In any restaurant, menu pricing is important. It shouldn’t be so expensive that your customers aren’t able to afford them or so inexpensive that you’re not able to recover your food costs.
Profit margin for restaurants is the percentage of sales that is profit after covering all costs. Markup, on the other hand, is the percentage you add to the cost of an item to set its selling price.
These two terms are important for you to know when setting prices, as they will help you increase your profits accordingly. Let’s see what these two terms mean and how they can help you in your restaurant journey.
Difference Between Profit Margin and Markup?
The difference between profit margin and markup comes down to how you calculate your profit. Profit margin for restaurants is the percentage of sales that is profit after covering all costs. Markup, on the other hand, is the percentage you add to the cost of an item to set its selling price.
Think of it like this: markup looks forward (how much more you charge compared to your cost), while margin looks backward (how much profit you keep from the selling price).
What is a Profit Margin?
Profit margin shows you what part of your revenue is actual profit. It gives you a clear picture of how much you really keep after costs. For restaurants, profit margins are simple; they tell you if your pricing is strong enough to cover expenses like ingredients, staff salaries, rent, and utilities.
According to a study by Deloitte, the average profit margins for restaurants usually range between 3% to 6% depending on the type of food business and location. That means if your restaurant earns RM100, only RM3 to RM6 is left as profit. This is why small changes in pricing and cost control make a big difference.
Examples of Profit Margin
Let’s say you sell a burger for RM20 and the cost to make it (ingredients, packaging, etc.) is RM10.
Your profit is RM10.
Profit margin = (Profit ÷ Selling Price) × 100
Profit margin = (RM10 ÷ RM20) × 100 = 50%
This means that half of what you earn from selling that burger is profit.
How to Calculate Profit Margin
The formula for profit margin is simple:
Profit Margin = (Selling Price – Cost) ÷ Selling Price × 100
If a bowl of noodles costs you RM7 and you sell it for RM15:
Profit = RM15 – RM7 = RM8
Profit Margin = (RM8 ÷ RM15) × 100 = 53.3%
By keeping track of your margins, you can see which items on your menu bring you the most profit.
What is a Profit Markup?
Profit markup, also called markup price, is the percentage you add on top of your cost to reach the selling price. While margin looks at profit compared to the selling price, markup looks at profit compared to the cost price.
For example, if your noodles cost RM7 and you add a 100% markup, the selling price becomes RM14. Markup helps you decide how much extra you should charge above your costs to set the right price.
Examples of Profit Markup
Let’s go back to the burger example. The burger costs RM10 to make, and you sell it for RM20.
Profit = RM10
Markup = (Profit ÷ Cost) × 100
Markup = (RM10 ÷ RM10) × 100 = 100%
Here, you doubled the cost to get the selling price, which means you used a 100% markup.
How to Calculate Profit Markup
The formula for markup is:
Markup = (Selling Price – Cost) ÷ Cost × 100
If you want to sell a pizza that costs RM12 to make with a 150% markup:
Selling Price = Cost + (Cost × Markup %)
Selling Price = RM12 + (RM12 × 1.5) = RM30
So, with a 150% markup, your RM12 pizza is priced at RM30.
Setting Your Prices With Profit Margins
When you use margins to set prices, you start with the selling price in mind. For example, if you want to keep a 40% margin on your dishes, you calculate backward.
Say your pasta costs RM9 to make. To have a 40% margin:
Selling Price = Cost ÷ (1 – Margin %)
Selling Price = RM9 ÷ (1 – 0.4) = RM15
Using this method makes sure that your desired margin is always protected no matter what the cost is.
Setting Your Prices by Profit Markup
Using markup is easier for many people because you just add a set percentage to your cost. If your markup is 200% and your cost is RM8, your selling price will be RM24.
Many food businesses prefer markup because it feels simpler. But the risk is that you might end up with different margins across your menu items. Some dishes may look profitable but actually bring in less profit percentage compared to others.
Pricing Your Menu: Margin or Markup?
So which one should you use? The truth is, both margin and markup have their place. Markup helps you set prices quickly, while margin tells you how much profit you really keep. To grow steadily, you should monitor both.
Industry research shows that food costs usually take up 28% to 35% of sales in restaurants (Restaurant Report, 2024). This means you should keep your prices at a level where your margin is strong enough to cover all other expenses like rent and staff.
If you only focus on markup without checking margins, you may price some dishes too low and lose profit without realizing it. On the other hand, only focusing on margins can make pricing complicated without a good system to track costs.
How EasyEat helps you Calculate Your Profit Margins
This is where technology can help. With EasyEat, you don’t have to calculate margins and markups by hand. EasyEat provides a detailed profit and loss report that shows you exactly how much profit you are making.
Recently, EasyEat merged with Food Market Hub, which is a leader in restaurant back-of-house software. This partnership makes it even easier for you to manage costs and grow your profits. The system gives you detailed reports about your cost of goods sold (COGS) and even ingredient-level reports. For example, you can see how much a single tomato or a piece of chicken breast adds to your dish.
By having this level of detail, you can price your menu more confidently, knowing exactly where your profit margins stand. This makes sure you are not just covering costs but also keeping healthy profits.
