Explore how to make a 20 percent profit margin
I recently learned that a profit margin of 7 percent is the average for the pizzeria industry. So, for every dollar in sales, only seven cents is left over to take home as profit. This means for every $10 pizza I sell, I should only get to keep 70 cents.
My first thought was: This must be wrong. Who gets out of bed early in the morning, goes in and makes dough, makes pizza all day long, deals with customer complaints, employee issues, equipment breakdowns, taxes and regulations, all while working until close with the ever-looming fear of a random lawsuit, just to take home a mere 7 percent profit?
I just could not come to terms with this figure. If this statistic holds true, it means that a typical pizzeria that is doing $10,000 in sales per week for $520,000 in annual sales will only generate $36,400 in profit. Wow, my mid-level managers make more than that!
I had a pretty good grasp of my profit margin already, as I do the majority of my bookkeeping myself.
But I wanted to be sure. So I sat down and recalculated my profit margin, then double-checked triple-checked. Obviously, I am making a mistake in my math somewhere, I thought to myself. My numbers can’t be right. But after verifying all of my math and numbers, my original estimate of my profit margin was verified: 20 percent. That’s correct, my pizzerias generate an average of 20 percent in profit.
My small-town carryout-only pizzeria with sales of $286,000 makes more than 20 percent in profit. My small-town dine-in, delivery and carryout pizzeria with sales of more than $700,000 makes a profit in the high teens. And my newest location, which is primarily a full-service pizzeria with sales topping a million per year, makes well over 20 percent in profits.
Keep in mind that, even though my pizzerias are generating over 20 percent in profit, I am not taking home 20 percent in income. Taxes, debt service and business reinvestment eat up a portion of those profits. But I am certainly keeping a bigger piece of the “pie” than most operators. So, what am I doing differently? And can every operator knock down 20% profit?
One of the first things that I did was to reach out to my colleagues in the pizza industry to see what they are achieving profit-wise. What I found was that the 20 percent profit margin was not unique to me. Many other operators are successfully operating near or above that mark. Operators I asked from Ohio, California, Washington and Alabama were having similar success. At the same time, however, I found that many operators I would have expected to be largely profitable were barely making a profit at all, or were just breaking even. After a good solid comparison and contrast review, I was able to identify these common denominators of high-profit margin operations.
Build Your Business Backwards
Much as solving a maze puzzle by starting at the end is easier than starting at the beginning, I prefer to start at the end of a business rather than the beginning. I always start with the amount of money that I want to make, and then move back to fixed costs, variable costs and sales numbers. By knowing the amount of profit I want, I can determine the amount of sales that I need. I am then able to tailor my menu to the food cost percentage that I need, not the other way around. I know how much I can spend in labor dollars before I even open my doors.
Location, Location, Location
The old cliché rings very true when trying to engineer profit. Having enough potential customers available, having a need and want for your concept in the community, and having low fixed costs are all part of the recipe for profit. A small Midwestern town of 20,000 people can have a higher profit potential that trying to shoehorn another pizzeria into New York or San Francisco, even though there are millions of potential customers.
Each one of my pizzerias is built to run 100 percent without me in the picture. I could disappear off the planet and my staff would probably not notice, except on payday. I built my systems so that every single task has a procedure, checklist, recipe or some other guide in place to explain how, why and when to do it. When your staff know how and why to do something, you can usually count on them to produce.
Outside the Box
Just about everything that I do is outside the box. My marketing budget is zero, so anything that I spend on marketing is over-budget. Most, if not all, of my marketing is completely nontraditional. I spend virtually no money on radio, newspaper or direct mail. My objective is to make people talk about me. Word of mouth is the most powerful marketing tool and you don’t get word of mouth by running coupons in the newspaper. My marketing strategy can be summed up by paraphrasing a popular saying: “ I don’t care what people think, as long as they think about me.” However, I hope they usually think good things.
I Don’t Care
I do things the way that I want and I don’t care what anyone thinks. I do it my way. I choose to lead rather than follow. Everyone is usually certain that I will soon be going out of business because of the way that I do things. They have been telling me this for the 17 years that I have been in business for myself. I still get the random email, phone call or letter from another local business owner expressing concern for the way that I operate my business and giving me some advice on how to keep my doors open. I don’t care what they think. I do it my way and it works.
Michael Shepherd is a four-time World Pizza Champion who owns and operates three unique brick oven-style pizzerias in Northwest Ohio. Over the past 17 years he has grown his small-town locations into a multi-million-dollar company.
This Pizza Expo Exclusive is part of a continuing series leading up to the International Pizza Expo at the Las Vegas Convention Center. Seminar speakers and demonstrators provide professional advice on their area of expertise.
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