While a bar can make profits from food, a large portion of their overall earnings will come from alcohol sales. Yet many bar owners struggle with figuring out the proper way to price their drinks.
Methods for calculating liquor prices can vary, but there are a few standard best practices that bars use to set the costs of their drinks. While some estimates might appear high, it is necessary to remember that the value of the drink pays for more than the price of the liquor, but overhead as well.
The following are the 7 steps to follow for traditional pricing method for calculating your bar’s liquor prices:
Step 1. Determine the pour cost
The alcohol cost will be the percentage of markup that a bar will give alcohol. For most bars, this is around 20 – 25%. Some bars might set their pour cost based upon the type of drink. For example, wine at a 22% cost, beer at 20% cost, and liquor at a 14% cost.
Alcohol price is flexible and can be adjusted when needed. For daily specials or happy hours, bar owners will reduce the alcohol cost.
To calculate the pour cost, divide the cost to make the drink by the price at which it sells.
Step 2. Determine the cost per ounce
Understanding the price per ounce in a liquor bottle will help owners determine what their final pricing will be. Dividing the cost of the container by how many ounces it holds will calculate the price per ounce of the bottle.
If the bottle costs $20 and it holds 25 oz (the typical amount in a 750ml bottle), the cost per ounce would $.80.
Step 3. Calculate the Cost of Liquor per Drink
Multiplying the cost per ounce by the amount of alcohol in the drink will calculate the value of the liquor per glass. Typically, drinks will have between one to one and a half ounces of liquor. Using the sample from above, this would give a cost of $.80 – $1.20.
Step 4. Factor in additional costs
Alcohol isn’t the only cost of a drink. The cost of a drink can be driven up by the prices of mixers and garnishes. These additional costs can be calculated similarly to the value of the alcohol, or the bar owner may choose to add a flat rate to all drinks.
Bar owners may also choose to factor in shrinkage into the costs of their drinks. Shrinkage is alcohol lost due to expiration or damage. Most bars add 20% to the price of the drink to account for shrinkage.
Step 6. Adjust the price based on calculations
The customer experience is easier when the customer can quickly add pay for the cost of a drink. Rounding the price of the drink up to the nearest quarter will allow the customer to add the total of multiple drinks swiftly. Round totals also enable the cashier to provide change to the customer and decrease transaction time more efficiently.
Step 7. Continually evaluate
Calculations can give an approximate idea of what a bar owner should charge for their drinks, but the estimates might not be all that is needed. A bar owner should evaluate their profit margins to be sure that their drinks are bringing in enough revenue to keep the bar profitable.
Some bar owners will add additional variables to their pricing models. The four-tiered method of pricing alcohol is a way of pricing alcohol based upon what “category” in which the liquors belong.
The four tiers of alcohol are:
- Super Premium
Well liquors are the cheapest liquors available. The alcohols considered well are the house liquors that mix with something else. Well liquors are usually kept in the speed rail for easy access for bartenders. If a customer orders a generic drink – whiskey and coke, vodka and soda, etc. – their order is made with one of the well liquors. Well liquors have a pour cost set around 30%.
Call liquors are liquors that are known by their names. When a customer orders a drink with specific alcohol included, it is a call liquor. Some examples of drinks from call liquors are Jack and Coke or Seagrams and Sprite. Bar owners will set the pour cost for call liquors at about 25%.
Premium liquors are liquors kept on display shelves behind bars. Premium liquors are the liquors that are the highest quality that brands have to offer. Premium liquors include alcohol like Maker’s Mark Bourbon or Beefeater Gin. Premium liquors will have a pour cost set at roughly 20%.
Super premium liquors are the alcohols that are the highest-quality bottles in the restaurant. Super Premium liquors are typically small batch or aged. Johnny Walker, Patron, and Grey Goose are examples of Super Premium Liquors. Pour cost for Super Premium Liquors is generally at about 15%.
The following are a few things to keep in mind when pricing your bar’s alcohol:
It’s essential to adjust pricing based upon the demographics of the location of the bar. Different neighborhoods will have different tolerances on what they will pay for a drink.
A dive bar located in a rural part of town benefits from a lower-priced cost strategy. Many of the customers that visit a bar in this location can’t afford higher-priced drinks. These customers will often order well cocktails and domestic beers.
Similarly, bars near areas populated by college students should acquire a lower-cost strategy. College students tend to frequent spots where they can drink the most for the smallest cost.
Bars residing in busy urban areas have more leniency on pricing. Customers at a higher cost-of-living area will expect drink prices to be higher as well. It’s not unusual for a customer to pay $13 for a single cocktail in a more expensive neighborhood.
For a business to remain successful, it needs to be competitive. If a bar down the street is selling drinks cheaper, it might steal potential customers. A bar owner might acquire a strategy to match the competitor’s prices or price their drinks lower.
However, depending on the atmosphere and targeted clientele, it isn’t uncommon for a bar to have a higher cost for drinks. An upscale bar with a tasteful ambiance can still be successful versus a sports bar next door. Customers are willing to pay a premium for the new atmosphere.
Bar promotions such as happy hours can make it difficult for a bar owner to set prices. For a new operation, owners might need to make an educated guess. After analysis of the profit margin per item during the happy hour, an owner can make a better guess on what things to serve during happy hour. Decisions based on data and analytical choices will help keep the bar profitable.
However, if the bar is in one of the eight states that don’t allow happy hours, then that’s a decision the owner won’t have to make.