Margin

Margin is the amount of revenue remaining after a defined cost has been deducted, usually expressed as a dollar amount or percentage of revenue. In restaurant management, the word is used in several ways, including gross profit margin, contribution margin and operating margin. It is important to specify which margin is being discussed.

Common types of margin

• Gross profit margin: net sales minus cost of goods sold, expressed as a percentage of net sales.
• Contribution margin: selling price minus variable costs, expressed as a dollar amount or percentage.
• Operating margin: operating income divided by net revenue, after operating expenses are deducted.
• Net profit margin: net profit divided by net revenue, after all applicable expenses.

Restaurant example

A dish sells for $20 and has an ingredient cost of $6. Its food gross margin is $14, or 70% of the selling price, before labour and other operating costs. This does not mean the restaurant earns a 70% net profit.

Margin versus markup

Margin is calculated as profit divided by selling price or revenue. Markup is calculated as profit divided by cost. They are not interchangeable: a $6 item sold for $20 has a 70% gross margin on the ingredient-cost basis, but its markup over the $6 cost is 233.3%.

Chef’s tip: Always label the cost basis and the type of margin in reports. Food cost, labour, overhead and other expenses must be considered before drawing conclusions about restaurant profitability.

Key distinction: Margin is the share of revenue remaining after a defined cost; it is not the same as markup or net profit unless those specific calculations are stated.