A good profit margin on the most common cocktails is about 80%. That’s, on average, 10-15% higher than food. That's why bar profitability can be so high, and being a good bar manager is in high demand. There’s no denying that serving drinks is a great way to make money in the hospitality industry.
If you’re pricing your drinks correctly, that is.
That’s why it’s important to have a sound alcohol pricing strategy (and a beer pricing strategy) to use at your bar. So let’s walk through the components of one, then take a look at how to implement it.
How Do You Decide Menu Prices?
Bars and restaurants consider three things when deciding menu prices: the cost of the item being sold, competition, and demand.
This is the most traditional and airtight way to price drinks and cost out drink and alcohol menus. Pour cost is the amount of the drink’s price that it costs to make the drink. A drink with a pour cost of 15% has a profit margin of 85%.
The average bar industry pour cost is between 18% and 24%. Most food and beverage directors expect a pour cost of 20%. That means they’re shooting for 80% gross profit on their drinks.
But alcohol pricing based on a desired pour cost doesn’t matter if your drinks aren't selling. That’s why you should also consider your competition’s pricing and customer demand.
How Much Should a Drink Cost?
There are two answers. First, the average drink costs between $1 and $3 for a bar to make. Here are some tips to lower pour cost if it's trending high. Second, a drink should cost 20% of what you’re selling it for. Again, that’s a 20% pour cost and what the bar and restaurant industry shoots for.
Let's say you’re hitting a 20% pour cost with a $12 margarita. But the bar down the street is selling a similar $10 margarita. Your pricing strategy may need to be revisited if that discrepancy is eating into your units sold.
It’s worth accepting a higher pour cost if it means actually selling drinks. But before lowering your prices because your competitor is, make your cocktail stand out for what makes it different. Do you use small-batch tequila? Mention it in the description. A revamped drink description and some good old fashioned menu engineering can likely get your margaritas moving off the shelf at your desired price.
On the flip-side, if your $12 margarita is flying off the shelves, then it may be underpriced. If you increase the price, the demand may not drop proportionately and you’ll profit.
However, if it’s not selling and you lower the cost, you may also profit. Even if that means a higher pour cost. That’s because you’ll be selling a lot more drinks.
There isn’t a one-size-fits-all answer. The bars that get this right test their pricing strategies all the time. You’ll have to do something simple math to figure out your best option. Read on and you’ll see how.
How Do Bars Price Drinks?
Bars typically price drinks by targeting a pour cost and pricing the drink to achieve it.
You know how much it costs to make a drink and how much profit you want to make on it. That that point, pricing a drink is a straightforward calculation. Figure out what pour cost you want and adjust the price to get there. Wine by the glass and wine bottle pricing work a little differently.
Let’s see how that looks in action by calculating a drink price based on pour cost, then factoring in competition and demand. We’ll keep going with the $12 margarita.
How Are Drink Prices Calculated?
Drink prices are calculated by dividing the cost of their ingredients by the desired pour cost.
Your $12 margarita has a pour cost of 20% and a profit margin of 80%. That means the cost of the drink itself, the pour cost, is $2.40.
Now let’s say you want a pour cost of 18%. You’ll use this formula:
Drink Price ($) = Ingredient Cost ($) / Target Pour Cost (%)
Drink Price ($) = 2.40 / .18
Drink Price = $13.33
You’d need to price your margarita at $13.33 to achieve a pour cost of 18%.
Factoring in Competition
Let’s say you’re selling 100 margaritas a week at $12 each. At a 20% pour cost, you’re making $960 profit on margaritas per week.
But what if you set the price at $11 and sold 20 more? That would be a 22% pour cost but leave you with $1,030 profit.
You decreased your price and made more money. Everybody wins.
Factoring in Demand
Now let’s say you’re selling 300 margaritas a week at $12 each. At a 20% pour cost, that’s $2,880 profit per week.
That’s a lot of margaritas. Obviously there’s a demand for them. If you increase the price $2 and sell 70 fewer margaritas, then you’d be at a 15% pour cost. That’s great! But that’s only $2,737 profit per week on margaritas. You overestimated demand and you’re losing money.
So, How Do You Cost Out a Menu?
Costing out a menu is a dance between ingredient cost, demand, and competition. Start with a targeted ingredient or pour cost, then tweak your prices based on demand and competition. Observe your profit margins as you change your price, and find the sweet spot.
Don’t forget that ingredient cost, competition, and demand all change throughout the year based on supply and seasonal trends.
Cost out your menu at least 4 times a year. Once every season. And here's a useful tip. If you use a QR menu, changing your prices all the time is no big deal. You'll be able to update your menu instantly, for free.
Alcohol and Drink Pricing Made Easy
Figuring out current and target pour costs is the most important factor to a profitable alcohol pricing strategy. To boost your bar’s profit margin, drink prices need to change to reflect the reality of ingredient cost, competition, and demand. That’s a lot of calculations to do.
That’s where a liquor inventory software like BinWise comes in so useful. First, it helps you quickly and accurately take your beverage inventory. It then uses those inventory numbers to calculate pour costs and a host of other useful numbers. Everything you'll need to make the most profitable decisions you can.
Book a demo and let us show you exactly how BinWise helps bar managers and beverage directors all across the country.