Whether you’re on the brink of opening a new bar or looking to revamp your existing drink prices, crafting the perfect pricing strategy for each beverage is no small feat.
Understanding the nuances of liquor cost, pour cost, and how to price drinks, from bottled beer and wine bottles to specialty cocktails, is crucial for a profitable bar or restaurant business.
In this article, we will delve into the complexities of beverage cost, offering insights on pricing liquor and drinks to align with your bar’s financial goals and customer expectations.
What is a bar menu pricing?
Bar menu pricing is a part of writing your bar business plan and refers to setting prices for drinks and other items offered at a bar.
The aim is to ensure that each menu item is priced not only to cover its direct costs – such as ingredients (commonly referred to as pour cost) and preparation – but also to contribute to the overall financial health of the establishment.
The pricing must consider various factors, including
- labor costs,
- operational expenses,
- overheads,
- market competition,
- customer expectations,
- the bar’s target profit margins
The goal is to find a balance that attracts and retains customers while ensuring the bar is profitable and sustainable.
What is the pour cost?
Pour cost, in a bar or restaurant context, refers to the cost of the ingredients used to make a drink relative to its selling price. It’s a crucial metric for understanding the profitability of each drink sold.
Pour cost is calculated by dividing the cost of ingredients for a drink by its selling price so the formula looks as follows
Pour cost percentage = (Cost of ingredients / Selling price) x 100
This percentage helps determine how much a drink costs compared to how much it’s sold for, guiding pricing decisions.
According to BinWise, the typical pour cost in the bar industry ranges from 18% to 24%, with many food and beverage directors aiming for a pour cost of around 20%. This target reflects achieving an 80% gross profit margin on drink sales.
Example of setting up a drink price based on the pour cost
Taking the formula for the pour price calculation, the formula for calculating the selling price of a drink in a bar setting is as follows
Selling price = Cost of ingredients per drink / Target pour cost as a decimal
Let’s say the cost of ingredients for a cocktail is $3, and the target pour cost is 20% (or 0.20), the selling price would be calculated as:
Selling price = $3/0.20 = $15
The average bar price for a drink can vary widely depending on several factors, such as
- location,
- type of establishment,
- the specific drink being served
The general price ranges for common types of drinks are as follows
- Cocktails:
- Standard mixed drinks: $5 to $10
- Specialty or craft cocktails: $8 to $15 or more
- Spirits:
- Shots: $4 to $10, depending on the brand and type
It’s important to remember that these drink prices are just general estimates and can change. Things like where the bar is (like in a city or a small town), who comes to the bar, and how good the ingredients are can make a difference.
High-end establishments and bars in major cities often charge more than these average prices.
Example of setting up a shot price based on the liquor prices
Imagine you have a bottle of premium whiskey to price per shot in your bar. Determine liquor costs using the liquor cost formula:
Assumptions
- The bottle of whiskey costs $48
- The bottle volume is 750ml
- Typically, a shot is 1.5 ounces (approx. 44ml), so you can get around 17 shots from one bottle
Liquor Cost per Shot = Bottle Cost / Number of Shots
In our example, liquor cost per shot = $48 / 17 = $2.82 per shot
Now you need to decide on the target pour cost percentage. For premium whiskey, a pour cost of 20% would be reasonable.
Pour Cost = Liquor Cost per Shot / Selling Price
To find the Selling Price, you rearrange the formula, and it goes as follows
Selling Price = Liquor Cost per Shot / Pour Cost Percentage
Selling Price = $2.82 / 0.20 = $14.10
Based on the calculation, you would set the price for a shot of this premium whiskey at approximately $14.10 to maintain a pour cost of 20%.
How to price your bar menu?
To price drinks and other menu items from your bar menu, follow the steps below.
1. Write down all menu items you offer in your bar
2. Compute the pour cost for each beverage by conducting drink recipe costing
3. Now consider the minimum pouring cost for any drink you offer. Of course, different types of alcohol will have different pour costs (e.g., different for drinks and wines), so at this point, your goal is to determine the minimum pour cost value
4. Now calculate drink prices using the formula we provided above, which is
Selling price = Cost of ingredients per drink / Target pour cost as a decimal
5. After completing your pricing calculations, the resulting figure might not be a round number. Consider rounding the price to the nearest quarter for a more aesthetically pleasing appearance, which helps present a neater drink menu
6. Explore different bar pricing strategies to find what fits best for your establishment. Below you will find examples of pricing strategies you can use.
7. Regularly evaluate and adjust your drink prices. For that purpose, incorporate the menu engineering practice to analyze each drink’s profitability and popularity. Closely examine alcohol sales data and customer preferences, identifying which items are bestsellers and which are less popular but highly profitable.
8. Based on the profitability and popularity analysis of the drinks, make informed decisions about price adjustments, menu layout changes, and possibly phasing out underperforming items to ensure your bar remains both appealing to customers and financially viable.
Defining a bar pricing strategy
Pricing beer, wine, cocktails, and drinks to ensure their attractiveness while covering costs and generating profit can be called a bar pricing strategy. This strategy considers various elements, including the cost of ingredients, labor expenses, market demand, and competitors’ pricing of similar offerings.
Here are some different strategies for pricing bar menu items.
1. Food cost percentage pricing
This strategy sets drink prices based on the cost of the ingredients (food cost) as a percentage of the selling price. It ensures each drink covers its ingredient costs and helps maintain consistent profit margins.
This method is particularly useful for cocktails and mixed drinks where ingredient costs vary significantly.
You need to use the following formula
Food Cost Percentage = (Cost of Ingredients / Total Sales) * 100
Example of setting up a price for a drink based on food cost percentage
- The cost of ingredients for a drink is $1.50
- The target food cost percentage is 25%
To find the Selling Price, you rearrange the formula, and it goes as follows
Selling price = (Cost of Ingredients / Food Cost Percentage)
In our example, selling price = $1.50 / 0.25= $6.
Read more in our article about how to calculate food cost percentage.
2. Cost-plus pricing
This strategy involves calculating the cost of making a drink (including ingredients and overhead) and adding a set markup percentage to determine the price.
It’s straightforward and ensures each drink covers costs and contributes to profit. Still, its disadvantage is that it needs to consider the demand for each item or the prices competitors set for comparable drinks.
Example of setting up a price for a drink based on cost-plus pricing
- A cocktail costs $2 in ingredients
- We apply a markup of 50%
The price would be: $2 + (50% of $2) = $2 + $1 = $3
3. Value-based pricing
Prices are based on the perceived value to the customer rather than just the cost. This strategy is ideal for bars with unique or high-quality offerings, allowing for higher prices for specialty drinks or experiences.
Example of value-based pricing
A signature cocktail with unique ingredients and presentation is priced at $15, above the average, due to its perceived higher value
4. Gross profit margin pricing
It focuses on the profit margin a bar wants to achieve on each drink sold. To use this method, a bar determines its desired gross profit margin.
It involves calculating the total cost (including ingredients and overhead) and adding a specific percentage to achieve the target margin.
This approach aligns pricing with overall profitability goals and effectively manages a diverse range of beverages.
The formula to calculate the selling price based on gross profit margin is as follows
Selling Price = Cost of Goods / (1 – Desired Profit Margin)
Example of gross profit margin pricing
- The cost to make a drink is $3
- The desired profit margin is 75%
The price would be: $3 / (1 – 0.75) = $12
5. Tiered pricing
Drinks are categorized into different price tiers based on
- brand prestige,
- ingredient cost,
- drink type
This method simplifies pricing structure and caters to a diverse customer base, offering options for different budgets and preferences.
A bar categorizes spirits into standard, premium, and super-premium tiers. Standard drinks are priced at $5, premium at $8, and super-premium at $12.
6. Competition-based pricing
Prices align with competitor rates, ensuring the bar remains competitive. This strategy works well in areas with many bars but may not adequately reflect your unique costs and value propositions.
The average price for a craft beer in the area is $6. The bar sets its craft beer price at $6 to stay competitive.
7. Dynamic pricing
Prices fluctuate based on demand, time, or special events. This could mean higher prices during peak hours or discounts during slow periods.
This pricing cocktails strategy maximizes revenue during busy times and attracts customers during off-peak hours but requires careful management to avoid customer dissatisfaction.
During happy hour (5-7 PM), prices are reduced by 20%.
A $10 drink becomes: $10 – (20% of $10) = $10 – $2 = $8
8. Portion pricing
Portion pricing for bars involves setting prices based on the specific quantities or portions of each drink served.
This strategy ensures that pricing is proportional to the amount of liquor or ingredients used, maintaining consistency and fairness.
If a standard 1.5-ounce shot of whiskey is priced at $5, a double portion of 3 ounces might be priced at $9, slightly less than double the single shot price to encourage higher sales of larger portions.
9. Markup pricing (factor pricing)
Factor pricing involves applying a consistent markup percentage to each drink’s cost of goods sold (COGS).
This straightforward method ensures a uniform profit margin across all drinks and is easy to calculate. It’s particularly suitable for bars with various drink prices and types.
To calculate factor pricing, use this pricing factor formula
where
- Ideal food cost percentage: Target cost ratio of ingredients to the selling price.
- Pricing factor: Multiplied by the ingredient cost to find the selling price.
Example
With an ideal food cost percentage of 25%, the pricing factor is:
Pricing Factor = 1 / 25% = 4
For a drink with ingredient costs of $4, the selling price is:
Selling Price = $4 × 4 = $16
These markup pricing strategies ensure drinks are priced to cover costs while achieving the desired profit margins.
Once you price your bar menu, you can use a menu-making app to design, build, and oversee your menu.
Leverage menu management software for crafting a restaurant menu effectively.
If you want to offer your products online, consider establishing a bar website with an online ordering system.
What determines the drink prices on a menu?
Several key factors determine drink prices on a menu:
- Cost of ingredients: The price of the raw materials used to make the drink is a foundational factor. This includes the cost of liquor, mixers, garnishes, and any other ingredients.
- Labor costs: Preparing and serving the drink, including wages for bartenders and other staff.
- Overhead expenses: Operational costs like rent, utilities, and equipment maintenance contribute to the overall pricing structure.
- Market demand: Popular and demand for certain drinks can influence their pricing. Popular or trendy drinks may command higher prices.
- Competition: Prices set by nearby or similar establishments can impact how a bar prices its drinks to remain competitive.
- Target profit margin: The desired profitability of the bar dictates the markup on drinks. Bars aim to set prices that cover costs and achieve a certain profit level.
- Customer demographics: The target customer base’s spending habits and preferences can influence pricing decisions. Higher-end bars price their drinks higher to match the expectations of their customers.
- Menu positioning and marketing strategy: The way a drink is positioned on the menu, such as a premium or signature drink, and the marketing strategy around it can also determine its price.
These factors help bar owners and managers decide on the most appropriate and profitable pricing for their drink menu.
Key Takeaways
- Calculate the cost of ingredients as a percentage of the final selling price to ensure each drink covers its production costs and contributes to profit.
- Stress the importance of regularly reviewing pour costs, as they directly affect pricing decisions and overall profitability, ensuring that each drink served maximizes revenue while minimizing waste.
- Consider using cost-plus pricing to add a predetermined markup to the cost of production, ensuring both cost coverage and profit.
- In the case of specialty or signature drinks that offer a unique experience, consider incorporating value-based pricing.
- Analyze liquor costs for pricing and adjust prices based on liquor cost fluctuations.
Frequently Asked Questions (FAQ)
How to determine prices of your bar?
To determine prices for your bar, start by calculating the cost of each drink, including ingredients, labor, and overhead expenses. Next, assess market factors such as customer demographics, competition, and local pricing trends. Finally, set your prices by applying a suitable markup to cover costs and achieve desired profit margins while ensuring your prices align with customer expectations and market standards.
What is the average pour cost?
According to Perfect Venue, the pour cost percentage varies widely, but it’s common for most bars and restaurants to aim for an average pour cost ranging from 18% to 25%.
What is a typical bar markup?
A typical bar markup for drinks usually ranges between 200% to 400%. According to BinWise, the typical markup for bar liquor is approximately 400 to 500%, which is higher than any other type of alcohol. This substantial markup is why high-volume nightclubs, known for selling numerous shots, are often among the most lucrative establishments in the hospitality sector.
What is bar costing?
Bar costing is calculating the total cost of serving drinks at a bar. This includes several components:
- Ingredient costs
- Labor costs
- Overhead costs
- Pour costs
- Accounting for losses due to wastage, spillage, or free drinks offered to customers.
Bar costing helps set appropriate drink prices to ensure profitability while remaining competitive and attractive to customers.
