Bar Profitability: The Complete Guide to Boosting Bar Profit Margins
It’s 900 A.D. You stumble, thirsty, across a field in medieval Ireland.
You make it to an open door, beyond which are the sounds of merrymaking. You enter.
And you slam a beer.
You’re in what will become the oldest bar in Europe: Seán’s Bar in Westmeath, Ireland.
See, our desire to belly-up to a bar and relax is as old as the hills.
And it’s only growing. From 2013 through 2018, the bar and nightclub industry in the U.S. has grown an average of 2.9% year-over-year.
Good news: it’s not stopping any time soon. In 2018, it was a 27 billion dollar industry. Make the right choices, and your little corner of it can be profitable, too. Sometimes wildly profitable.
To boost your bar profit margin, you’ll need to build a strategy based on a solid understanding of pour cost and drink pricing.
And that’s just what we aim to help you do in this lovely bar profitability guide. Let’s get to it.
Understanding Pour Cost
Figuring out your pour cost has a lot to do with understanding your bar’s inventory.
And beverage inventory management is a huge topic. That’s why we wrote a whole guide dedicated specifically to it. Read it and you’ll be an inventory whiz.
Specifically, you’ll first need your inventory usage in dollars, otherwise known as the cost of goods sold (COGS).
What is Pour Cost?
Pour cost, also sometimes called liquor cost, is one of the most misunderstood parts of running a bar. And it’s one of the most important to boost bar profitability.
It’s how much inventory you’re using—in dollars—divided by how much of that inventory you’re selling. It’s one of the primary drivers of bar profit margin.
The average bar has a pour cost of 25-30%. Most bar operators consider 20% a good goal.
Liquor cost, beer cost, and wine cost will all differ slightly, though. Keep that in mind as you read about industry-wide pour cost numbers.
Formula for How to Calculate Pour Cost
Pour Cost = Inventory Usage ($) / Total Sales ($)
Let’s say we order an Aperol Spritz from Sean’s Bar.
The inventory usage in dollars for one month was $300 worth of Aperol, Prosecco, and soda water.
Sean’s sells an Aperol Spritz for $6.25 each, and, over the month, they sold 160 of them.
The total revenue for Aperol Spritz that month was $1,000.
Pour Cost = Inventory Usage ($) / Total Sales ($)
Pour Cost = $300 / $1000
Pour Cost = 30%
That’s pretty weak from a bar profitability standpoint. That means they’re only making 70% profit on their Aperol Spritzes.
Not so good, Sean’s.
To get the pour cost for the entire bar, Sean’s will have to do this for every. item. they sell.
Yes, doing that manually can be monotonous, and it’s easy to make mistakes. And that’s why a bar inventory management software is a huge help.
Now that we have our pour cost, let’s look at all the ways we can make decisions based on it that will increase our bar profit margin.
Lowering Pour Cost and Boosting Bar Profit Margin
Once you’ve calculated the pour cost for each item on your menu, and your bar as a whole, your sacred mission is to figure out how to reduce it.
There are four primary ways to attack high pour cost and boost profit margin: deliberate drink pricing, smart ordering, watchful variance management, and creative marketing.
Strategic Drink Pricing
A lot of bars do this backwards: they set prices then observe the pour costs.
The right way to do it is set a target pour cost first, then price the drink to achieve it.
Here’s a handy formula:
Drink Price ($) = Ingredient Cost ($) / Target Pour Cost (%)
Let’s take a closer look.
As mentioned, industry average pour cost hovers around 20%. We know that Sean’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 even lower: most bar operators shoot for around 15%.
But we’ll not be greedy … yet. Let’s price our Aperol Spritz with a target 20% pour cost.
Based on our pour cost numbers, we’ve got a $300 cost of goods sold and 160 units sold, so we’ve got an ingredient price of $1.88.
Drink Price = $1.88 / 0.20
Drink Price = $9.40
To hit their target pour cost of 20%, Sean’s should charge $9.40 for an Aperol Spritz.
But that’s not the end of the story.
Bar Profitability and Raising Drink Prices
Pricing your drinks is ultimately a delicate dance between how popular a drink is, how much people are willing to pay for it, and how much effort it takes to make it.
Consider labor 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 affecting units sold is a super easy lever to pull to lift your bar profit margin.
- Your mixologist created something astounding and the whole neighborhood is buzzing about it. In that case, there may be no difference between $9.40 and $12 to the customer.
Beyond that, food and beverage costs themselves change all too 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 the price of the goods themselves rises, chances are your pricing will too.
- If indirect costs increase, like, say, rent or other operating expenses, chances are your pricing will too.
- When you’re updating your menu, you want the pricing to be generally 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. EasyList from BinWise can help with this; it uses point-of-sale data to show you how other restaurants have priced and sold specific products.
Bar Profitability and Smart Ordering
When ordering and receiving shipments, attention to detail is a big part of keeping cost down.
According to Master Sommelier Laura Maniec:
“Operational issues like tracking shipping and receiving orders are vital for success. For example, it’s very important to pay attention to issues like getting shipped wines you didn’t order, you need to send back or didn’t notice so you can account for every single bottle. The practice of attention to detail keeps your cost down.”
Another big part of running a profitable beverage program is your relationship with distributors. The more you order from a distributor, the more likely it is that you can negotiate prices.
BinWise Pro makes it easy to see which suppliers you order from, how much you order, and how frequently you place the orders. That information can be used to leverage your buying power and secure lower prices (i.e., volume discounts).
Shrink Your Shrinkage, Boost Bar Profitability
Variance, or the difference between the amount of liquor sold and the amount of liquor used, is one of the biggest obstacles to a soaring bar profit margin. It’s also called breakage, shrinkage, or loss, for obvious reasons.
Good 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 or the locations (dining room, patio, etc.) with the biggest variance.
This will point you to the exact areas of opportunity you have to decrease variance and increase bar profitability. But once you identify where your variance is coming from, what do you do about it?
Back to Master Sommelier Laura Maniec, well-known in industry circles for being a “variance hawk”:
“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, including investigating the variance and typing up a detailed report, these are vitally important tasks for increasing sales and lowering costs by paying attention to seemingly small details.”
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 staff to hit the mark consistently will do wonders.
- The comp policy. Comping drinks, within reason, can be great 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.
- 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.
Develop a Diverse Menu
A profitable drink menu is one that no customer can put down without ordering a drink. That means it’s diverse: it’s got something for everyone.
A good 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, and provide them with some old favorites they can fall back to.
- Signature cocktails. This is what impresses people. The Nimble Bar Co. came up with 5 cocktail families—Negroni, Sidecar, Old Fashioned, a Sour, and a Collins—that “influence the creation of 99% of all great cocktails.” Getting a handle on and experimenting with these will give any signature cocktail a credible, time-tested foundation.
- Regional offerings. Highlight what makes your part of the world so special, both for locals to take pride in it and for visitors to discover it. You wouldn’t open a bar in Chicago without offering PBR or Old Style. You wouldn’t open a bar in anywhere 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.
Train Staff to Upsell
You’ve got a diverse menu full of drinks with low pour costs. Now it’s off to the races. Here are some great ways to put your staff is in the best position to sell:
- 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 tree can grow up to 40 feet high. I ordered the lychee martini immediately.
- 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, 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 all staff are talking about, or each staff member can choose their own drink to highlight.
Easy Bar Marketing Ideas
Done right, your bar marketing gives customers to a reason to show up and a reason to stay. And a reason for your bar profit margin to soar.
Here are some tips to get ‘em early and keep ‘em there late:
- Have at least one special every day. Happy hour? A nightly special? Both? Most people immediately ask “What are the specials?” Don’t disappoint them! Even if you’re not offering the greatest discount ever that night, at least you’ll have a good answer.
- 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 easily discoverable.
- Host pop-up restaurants. If you don’t serve food, this is an incredible way to offer guests great food, support local businesses, and attract a whole new network of people in the door who appreciate you hosting their friends.
- Have a rotating schedule of events. Cult movie screenings, live music, trivia. Plan a few events per week for a month, create a calendar for the month, put it online, then print it out and hang it in your bar’s restrooms. Seriously.
- Advertise online. Both Facebook Ads and Google Ads can target based on geographic location. On slow nights, surface an ad with your 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
Mastering your pour costs, pricing strategies, menu building, and marketing are tried-and-true ways to ratchet up your bar profitability.
One of the best tools to do that quickly and effortlessly is BinWise Pro.
It’s all-in-one beverage inventory management system, and some of the nation’s most iconic beverage programs are already using it to whiz through taking inventory, automatically generate pour cost and variance reports, and take their profits.
It’s time to sign up for a free demo, hear exactly how, and become the next great barkeep in a line stretching back a thousand years.