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A good profit margin on the most common cocktails is about 80%. That’s, on average, 10-15% higher than food. Not too shabby.
It'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-it's why bars focus so much on a great liquor bottle display. If you’re pricing your drinks correctly, that is. So, it’s important to have a sound alcohol pricing strategy to use at your bar, to limit bar costs (learn more on bar costs: how to get a liquor license) and boost profits. Let’s look at how it’s done.
How to Price Liquor for Your Bar
Bars and restaurants consider three things when deciding menu prices: the cost of goods sold for the item being sold, competition, and demand. You can gain valuable insight into your competition by doing a swot analysis. Check out a bar or restaurant swot analysis example to get some ideas on how to do one.
How to Price Alcohol In a Bar with Pour Cost
Using liquor cost as a goal is the most traditional and airtight way to price drinks. Liquor cost, or 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%. Learn how to become your own liquor cost calculator.
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.
How to Price Cocktails
Let’s apply the same principle to pricing cocktails. We have our goals now. A pour cost of 20% and, therefore, a margin on liquor sales of 80%.
Let’s say your bar offers a margarita for $12 and it costs $3 to make. That’s a 25% pour cost. Understandably, you want to lower that.
You’ll use this formula:
Drink Price ($) = Ingredient Cost ($) / Target Pour Cost (%)
Drink Price ($) = 3 / .20
Drink Price = $15
You’d need to price your margarita at $15 to achieve a pour cost of 20%. You can do the same for food, but use your target food cost.
How to Price Shots of Liquor & Spirits
Setting shot prices at bars is an easy exercise. Given that there’s no additional ingredients, the pour cost calculation is straightforward. You just need to know how many shots in a handle (see also: how much is a shot) and follow the liquor cost formula and set your pricing strategy using the above method we used in the cocktail example.
The only real issues you have to account for are pouring doubles or serving drinks on the rocks.
Both of which change the serving size and alter liquor cost and profit margin.
This can be easily done by making sure to have a modifier button in your POS system. And making sure your staff doesn’t let rocks pours and doubles slip through the cracks. Variance for that reason is the primary way spirits affect pour cost. Because it’s not accounted for.
How Much Does Liquor Cost?
The average drink costs between $1 and $3 for a bar to make. That’s why liquor markup in bars is so profitable. Alcohol is relatively cheap to acquire. Especially when you get the right liquor bottle sizes that give more value for money.
Average Drink Prices at Bars
Most restaurants are aiming for 20% pour cost and 80% margin on liquor sales. That means the average drink prices at bars are between $5 and $15.
Liquor Markup in Bars
The standard liquor markup in bars is around 400 to 500%. That’s the highest of all types of alcohol. And that’s the reason why high-volume nightclubs that sell a lot of shots are some of the most profitable in the hospitality industry. They also help cover a lot of the bar's overhead expenses. Invest in accounting software to ensure you keep an eye on these costs and always charge the optimal prices.
Liquor Pricing: Other Factors
Competition
Let's say you’re hitting a 20% pour cost with a $15 margarita. But the bar down the street is selling a similar $10 margarita as an LTO (see LTO meaning). Your pricing strategy may need to be revisited if competition is eating into your units sold.
It’s worth accepting a higher pour cost if it means actually selling bar 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 and provide a great tool for restaurant marketing ideas.
Demand
On the flip-side, if your $15 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.
Psychology
Ever heard of psychological pricing? Our friends over in the retail industry came up with (and perfected) it. But many of its principles are applicable to bars, restaurants, and menus. Even your a la carte menu, table d hote menu, or prix fixe menu can be manipulated in this way. Check it out and use some mind power!
Additional Revenue Streams for Bars and Restaurants
As the markets become increasingly competitive, some businesses need to reduce their profit margins in order to compete. This can lead to a slower increase in average drink prices at bars compared to inflation. That’s why some owners might turn to additional revenue streams as a way to increase profit without increasing bar prices. Here are some ideas on how to diversify a bar or a restaurant’s income without changing the liquor prices.
- Sell merchandise. Selling branded t-shirts, mugs, and pint glasses has the potential to increase revenue and help a business’s brand awareness. These products can also be part of gift sets. Additionally, businesses in the restaurant industry can also sell bar tool sets, branded kitchen apparel, and even household products like scented candles.
- Organize events. Events such as live music performances or comedy nights have the potential to expand your clientele. Trivia quiz nights can also be an easy event to organize. Such games can increase customer satisfaction and help a bar or a restaurant increase profits without increasing their bar prices. Most businesses in this niche prefer to organize such events on weekday nights as they are slower compared to Fridays and weekends. In addition to these ideas, a restaurant can also consider organizing online cooking classes. Instead of jacking bar prices, bars can organize various workshop events. They can be related to mixology or beer brewing.
- Offer special brunch hours. Weekend brunches are enjoyed by many people. Restaurants can offer special brunch menus. Bars, on the other hand, can partner with bakery businesses and offer specialty coffee and tea drinks combined with delicious pastries and desserts.
Frequently Asked Questions On Pricing Liquor for Your Bar
Before you put up the sale signs and slap on some price tags, there are a few more questions you should know the answers to. Those questions are:
What is a Reasonable Price for a Drink?
We mentioned before that on average, the cost of a drink in a bar ranges from $5 to $15. There are some bars that charge much higher - usually because of their location, status, or reputation. There are also places like dive bars that charge much more on the lower end. If you were to ask a bar patron, they'd say anywhere from $2 to $5 to $10 is the most reasonable. Finding a middle ground with this, say in the $7 to $10 range, with your best cocktails being up around $15 - or potentially even higher - will grant your bar the status of having some great reasonably priced drinks.
What is Cocktail Menu Engineering?
How much you can realistically sell a drink for affects its price. That’s where menu engineering comes in.
It’s the art and science of designing menus so that your most profitable cocktails become your more popular cocktails.
And all the cocktails complement each other.
Here are two examples of menu engineering in action:
- You’ve isolated your most profitable drink. Now you visually emphasize it and place it in a position on your menu where most people look (top right corner, for example).
- You have a drink with a high pour cost and low margin that you don’t want to change or get rid of. It adds a nice touch to your cocktail menu and communicates some of what makes your bar special. Create a few simple cocktails with low pour costs to make up for it. Place them near each other on your cocktail menu and they’ll temper each other. Your menu won’t look too haughty or too rough-and-tumble.
How Will This Affect My Bar Cost?
Once you've mastered the skills outlined in this article, you'll see the ratio on your bar cost to bar profits begin to shift. You'll be paying the same amount, so technically, your bar cost won't change, but your bar profits will grow.
Alcohol and Drink Pricing Made Easy
Wine by the glass and a wine bottle price work a little differently. A beer pricing strategy is its own animal, too. But figuring out current and target pour costs is the most important factor to a profitable alcohol pricing strategy. Any kind of alcohol.
To boost your bar’s profit margin, drink prices need to change to reflect the reality of ingredient cost, prime cost, competition, and demand. That’s a lot of calculations to do. This also incentivizes your bartenders to upsell and maximize your profits. Just make sure you know things like how many ounces in a pint.
That’s why liquor inventory software like BinWise is so useful. We help bars and restaurants across the country get the data they need to price liquor strategically. It will also prevent you from discovering what happens when alcohol expires. But read our article on "Does alcohol expire" first, just in case.