecasts

Performance

Performance is the first major category for your restaurant operation. It refers to how your restaurant fared compared to the market in which you compete or operate. It begins with knowing the revenue share of your restaurant versus the market. In short, this is knowing who your competition is.

Why is knowing about the competition so important?

If you operate in a particular competitive set, it is evident that decisions that you take on pricing, quality, presentation, products and services will impact not just your results but also that of the the competitive set. So, knowing where you stand versus your competition is key.

Performance can be seen from the point of view of market segments of your restaurant outlets and the catering operation. Generically, the catering is the most profitable operation in the food and beverage business. Results can be tracked both from a revenue perspective as well as covers served which indicates volume.

See attached Restaurant Performance Snapshot for the elements of the performance category.

Revenues and Profitability

Revenues are the foundation on which any restaurant (or for that matter any business) operation rests. Understanding your revenue behavior from the perspective of actuals, budgets, last year allow you to make comparisons of business results and indicating where you stand. Knowing whether you are growing or not in your revenues over time is critical to sustain the operation itself.

If revenues are the foundation of your restaurant operation, then profitability is the very reason for survival and earning a good return on investment for your owners. Profitability is what sustains the restaurant operation and injects vital cash flow to run the business. It is often said in the hospitality industry that if there is no top line, there is no bottom line too. Owners are constantly looking for sustainable profits to continue running the restaurant operation.

In measuring profitability, knowing how your food costs, labor costs move is critical to know. These are the costs which actually dictate what profits you are able to retain from the revenues you have earned.

See attached Restaurant Performance Snapshot for the elements of the performance category.

Statistics

While performance versus competition and revenues and profits are major categories, knowing the price and volume elements of related performance indices is critical. Here is where knowing how much of your restaurant results is coming from the occupancy of the hotel (for a restaurant operation within a hotel), how much of your guest patronage is in-house and how much non-resident, knowing what your overall average check is are indicators that allow you to take decisions in the right direction in the pursuit of budgets and targets.

Most times, the direction in which the statistics are headed can clearly point to what is happening to actual revenues and profits. So, keep a sharp eye out for indications of drop in volume or growth from these elements.

See attached Restaurant Performance Snapshot for the elements of the performance category.

Forecasts

While the measurement of revenues and profits during the current month and year-to-date is important, however, depending upon the month of the year you are presently in, knowing the big picture for the entire year is crucial.

For example, if you are in the month of March 2015, knowing what happened to your performance during March and year-to-date for three months is important. However, you must also know what your forecast for the entire year is indicating. In a way, you are using three months actuals and projecting nine months of forecasts which completes the picture for the full year performance.

Forecasts need  to be measured, actioned upon and  monitored both for revenues and profits.

See attached Restaurant Performance Snapshot for the elements of the performance category.

Conclusion

Your restaurant is a complex business operation. Keeping it on a path of revenue and profit growth is key to survival and competing in the environment you are in. If you are on top of the elements shown in the attached Restaurant Performance Snapshot and measure and monitor the indicators, you should be able to run a healthy, growth oriented restaurant operation.

Attachment

The Restaurant Performance Snapshot attached is a Microsoft Excel file that can be downloaded and edited to customize to your unique needs. However, it is important to keep the major four categories intact so that you get a comprehensive picture of your restaurant operation. Data inside the attached snapshot can be imported from your management reporting system or can be manually keyed in. The attached format is applicable for  a single restaurant or for the total food and beverage operation of the hotel, in case your restaurant is part of a hotel operation.

Restaurant Performance Snapshot

More of this kind of analysis and reporting is available in the full fledged Restaurant Profits A La Carte online course written exclusively for Directors of Food and Beverage and Executive Chefs about which you can learn here.

If you liked this blog post, please leave a comment below.

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Are you leveraging the Quantity Price Magic?

POWER TIPS SERIES

Power Tip 4 – Are you leveraging the Quantity Price Magic?

If you have not read Power Tip 1, go here for it on RevPAR VS Average Daily Rate focus or Power Tip 2 here for Buffet Spreads – bundling food and beverage items for higher profits and here for Power Tip 3 here for Are you sacrificing sales mix for sales?

Are you leveraging the Quantity Price Magic?

Are you leveraging the Quantity Price Magic?

A Room sold at a lower rate is any day better than a room vacant from a bottom line perspective
What does this mean? How can you leverage this powerful principle?

Room Revenue is contributed by two major elements – price and quantity. In other words, occupancy and average rate. But this is common knowledge. What is uncommon is their impact on profitability.

Price and quantity affect profitability differently. Any additional dollar of revenue earned contributed entirely by price (average rate) tends to go entirely to the bottom line when compared to revenue contributed by quantity which brings with it variable costs.

In short, if the major part of your room revenue performance is contributed by price or average room rate than volume or occupancy, you should me making more profits than if volume was making such major contribution.

So, next time you are analyzing your profitability, be aware that it all boils down to how your revenues were delivered. The top line influences the bottom lime. One of the most powerful principles profitability behavior.

Watch out for Power Tip 5 in the Power Tips Series.

Leave your comments below this post.

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Are you sacrificing sales mix for sales?

POWER TIPS SERIES

Power Tip 3 – Are you sacrificing sales mix for sales?

If you have not read Power Tip 1, go here for it on RevPAR VS Average Daily Rate focus or Power Tip 2 here for Buffet Spreads – bundling food and beverage items for higher profits.

Balanced Sales Mix

Balanced Sales Mix

Your profitability is enhanced not by your Sales but from your Sales Mix. So, what is the difference?

Sales is about the number of products on offer. Sales Mix is about the combinations of products on offer. Sales deals with absolute quantity sold. Sales mix deals with proportion of each product compared to total.

Proportion and Quantity
Why are proportion and quantity such a big deal?
Combinations are where the sales mix magic happens. Each combination of price, cost and contribution margin for the items forming part of the sales mix is what brings in the profit element.

Contribution Margin – path to profit
Put simply, contribution margin is selling price less variable expenses. This is different for different items being sold. However, the unique combination of high contribution margin items in the sales mix is what boosts the bottom line.

Pay attention to what each item in the sales mix contributes to profitability. It is more important than simply the number of items sold.

Watch out for Power Tip 4 in the Power Tips Series.

Leave your comments below this post.

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Buffet Spreads – Bundling Food and Beverage Items for Higher Profits

POWER TIPS SERIES

Power Tip 2 – Buffet Spreads – bundling food and beverage items for Higher Profits

If you have not read Power Tip 1, go here for it on RevPAR VS Average Daily Rate focus.

Buffet Spreads - bundling food and beverage items for Higher Profitability

Buffet Spreads – bundling food and beverage items for Higher Profitability

In any hotel food outlet and in particular when buffet spreads are offered, it is important to push beverage sales along with the food offering. Consider that a quality buffet offers you a soup, salad, entree, dessert and a drink all for a fair price. This strategy provides a balanced meal, enhances sales mix and revenues and boosts profitability. This is the Buffet spread philosophy.

It is predominantly a sales mix matter. The principle of bundling more than one product is an age old marketing strategy. Take for example the ubiquitous McDonald’s Value Meal Bundle – Fries and Soda are offered along with the main food item for a value bundle price. This is to the benefit of the customer. For the vendor, It helps push sales of 3 products instead of one. A classic Win Win situation.

In the case of hotel food and beverage items, there is similarly a silver lining. Selling four items (soup, salad, entree and dessert) instead of one has enormous benefits. Contribution margins are enhanced, service employees can be reduced with a buffet spread laid out and revenues are boosted. Moreover, beverage costs are much lower than food costs and tend to boost profitability through contribution margin.

The buffet spreads in hotels are their version of the McDonald’s Value Meal bundle. You get a soup, salad, entree, dessert and a drink all for a fair bargain price compared to an a la carte order of these items individually. In this case, there is something that even the McDonald’s bundle cannot offer – unlimited consumption of food and beverage items. You can always keep going back to the buffet for more helpings. A unique Win Win situation again.

Watch out for Power Tip 3 in the Power Tips Series.

Leave your comments below this post.

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RevPAR Vs Average Daily Rate Focus

POWER TIPS SERIES

Power Tip 1 – RevPAR Vs Average Daily Rate Focus

RevPAR VS Average Daily Rate Focus

RevPAR VS Average Daily Rate Focus

Recently, while working with my customer, I was asked this question: Why should hotel RevPAR be preferred over Average Daily Rate? My response was this.

If you were an archer and granted a boon to choose strength (power) against distance, which would you choose? Which is best?

The best would be neither power nor distance individually but the two together. The two are complementary to each other. The two enhance each other.

Business is no different. If you were tasked with achieving a revenue target, you will need both quantity and price (power and distance comparably). Just one of them is good but not good enough. You need both. This is why you would choose RevPAR over ADR.

Illustration

RevPAR = ADR x Occupancy %

See how RevPAR uses both ADR (power) and Occupancy % (distance) – the best combination.

It tells you what the combination of occupancy and rate is producing. This is the reason RevPAR has become a global norm to measure asset utilization in the hospitality industry.

Look out for Power Tip 2 which will be: Food and Beverage as a profit boost combination

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