5 Steps to Cocktail Pricing for Bar Profits
For many bar owners, one of the most difficult tasks is determining what price to charge for cocktails. This guide will walk you through a methodology that you can use to maximize your bar profits through your pricing, ensuring that you can hit the margins you need. Without a repeatable, standardized approach to pricing, you are only guessing, which means leaving money on the table.
Why Do You Need to Create a Standardized Approach to Cocktail PRicing?
Every business is different. It’s unlikely that your bar will use the exact same pricing model as your competitor down the street. And, if we are honest, they probably are not doing the research you are doing, putting in the time to gain knowledge, and will have a more haphazard approach. This is what most bar owners do, and why most bar owners are stuck with net profits under 10% of revenue. You can only reach world-class profits (15-20%) when you pay attention to the details.
The problem is that paying attention to every detail, all day, every day, yourself is not a sustainable model. You have to create systems, procedures, and standards that allow you to delegate some of your work, or that automate some of the processes. This is the only way to have a work/life balance and to optimize the time you spend in your business. The five steps to cocktail pricing below will empower you to make sure that you have your theoretical costs set up for a 15% net profit, and have systems in place that you can rely on every time you need to adjust your cocktail menu pricing.
The 5 Steps to Cocktail Pricing
These five steps will guide you through the journey of pricing a cocktail from start to finish, they take some time, but once you have gone through this process once, and set up your systems, re-pricing your items to adjust for supplier price changes or recipe changes will be easy.
Step 1: Determine your Margin
You will never maximize your net income if you don’t start by watching your Prime Cost. Prime Cost is the industry term for your cost of product production. It is similar to what most industries would call gross margin, although, unlike some other industries it includes your labor costs. To maintain a 15% net profit, you need a prime cost percentage that is no greater than 55%.
Prime Cost Percentage = (Food & Beverage Costs + Labor Costs) / Total Sales
Since Prime Cost includes your labor and food & beverage costs, for pricing we need to remove the labor component from the total so that we know what our target food & beverage cost is. Most bars that maintain a Prime Cost of 55% are between 25% and 30% on both food & beverage cost and labor cost as a percentage of sales. You could maintain both at 27.5% or more commonly, have a labor cost closer to 30%, and maintain a composite food & beverage cost at 25%. It will all depend on your individual bar’s concept, offerings, service standards, and so on.
There is one other consideration to keep in mind. Not all items will have the same cost percentage. While you could create a cocktail menu, on which every item had an exactly 25% beverage cost, more likely you will have some items that are a higher cost and some that are a lower cost. That means to hit the 25% target, you have to factor in your product mix and the popularity of each item. Menu engineering is a tool that can help you do this.
Once you have determined the cost percentage that you need for the cocktail you are pricing, it is time to move on to step 2.
Step 2: Know Your Product Costs
In step one, we determined the margin needed to be successful as a business, now we have to determine how much the cocktail costs so we can apply the cost to that margin and determine a price.
Where many bar owners go wrong is in guessing a cost, coming up with a figure that they think is roughly around what the actual cost is. There are two major problems with this approach.
First, when we guess, we are often wrong. The bar business is a business of details and data just as much as it is about providing a great guest experience. Without an accurate beverage cost for a cocktail, down to the penny, there is no way you can ensure that you hit the margin that you need to maximize your profits.
Second, to the penny costing is the only way you can conduct analytical reviews of your menu items. Tools like menu engineering only work if you know exactly what something costs. Being off by three or four percent can be the difference between being able to take your family on vacation for spring break or not. You must know your costs to the penny.
One thing to always remember when costing a cocktail is that everything that goes into the cocktail costs something, and that includes the garnish. You have to cost every single thing that is involved in the cocktail. If you make your own syrup or ingredients that go into a cocktail, you need to precisely cost those so they can be figured into your cocktail cost.
For example, if you were pricing a simple Paloma, you would need to include the costs of the tequila, the grapefruit and lime juice, simple syrup if you use it, soda, and if you garnish with Tajin and a grapefruit wedge, those need to be included as well.
Step 3: Determine your Theoretical Price
This is the easiest step of all, it is merely dividing the cost of the cocktail by the margin that you need to target.
Theoretical Price = Cost / Margin
So, say your Paloma cost is $2.00 and your cost margin is 25%. You get the following equation:
Theoretical Price = 2.00 / 0.25 = $8.00
If only the math worked out that simply most of the time. You will rarely ever have an item that has a cost that comes out so nicely. More likely your cost will be something like $2.36, giving you a theoretical price of $9.44 (2.36/0.25=9.44). The difference between guessing what something costs $2.00 and knowing the exact to the penny cost of $2.36, really makes a big impact on the final price and your margins.
I am sure some of you are asking the question, why does this say theoretical price and not just price? The answer is simple, in steps 4 and 5 we optimize this price to include taxes and fees and round to a logical number.
If you are a business that does not include any taxes or fees in your total price and is cash-free, you could stop here. For everyone else, charging $9.44 for a cocktail just doesn’t make sense.
Step 4: Add in Fees and Taxes
If you look at the sentiment of guests on the internet, there is increasing backlash against bars that include credit card fees, service fees, kitchen fees, and other random fees that are added to the bill and not included in the price.
Further, for most bars, it makes sense to include any sales or other taxes in the price of both beverages and food. This was very common historically in the USA and is by far the more common model globally, where the price is the price inclusive of everything. This is especially true for cash transactions since it can allow you to have all your prices set to the quarter, or half-dollar eliminating the need for maintaining smaller change in your cash drawer.
To calculate what you need to add to your price for taxes and fees, first, you have to determine what you want to include. For most bars, I recommend calculating credit card processing and sales taxes in the price. But, depending on your exact situation this can vary.
One thing to keep in mind is that both credit card fees and sales taxes are a function of the total end price, so if you add credit card fees in first and then sales tax, your actual credit card fees will be slightly higher than you modeled. The easiest thing to do is factor this in when you go to round prices, in the next step. However, a good rule of thumb is to add in credit card fees first and then sales taxes since the sales taxes generally are a much higher percentage than credit card fees.
To add in your credit card fees, you first have to know what they are. Most credit card fees are composed of two components, a percentage that is charged on the total and a per transaction fee. The percentage can either be a flat rate or what is called interchange plus that takes the exact fee from the credit card company itself and the processor adds a small additional fee for processing the payment.
The easiest way to model your credit card processing is a percentage. If you have been in business for a while, you can just take your total credit card fees divided by your total credit card sales and get an effective rate that you can use for modeling. If you have a new business, you can ask the credit card processor you are working with, or just use 3% as an estimate. Most bars will have an effective credit card rate of 2.5-3.5% so 3% is a good starting point. Just make sure you update all of your modeling once you have enough data to determine your actual effective rate.
Your sales tax rate will be whatever rate your jurisdiction charges. In the USA this can be composed of multiple individual rates such as state, county, and local sales taxes, food and beverage taxes, or regional transit district taxes. If all depends on where you are. In most of the rest of the world, this will be your VAT rate.
Our equations here will be:
Theoretical Price + (Theoretical Price x Credit Card Fee Rate) = Price with CC Fees
Price with CC Fees x Sales Tax Rate = Inclusive Theoretical Price
Let’s use the $9.44 that we determined for a Paloma in the previous section as an example, with a credit card processing effective rate of 2.89% and a tax rate of 9%.
9.44 + (9.44 x 0.0289) = $9.713
9.713 + (9.713 x 0.09) = $10.587
Step 5: Determine the Final Price
As mentioned above, one of the goals of good pricing, especially if you have significant cash sales is to help in eliminating the need for lots of different coins. This helps in a few ways. First, it decreases the number of coins you need to have on hand and count daily. Second, it makes it much easier for your bartenders to make change for guests quickly and easily. That means that you need to round your theoretical inclusive price to a logical number.
When it comes to rounding prices, you generally want to round up and not down. Rounding up will give you a bit more cushion to your margins rather than cutting into them. This is a judgment call. I generally round anything more than 0.05 over the nearest quarter up, if I am rounding to the quarter, and anything more than 0.15 up when rounding to the nearest half-dollar.
So for our example Paloma our un-rounded price was $10.587 or really $10.59. This is a case where all other things being equal, if I was rounding to the quarter, I would price the drink at $10.75, but if I was rounding to the half dollar, I would price the drink at $10.50. That being said, if the Paloma was the number one selling cocktail in the bar, I would be more likely to round this number up than down.
Once you have rounded off your price, you have a price you can charge that will maintain your margins and help to ensure that you are maximizing your bottom line, which, as the owner, is what you get to take home.
Pricing FAQs
What about my competition’s cocktail pricing?
Any time you price a menu item, you need to make sure that it fits in with the overall pricing in your market. Moist neighborhood bars in any area are going to have almost identical pricing. However, you cannot just pick what your competitor does, you have to make sure that you can make the margin you need. If you do the math and end up with a price significantly under the competition, you can charge the market rate and make a great margin, or charge a lower price and try to capture the volume in the market for that cocktail. If your price is significantly higher, you may need to adjust your ingredients to be able to offer the price at the market rate, or market your drink on why it is different, better, and therefore more expensive.
Why can’t I just use the competition’s prices to set my prices?
You absolutely can. Chances are they are making the normal 5-10% margins that most bars make. If that is fine with you then just copy their prices. If you want to maximize your bottom line, have a better work/life balance, and run a world-class bar you need to do your math, have theoretical pricing models that you use, and set yourself up for a 15%+ bottom line.
What is the biggest mistake bar owners make when determining cocktail prices?
The biggest mistake bar owners make is not doing their costing correctly to the penny. If you do not know your costs exactly, there is no way you can set up systems and tools that allow you to consistently achieve your target net income percentage.
Where can I get more assistance with cocktail menu pricing?
The Bar Business Coach is here and available to help you with your bar, including menu development, item costing, and pricing. You can schedule a free 30 minutes strategy session here to learn more about our coaching and consulting services and see if we would be a good fit to work together.