The Science Behind Properly Pricing Liquor: Trends, Tactics, and Technology
Pricing drinks properly is one of the hardest tasks for bar or restaurant owners to get right. When set too high, prices can decrease orders, but when set too low, prices can decrease revenue. Setting pricing at a profitable level is a science, with a number of factors affecting pricing decisions.
Pour cost is a common industry standard and simply refers to the cost it takes your establishment to make the drink, divided by the price you sell it for. The pour cost is typically 20-25%. That simply equates to how much each drink is costing the business. One way to control pour cost is through your pour size (how much liquor is included in each drink).
A typical pour size is 1-1.5 ounces of alcohol, with a liter bottle adding up to roughly 30 drinks (20 if you are serving doubles). The costs of drinks can be covered by simply adjusting your pour size, rather than raising the price for the patron or changing your inventory system.
Two Pricing Approaches
The following are two approaches for establishing an appropriate pricing structure. Which one works best for your business?
The Traditional Method
There are 5 steps to follow in the traditional (or manual) method for calculating beverage prices:
- Start with your intended percentage of alcohol cost (typically 20-25%), excluding mixers. Remember that pour cost can vary; bars in high-end markets may choose a lower percentage while pour cost may rise during promo events like Happy Hours.
- Determine the cost per ounce. This can be done by dividing the cost of the bottle by how many ounces it holds.
- Multiply the cost per ounce by your pour size (usually 1-1.5 ounces). This will establish your liquor cost per drink.
- Multiply your liquor cost per drink by 4 or 5 to cover all the other variables.
- Round the price to the nearest quarter.
Although this is the tried-and-true method of calculating drink costs, it is not an exact science—nor is it the easiest means of pricing.
Some bar and restaurant owners choose to simplify the traditional method by creating pricing categories based on the quality of the liquor. These are usually lumped into four tiers, and priced accordingly:
- Well: These are the cheapest “house” liquors that are always mixed with something else. They sit in the well behind the bar (thus the name), and consist of local brands.
- Call: These are familiar liquors that patrons will “call” by name. Think “Bacardi and Coke.”
- Premium: Most bottles reflect the highest quality for a certain brand. Examples of premium liquor include: Bombay Sapphire Gin, Absolut, and Crown Royal.
- Super-Premium: These are the highest quality bottles in the house, and are usually aged and distilled with purity. Examples of super-premium brands include: Grey Goose, Johnny Walker, and single malt scotches.
The traditional method can be used to gauge pricing on a tiered structure, but the cost of the bottle is not the first thing considered when categorizing a brand.
It’s always a good idea to look at what your neighbors are doing when setting a pricing structure. Market positioning usually boils down to a “meet or beat” methodology. Some bar owners choose to “meet” their competition by featuring the same products and pricing them similarly. Other operators choose to “beat” their competition by pricing comparable products for less, or offering higher quality products for the same price. No matter which method you choose, it is important to at least consider what the competition is doing, and how it is working for them.
Customer characteristics like age, gender, or occupation are critical to evaluate when pricing your menu. An affluent clientele is likely to accept paying more for drinks and to visit establishments that charge above-market prices, whereas a blue-collar market may appreciate a more affordable menu with bundled items. Consider that pricing can affect customer volume and balance things out, as higher-priced establishments may be more exclusive and lower-priced bars might draw more customers.
One of the greatest head scratchers for owners is pricing their Happy Hour menu. Pricing can be a guessing game based on factors like the time of day, the clientele, and the length of your Happy Hour. It is important to maximize profits during this period by tracking your profit margin per item and adjusting the price or item served.
If your profit margin is greater for craft beer during happy hour, you may want to run a special on cocktails—or consider serving less of them. Your stock management is usually tied to pricing. Decisions should always be based on actionable data that is tracked throughout each happy hour and analyzed on a monthly or quarterly basis. Consider using software like TapHunter’s inventory tools to make this analysis faster and easier.
Simplify Your Calculations
It’s no surprise to any successful bar owner that the most efficient way to run an establishment is to adopt user-friendly platforms that automate key processes. Technology is the key to working smarter, not harder.
Whether you are updating your craft beer offering or changing a cocktail list, TapHunter is a simple dashboard that can run your complex calculations for you. Rather than manually computing a price, the system can do it automatically. TapHunter can also give you pricing suggestions based on your markup and package costs, as well as recommendations for pour sizes.
Fortunately, in this modern age, there’s no need to play a guessing game when it comes to pricing. Utilizing the proper platforms—while considering your competition and clientele—is a bona fide method to ensuring proper pricing and repeat customers.