KPIs, or Key Performance Indicators, are the single most important metrics to understand when you want to grow your restaurant. We've talked to hundreds of restaurant owners, and we were shocked to find out that the vast majority do not know these numbers for their own stores.
Tracking KPIs is, in our opinion, the only way to truly understand your business and grow it (or even just keep it around) reliably and effectively. Without knowing, for example, how much each new customer is worth to me, I can't know what I'm willing to pay to get new ones!
There is a seemingly unlimited number of KPIs to wrap your head around, so we've cut through the noise to give you a place to start. Here are the first 6 we think you should start with:
1. Cost of Goods Sold
The Cost of Goods Sold (COGS) is the total amount paid for ingredients and employee labor.
You can calculate this amount by taking the value of the inventory you start with at the beginning of the period, adding the cost of inventory purchased during that period, and finally subtracting the value of the inventory you end with at the close of that same period.
Equation: value of starting inventory + cost of purchased inventory - value of ending inventory
This KPI is important because it helps you find a big portion of your total monthly capital needed to continue running your business. Many business owners find peace of mind in knowing they can cover these basic "runway costs." When scaling up your business, it's very important to keep tabs quarterly, if not monthly, on these costs.
2. Gross Profit By Menu Item (and Popularity)
Gross Profit is the amount you make from selling any given menu item minus the unit cost (ingredients + overhead).
We believe it is important to understand this number for every menu item. As an example, if I'm selling a large Mega Pepperoni Pizza 🍕 at my shop for $22, I want to know how much money I "take home" from that $22. After calculating the cost of the ingredients going into it, I find that it costs me $11 in ingredients. I can drill further if I know it takes 6 minutes (10% of an hour) for an employee to make it. That employee makes $9/hr on average, so 10% of that is 90 cents. Total, my cost for the large Mega Pepperoni Pizza is $11.90. Now finally, I know that I have $10.10, or about 46% gross profit margins on that item.
Why is this important? Well, for my store, that's a very profitable menu item. I want to make sure that my most profitable items are also very popular items. That's how I generate the most gross profits for that location! I would want to then think about running discounts (I know I have UP TO $10.10 to spend getting a single customer in to buy the 🍕 now!), advertising, etc.
The other side of this is that I know which menu items to push forward. If I know I only make $0.30 in gross profit on my average deep dish pizza, I definitely don't want to spend marketing dollars getting people to buy it. I may even think about removing the items in general!
3. Average Revenue Per Order
This one is more straightforward than the last two. How much money does the average customer pay us in an average order (also known as average transaction)? We'd leave it up to you how to determine "revenue" per customer, but we think it's important to understand the average total order amount and also the gross and net revenues on that average order.
Why is it important to understand this KPI? Well, learning how to bring this number up requires first knowing the number. Only after that can we build a strategy around increasing the average transaction amount. Maybe it means better combos, lower prices, higher prices, more add-on items (sides), or a more exciting soda fountain. Whatever it is that gets you there, now you're able to measure it.
4. Lifetime Value (LTV) of Customers
At this point, you're probably getting a feel for KPIs and why they matter. Well, LTV is one of the most often tracked KPIs across every industry. In order to have sustainable profitability, you must know how much revenue you generate from your average customer over the ENTIRE LIFETIME OF THE CUSTOMER.
Woah. Okay, so first we need to know how long your average customer makes purchases from you. Is it 1 year? 3 years? 5 years? 40 years? Assuming my average customer is loyal for 3 years and they spend an average $20/mo for that whole 36 months, the LTV of my average customer is $720.
Even better is if I know that my Net Profit margin for an average customer is 33%. Now I know that I net about $238 over 3 years per customer.
Knowing that number gives my restaurant superpowers! Am I exaggerating? Don't think so.
I now know how much I'm willing to spend to acquire a new customer. I know how quickly I make that spend back. I can also now track the increase or decrease in LTV as I experiment with new marketing tactics or technologies. See why this is your new favorite superpower?
5. Total Monthly Revenue vs. Costs
In the startup world, we often get asked, "How long is your runway?" Did I say often? I meant always.
The runway is how much money you are spending each month vs how much revenue you are bringing in. If I have $100k in the bank, and I am losing $10k every month I am open, my runway is about 10 months long.
Now, hopefully I'm in the black and am making money– not losing it. However, this just isn't the reality for every company. The key to knowing how long my runway is and even just knowing if I am profitable in the first place is understanding this Key Performance Indicator.
Once I know what my Total Monthly Revenue vs. Costs are, I know my effective "bottom line." I can't run a successful business without this number.
6. Customer Acquisition Cost
Customer Acquisition Cost, or CAC, is how much it costs your restaurant to get a new customer to make their first order at your store.
In the modern world, technology has enabled business owners to attract customers in entirely new ways. We have everything from targeted Instagram ads, which can run ads locally for your brick and mortar restaurant, to Doordash, enabling you to start delivering food without needing your own infrastructure to handle it! It's incredible!
When you're looking to start investing in a new platform like this, you must know how much it costs you on average to acquire a new customer (CAC). Knowing this will help you measure your returns on any new platform. If a new platform helps you bring your CAC down, think about putting more into it. If I'm spending $100/mo on a platform that gets me 10 new customers per month, my CAC on that platform is $10.
As we mentioned, there are 100's of other meaningful KPIs out there. It's your job to figure out which ones are the most useful for your longterm business objectives.
These 6 KPIs alone can be used together to back a new marketing strategy for you with actionable goals and numbers. Continue tracking these month-to-month for ideal results. Experiment with new strategies and platforms to find which tools can help boost your KPIs and give you month over month growth in your restaurant.
Good luck! And please feel free to reach out if you have any questions. 💥