Anyone who has ever looked at a business’s financials will quickly understand the difference between gross and net profit. But for clarity sake, let’s define them. Gross profit equates to how much money is made on a sale after deducting its production costs, while net profit is what’s left over after all other costs are deducted.
To start with a gross profit example, a standard hamburger might have raw costs totaling a mere $1.86, according to an article by Forbes. Sold for an average of $9, that means the gross profit is $7.14—equating to a 384% markup.
To the uninitiated, it would appear as though this hypothetical restaurant is taking in massive profit! But of course, there’s more to the story. As you know, there are a lot more costs to serving that burger than the materials, including labor (host, server, busser, chef, etc.) and overhead (utilities, property, taxes, maintenance, etc.). That Forbes article continues, “On average, 30% of restaurant revenues go to labor costs, 30% goes to general overhead, and 30–33% is spent on ingredients.” When it’s all said and done, “restaurants need to mark up ingredients on average 300%” to “make a slim profit (generally 3–5%).”
In other words, that $9 burger only generates $0.45 in net profit. That restauranteur has to sell a lot of burgers to strike it rich! Of course, this is why restaurants sell appetizers, sides, drinks, and desserts. Add-ons usually have higher profit margins anyway (500% or more, as it turns out), so it’s a no-brainer way to push the net profit higher.
While the difference between gross and net profit might seem like a bookkeeping issue, maybe something for the business owner to stress over, regular employees should be aware too. They rarely have to consider it, of course, because most employees are paid a flat rate per-hour, or if they are commissioned, they receive a percentage of the gross profit. Indeed, restaurant servers are usually tipped as a percentage of the revenue by the diners themselves, so a 20% tip on that $9 burger equals out to $1.80 in their pocket. (That tip is larger than the net profit, by the way!)
For both commissioned employees and those who receive percentage-based tips, selling more add-ons makes personal sense. A larger sale equals a bigger payday for them, so the natural inclination should be to offer. But for employees who are paid flat wages, they often don’t consider the value of making those offers. However, they should also consider that the better their employer does, the more he or she can afford to pay higher wages or hire additional help to relieve stress on the front lines. Moreover, add-ons and upsells are often welcomed by customers because they give them a more complete experience.
If your business employs people who are paid flat rates, you might consider offering incentives for great work. Bonuses will catch their attention, as will public recognition for hard work. Acknowledging their adherence to your customer-service goals and general attention to detail is especially easy when you use mystery shopping, and doing so sets a great example for your whole staff.
Either way, reinforcing the idea that the whole crew needs to work together to keep the ship afloat is critical to fostering a positive working environment, and will also help ensure profits are healthy. The Brandt Group is here for you as you consider how to train and reward your employees for offering those make-or-break add-ons and upsells effectively. Through our world-class mystery shopping services, we can measure the complete customer experience, from first contact to final sale. Reach out today!
