A thousand years ago, people slammed beers in bars just like we do. Bar profitability was probably a little lower then, but still. Look at Seán’s Bar in Westmeath, Ireland, founded in 900 A.D. It’s the oldest bar in Europe.
Our desire to belly-up to a bar and relax is as old as the hills, and it’s not stopping any time soon. From 2013 through 2018, the bar and nightclub industry in the U.S. has grown an average of 2.9% year-over-year. Whether you’re starting a bar or running an existing one, the industry has room for you.
Make the right choices, and your little corner of it can be wildly profitable.
To help you get there, we’ll cover what your costs are and how you can lower them, then we’ll look into some strategies to increase your restaurant sales.
But first let’s set the stage with a look at bar profitability at a high level:
The annual revenue for an average bar is $330,000 and the average expenses are $290,400. This means the average annual bar profits are approximately $39,600 (assuming a 12.5% net profit margin).
Calculating Bar Costs
The first step to achieving bar profitability is to get a handle on your bar’s costs. There are four major cost figures that you’ll need to be able to calculate before beginning your journey to maximum profits. These costs are cost of goods sold, prime cost, pour cost, and food cost.
Understanding Cost of Goods Sold
Cost of goods sold (COGS) is one of the most important figures for any business owner. Essentially, it is the cost to the business for all products sold.
What is Cost of Goods Sold?
In a restaurant or bar, the cost of goods sold would be the cost of all the ingredients and materials used to create a plate of food or beverage. To calculate the COGS, you’ll need to take inventory at the beginning and end of each period you’re looking to measure as well as any inventory ordered. Once you know those numbers, you can plug them into the formula below.
Formula for How to Calculate Cost of Goods Sold
This simple formula is:
Beginning Inventory + Received Inventory - Ending Inventory = COGS
Understanding Prime Cost
Prime cost is used by business owners to set goals and optimize profits. Once you know your prime cost, you can use this number to determine where you are wasting money and to help set prices.
What is Prime Cost?
Prime cost is the sum of cost of goods sold and labor costs. Since it is the total spend on materials and overhead, it essentially accounts for all costs of operating your bar within a given time period. Once you calculate this number, you can divide it by total sales to help determine your profit margin. It will also give insight into the health of your business and help you set pricing to maximize profit.
Formula for How to Prime Cost
The formula for prime cost is:
COGS + Total Labor = Prime Cost
Understanding Pour Cost
Pour cost is the biggest driver of your bar’s profit margin. A good bar manager needs to know how to find and monitor this cost. Let’s take a look at what it is and how to calculate it.
What is Pour Cost?
At a drink level, pour cost is how much a drink’s ingredients cost divided by how much the drink is sold for. It's what percentage of the drink's sale price you're eating to create the drink. Liquor cost, beer cost, and wine cost all differ. Keep that in mind as you read about industry-wide pour cost numbers and calculate your own.
Your pour cost is how much inventory you’re using—in dollars—divided by how much of that inventory you’re selling. The average pour cost for a bar is between 18% and 24%. Most bar operators consider 20% a good goal.
Formula for How to Calculate Pour Cost
Pour Cost = Inventory Usage ($) / Total Sales ($)
Let’s try an example. Seán’s Bar sells an Aperol Spritz for $6.25, and, over the last month, they sold 160 of them. First, we need to calculate inventory usage for Seán’s Bar's Aperol Spritz in dollars. That will show us how many dollars worth of Aperol Spritz ingredients Seán’s Bar used during that time frame. We discover that the inventory usage rate in dollars for one month of Aperol, Prosecco, and soda water, was $300. Math tells us that the total revenue for Aperol Spritz that month was $1,000.
Pour Cost = Inventory Usage ($) / Total Sales ($)
Pour Cost = $300 / $1000
Pour Cost = 30%
That means it costs Seán’s Bar 30% of the price of an Aperol Spritz to make it. That's weak from a bar profitability standpoint. They’re only making 70% profit on their Aperol Spritzes.
To get the pour cost for the entire bar, Seán’s Bar will have to do this for every. item. they sell.
Doing that manually can be monotonous, and it’s easy to make mistakes. But you can certainly become your own liquor cost calculator if you want. That’s why a bar inventory management software is a huge help to growing your bar's profit margin. We’ll get into that later.
Understanding Food Cost
If you run a restaurant or a bar that also sells food, food cost is just as important to monitor as pour cost. Food has a much lower profit margin than alcohol and is subject to more waste. If you don’t keep a handle on your food cost, it can easily chew through your profits.
What is Food Cost?
Food cost is how much a dish’s ingredients cost divided by how much the dish is sold for. It's what percentage of the dish's sale price you're eating to create the dish. Ingredient costs vary greatly by dish, so understanding exactly what you’re using and which dishes are popular will help you keep this number from getting out of control. The average food cost is between 28% and 35%.
Formula for How to Calculate Food Cost
Just like pour cost, this formula is nice and simple.
Food Cost = Inventory Usage ($) / Total Sales ($)
How to Establish Bar Pricing
A bar or restaurant that doesn’t optimize its prices will struggle to grow. Using the costs and formulas above, there are many ways you can establish good pricing and grow the bottom line. Here are just a few using pour cost as a guide, but the same can be done for food.
Lowering Cost to Boost Bar Profit Margin
Once you’ve calculated the pour cost and food cost for each item on your menu, your mission is to figure out how to lower them. There are three primary ways to attack high costs and boost bar profit margin: strategic drink pricing, smart ordering, and watchful variance management.
Strategic Drink Pricing
A big part of pour cost is how much you’re selling drinks for. That leaves one half of the pour cost equation under your direct and immediate control. You’re the one in charge of alcohol pricing.
Let’s look at two ways bars can improve their drink pricing strategies to chip away at pour cost. The first is pricing based on pour cost, and the second is knowing when to adjust drink prices.
Price Drinks to Achieve Target Pour Cost
A lot of bars do it backwards. They set drink prices then observe the pour costs. The right way to do it is set a target pour cost first then price the drink to achieve it. Here’s a formula to help you do it:
Drink Price ($) = Ingredient Cost ($) / Target Pour Cost (%)
Let’s take a closer look.
As mentioned, industry average pour cost hovers around 20%. We know that Seán’s Bar is leaving a bunch of money on the table with their Aperol Spritz pour cost of 30%. What’s more, liquor costs—as opposed to beer and wine costs—tend to be lower. Most bar operators shoot for around 15%.
But let’s not be greedy … yet. Let’s price our Aperol Spritz with a target 20% pour cost. As we know, we’ve got a $300 inventory usage rate and 160 units sold. That's a total ingredient cost of $1.88.
Drink Price = $1.88 / 0.20)
Drink Price = $9.40
To hit their target pour cost of 20%, Seán’s Bar should charge $9.40 for an Aperol Spritz. But ingredient cost isn’t the only factor to consider when pricing liquor—or when pricing beer for bars.
Know When to Adjust Drink Prices
Drink prices also depend on four other things. First, look at how popular a drink is and what you can charge for it. Then consider how much work it takes to make the drink and other indirect bar operating costs.
Consider your costs, clientele, and demand:
- A fresh blackberry mojito takes a lot more energy to make than an Aperol Spritz.
- A bar selling fancy cocktails across the street from the Met Gala isn’t hurting for well-to-do customers. Knowing when you can price drinks higher without turning guests off is a super easy lever to pull to lift your bar profit margin.
- Your mixologist created an astounding cocktail and the whole neighborhood is buzzing about it. In that case, there may be no difference between paying $9.40 and $12 to the customer.
Beyond that, food cost and beverage costs themselves change often. Sometimes, the changes are minimal and you can afford to pay a few cents more without passing the increase along to your customers.
Unfortunately, that isn’t always the case:
- If indirect costs increase, like, say, rent or other operating expenses, chances are your pricing will too.
- When you’re menu engineering you want the pricing to be consistent across it.
- When competition raises their prices. If they’re doing it and it hasn’t affected their traffic, then they’ve proven the concept. Take full advantage.
You can’t always foresee changes to a lot of the above. One thing you do have total control over, though, is who you order from and what you order.
Bar Profitability and Smart Ordering
When ordering and receiving shipments, attention to detail and developing good relationships are big parts of keeping costs down.
According to Master Sommelier Laura Maniec:
"Operational issues like tracking shipping and receiving orders are vital for success. It’s very important to pay attention to issues like getting shipped wines you didn’t order, you need to send back, or you didn’t notice. Then you can account for every single bottle. The practice of attention to detail keeps your cost down."
You should also cultivate your relationships with distributors. The more you order from a distributor, the more likely it is that you can negotiate prices.
If you’re using bar inventory software like BinWise Pro, you can easily see who you order from. You can also see how much you order and how often you order. That information can be used to leverage your buying power and secure lower prices (i.e., volume discounts).
Once you get all the right stuff delivered, it's time to make sure you don’t lose it. We’re talking about shrinkage.
Shrink Your Shrinkage, Boost Bar Profit Margin
Variance is the difference between the amount of liquor sold and the amount of liquor used. It's one of the biggest obstacles to a soaring bar profit margin. It’s also called breakage, shrinkage, or loss, for obvious reasons. Decreasing variance mostly comes down to taking inventory accurately and training staff properly.
Manage Inventory, Manage Variance, Increase Bar Profitability
Good bar inventory management is crucial to figuring out the variance for every product in your bar and for your bar as a whole.
With the help of bar management software, you can generate variance reports based on the types of liquor with the highest variance. You can even drill down into the locations (dining room, patio, etc.) with the biggest variance. Not knowing how to do bar inventory isn't an excuse anymore.
Help Your Staff Help Your Bar Profitability
Back to Master Sommelier Laura Maniec, well-known “variance hawk” in industry circles:
“If I was going to summarize being successful at the variance issue, I would say the success is not me, it’s my staff. My staff deserves the credit for being a part of the whole process of controlling the variance issue. This process has several parts. Investigating the variance and typing up a detailed report are important for increasing sales and lowering costs by paying attention to seemingly small details.”
Hire bar staff that you know can handle the job and give them the tools they need to succeed. Making sure your staff is trained on the following is the most effective way to lower variance:
- Standardized pours. It’s not easy to pour accurately every time. Training your bar staff on standard liquor pours and standard wine pours will do wonders.
- The comp policy. Comping drinks, within reason, can be great restaurant marketing. Your staff just has to know when it’s appropriate and how frequently is acceptable.
- Where things go. Disorganized bars can lead to a lot of waste, spillage, and breakage. Provide an accurate opening and closing checklist to ensure the bar looks its best at all times.
- Recipes. Standardizing recipes and having staff memorize them helps decrease the drinks you can’t sell made in error or drinks with incorrect, wasteful proportions.
Strategic pricing, smart ordering, and variance management are the three most obvious ways to boost profitability because they lower pour cost. Put as much info as you can into a bar operations manual so your staff knows what is expected of them.
Now let’s look at growing your bar profit margin by increasing revenue.
Increase Sales, Boost Bar Profitability
Sure, this is an obvious statement, but let’s look into how it’s done: developing a profitable menu, upselling, and marketing.
Profitable Menu = Happy Bar Profit Margin
A profitable drink menu is a drink menu that makes its most profitable items the most visible items and has something for everyone. Hit these two and no guest will put it down without ordering a drink.
Make Profitable Items Visible
Once you have every item’s pour cost, you’ll know which drinks make you the most money. These drinks need to be in sections of the menu that people’s eyes are drawn to.
You’ll want to make sure your money-makers are differentiated. That can mean using a different font or making the existing font bolder or bigger. You can also highlight profitable items with a box or border.
You should also take human eye-scanning behavior into account. A lot of experts think guests read menus in a Z-shaped pattern, making the top left of a menu the most valuable real estate. If you want to dive deeper into this, we wrote a whole guide about drink menu engineering and design.
Not everyone will want your most profitable drinks. So once you’ve got them front-and-center, make sure the other choices are diverse. You wanna have a little something for everyone.
Have Something for Everyone
A diverse, accessible drink menu should include:
- High-quality drinks. Make sure you have a collection of premium, super premium, and potentially top shelf spirits.
- Not-so-high quality drinks. Well and call liquors are necessary not only for the customers who prefer it, but to lower your cocktails’ pour cost.
- Staples. Dry martinis, Manhattans, Mint Juleps are all popular for a reason. Looking at a cocktail menu and being unfamiliar with the vast majority of it isn’t very welcoming. Give people a port in the craft-cocktail storm.
- Signature cocktails. This is what impresses people. The Nimble Bar Co. came up with 5 cocktail families that “influence the creation of 99% of all great cocktails.” The Negroni, Sidecar, Old Fashioned, Sour, and Collins. Getting a handle on and experimenting with these will give any signature cocktail a credible, time-tested foundation.
- Regional items. Highlight what makes your part of the world so special, both for locals to take pride in and for visitors to discover. You wouldn’t open a bar in Chicago without offering PBR or Old Style. You wouldn’t open a bar in Pennsylvania without offering Yuengling. You wouldn’t open a steakhouse in Oregon without offering a local Pinot Noir.
- Seasonal offerings. Few things are as affected by season as the drinks people seek out. Why? Narrative psychology states that people operate by creating meaning out of life’s events. Summer? That means it’s time for Sangria. Fall? That means it’s time for a Ginger Moscow Mule. Seasons give us a reason to drink a certain drink, and to us, that’s reason enough.
- Wines by the glass. Jump on the wine industry train! There are few things in the bar world more profitable than selling wine by the glass. And people love the chance to taste wines without investing in a bottle (which is why setting the right corkage fee is important). Though wine bottle prices are no slouches, either. It's a win-win!
Your menu is in place. Great! The heavy lifting is done. But to push your sales over the edge, you need a human touch. Your staff should be upselling.
Train Staff to Upsell
You’ve got a diverse menu full of drinks with low pour costs. Now it’s off to the races. The final step is making sure your bar staff knows how to upsell drinks. Here are some great tips to get you started:
- Make sure your staff know everything on the menu. Not just the drinks, but the ingredients, and some facts about the ingredients. One time a bartender told me lychee trees can grow up to 40 feet. Connection made, I immediately ordered the lychee martini. Being knowledgeable about the product is one of the most important bartender duties.
- Use scripts. Of course, some well-placed adjectives can’t hurt. To make drinks sound as attractive as possible, go over some talking points for the drinks you’re pushing that evening.
- Recommend pairings. If you have a kitchen, channel your inner wine expert and come up with at least one drink pairing for everything on the menu.
- Focus and set goals. Having staff focus on selling or upselling a specific drink makes it easy for them to get into a rhythm and sound natural. It can be a drink of the night that everyone is pushing, or each staff member can choose their own drink to highlight.
Upselling is a privileged position because it means people have come to your bar in the first place. What if traffic is down? That’s where marketing your bar comes in.
Bar Marketing Ideas to Grow Profit Margin
Done right, your bar marketing gives customers a reason to show up and a reason to stay. And a reason for your bar profit margin to soar. This is one of the most important bar manager duties as it greatly affects the bottom line. Here are some tips to get ‘em there early and keep ‘em there late:
- Have at least one special every day. Most people immediately ask “What are the specials?” Don’t disappoint them! If you're lacking for creative ideas, no worries, use our happy hour ideas or bar promotion ideas to get started.
- Make it easy to find your bar’s hours, menu, and specials online. You don’t have to go full-throttle on a social media campaign, just get your information out there. Send your menus to online menu providers like Menupages and Google My Business, and make sure your Facebook page and website have everything discoverable.
- Host pop-up restaurants. If you don’t serve food, this is a unique way to offer guests great food. It also supports local businesses and attracts a whole new network of people.
- Have a rotating schedule of events in your bar. Cult movie screenings, live music, trivia. Plan a few events per week for a month. Then create a calendar for the month, put it online, and print it out and hang it in your bar’s restrooms. Seriously.
- Advertise your bar online. Both Facebook Ads and Google Ads can target based on geographic location. On slow nights, surface an ad with your drink special to people nearby.
- Sports! Sports! Sports! There is no denying the popularity of watching sports in a bar, from watering holes to fancier spots. If you have a TV, pencil in a night to put a game on and offer an associated special.
You Are the Next Great Barkeep
Figuring out and lowering your costs and increasing revenue are the ways to ratchet up your bar’s profit margin. Don't just try to cut costs by offering a low bar manager salary. The proper leader can take charge and keep profits flowing. To help you get to the profit land quicker, look into bar inventory software like BinWise Pro.
It’s an all-in-one beverage inventory management system, and some of the nation’s most iconic beverage programs are already using it. They whiz through taking inventory, automatically generate pour cost and variance reports, and send their bar profitability soaring.
Sign up for a free demo, hear exactly how, and become the next great barkeep in a line stretching back a thousand years.