It is common knowledge in the food and beverage industry that the profit margin of alcoholic drinks are massive. However, if you’re pricing your drinks the wrong way, then it might not be as profitable anymore. In this article, we will discuss the basics and some notable strategies on how to price drinks at a bar or restaurant.
Drinks Cost Defined
Similar to the definition of food cost, drinks cost is the amount spent to make the drink. A bar’s drinks cost can either be a specific amount or percentage. It is important that your managers are aware of the bar’s drinks costs. Knowing the numbers will allow them to negotiate for better wholesale deals, deduct or add to recipes, and price the drink correctly to maximize profits.
Drinks Cost Percentage Formula
As mentioned above, there are two types of ways to calculate drinks costs – the total inventory used and the percentage.
The formula to calculate for the percentage is:
The formula to get the amount for your drinks costs is simpler. Just add the cost of all the ingredients used for drinks.
These formulas can be used in two ways. First, to provide costing at a per item level. Use this formula to compute the drinks cost of all cocktails, beers, spirits, and wine that you serve at your bar or restaurant. Secondly, to calculate actual drinks costs and percentage for a certain period of time. The way to do this is simply add up all your inventories used, divide it by the total drinks sales and multiply by 100. The period can either be weekly, monthly, quarterly, or yearly.
Drinks Cost Percentage Computations
To further illustrate our point above, here’s an example with actual numbers to help you understand drinks costs better.
For our first example, let’s look at costing a basic whiskey sour. The ingredients that you’ll need to make one serving is:
- 60 ml of bourbon
- 20 ml sugar syrup
- 20 ml freshly squeezed lemon juice
The prices as purchased are: $20 for a 1L Jim Beam Kentucky Straight Bourbon Whiskey, $1 for 1 KG sugar, $0.57 for 1 pc of lemon.
- 60 ml (from 1L) of bourbon is $1.2
- Assuming 1:1 ratio, 20 ml sugar syrup is $.020
- Assuming 20ml of freshly squeezed lemon juice is half a lemon, $0.285
Add them all up and the total cost for a basic whiskey sour is $1.505 for one serving.
As for our example in the next case, let’s calculate a bar’s drinks cost for the year 2020. Total drinks inventories used for 2020 was $150,000 and total drinks sales was $550,000. Simply divide $150,000 by $550,000 and then multiply by 100 to get 27.27% as your drinks cost percentage for that year.
How To Price Drinks at a Bar or Restaurant
Utilizing a bar’s target drinks cost percentage is the tried and tested way to price your drinks. If a drink has a drinks cost percentage of 25%, then the gross profit margin for that item would be 75%.
Industry experts believe that a bar or restaurant should have a drinks cost of 15-25%. Anything higher than 25% should be revisited.
Use this formula below to compute the selling price of your drinks.
Different Types of Drinks and How to Price Them Properly
Pricing of Shots of Whiskey/Gin/Bourbon/Tequila
Setting the pricing for these types of alcohol is straightforward. All you need to know is the purchase price and maximum number of shots in one bottle. In addition, it is important to keep in mind that a standard shot for a bar is 1.5 ounces or 45 mL. However, it is still the prerogative of the bar how much to put in one shot.
For example, a 750mL bottle of Jose Cuervo Especial costs $19.00. First, divide 750 by 45 to get the maximum shots in a bottle. In this case, it is 16.66 shots – since a whole number is required, round it down to 16 shots. Next, get the drink cost per shot – divide $19 by 16 – and you’ll get $1.1875 per shot.
For the sake of this case, let’s use 20% as our target drinks cost. In order to price shots properly, simply divide the cost per shot, $1.1875, by our target drinks cost of 20%. The result of $5.9375 is the ideal selling price for one shot of Jose Cuervo Especial.
Pricing of Cocktails
Cocktails are alcoholic drinks that are a combination of multiple ingredients. From the Whiskey Sour example we showed above, the cost to make one is $1.505. If your bar sells a whiskey sour at $4.50, that’s a drink cost of 33%. This is quite high and you should retarget it to 20% drinks cost.
Simply use the formula above to compute the ideal selling price. Divide $1.505 by 20% to get $7.55 as what your selling price should be to maximize profits.
Pricing of Beer (Bottled or Keg)
The way you price beer is similar to the way you price your shots. However, bottled beers are different and are treated as retail items.
If you’re selling draft beer, the best way to maximize profit is to purchase a keg. These come in 20L, 30L, and 50L sizes and it is ideal to purchase the size which fits your bar area.
In the same vein as a shot of tequila, get the maximum number of 330 ml draft beers you can serve. So, a 50 liter keg can serve 150 glasses of beer. If a 50 L keg costs $275, a glass of beer is $1.83. Therefore, the ideal selling price for a glass of beer is $7.32 at 25% drinks cost.
The computation for bottled beers can be made easily. Get the cost for a single beer bottle and use the formula to arrive at your ideal selling price.
Menu Engineering to Maximize Drinks Profit
Pricing your menu for maximum profit is just the start. How you get customers to order the profitable drinks is another story. To begin, it is important that you know which items are your most profitable and popular. In order to do this, apply the menu engineering matrix to all your drinks.
Once you’ve completed the matrix, you now know which items to emphasize on your menu. For example, the Negroni is your most profitable and popular drink. Make sure that it is placed strategically where people always look.
Another example of menu engineering at work is placing a high margin, low popular item together with your stars. Since they’re not as popular as your other items, place them beside the stars and put a nice visual for your customers to see.
How to price drinks at a bar or restaurant comes down to knowing your actual and target drinks cost. Factors that you need to consider to calculate for a drink’s cost are their ingredients, competition, demand, and manpower. Once you’re aware of these, you can now decide whether to adjust the pricing on your drinks menu to maximize profitability.
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