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
Let’s understand what pricing strategies work different types of drinks.
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 how to price drinks at a bar. 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.
How to maximize your restaurant profits from drinks
In order to maximize your profits, it is important that you are familiar with the operations of your bar. You must know the exact costs of your products, when there’s a high flow of customers, and how to offer great customer service.
In this section, we’ll be sharing a couple of tips on how to maximize your restaurant profit from drinks.
#1 Have Happy Hour Offerings
Restaurants usually offer happy hour during the lean hours of the day – around 3PM until around 7PM in the evening. The objective of happy hours is to generate more sales between launch and dinner hours when business is slow. The prices during happy hours are low since the items will be on promo.
Therefore, it is important that the menu is priced optimally during this time. Some examples of this promotion are buy one get one, buy two get one free, or a free drink for every order of a main course meal.
#2 Offer Free Tasting Sessions
This strategy is a good way to market new products and boost your profits. Buyers tend to reciprocate generosity given to them. If the customers who tried your free taste liked the drink, more often than not, they’ll buy the drink from you.
In addition, this can also serve as an initial product review that your customers can give you. If a lot of customers like the drink, then it might be time to make it a regular item in your menu.
#3 Utilize Upselling Methods
There are times when the restaurant’s staff should proactively look to increase sales. This can be done by upselling to customers. Upselling is a tactic used by restaurants to promote new products, premium items, or add-ons to customers. It is important that your front of house team is trained properly to upsell. Customers get irate when they feel like they’re being hard-selled.
If your staff does a good job upselling your products, you can expect for there to be a boost on your sales. As a restaurant, you have to make sure that they are educated about your menu, know your drinks with high margins, and know how to properly do a sales pitch.
#4 Introduce Session Cocktails or Mocktails
There are times that patrons want to enjoy the company of friends in a bar and don’t want to get inebriated right away. In order to maximize profits, look to create session cocktails (low alcohol content drinks) or mocktails for customers not looking for the hard drinks. By doing this, you’re catering to all types of customers that go into your bar and not just those who like to drink alcohol.
#5 Offer a Bevy of Seasonal Drinks
Holidays and special events are rampant for the whole year. This makes it the perfect time to craft limited seasonal drinks wherein you can charge for a premium. For example, Valentine’s Day is coming up and your bar should offer specialty drinks just in time for it. This offering will get people excited and they won’t mind spending a bit more just to give your seasonal drink a chance.
#6 Emphasize high-profit drinks on your menu
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.
EagleOwl is a back of the office solution that’s meant to increase a restaurant’s profitability. With our software many restaurants are able to increase their profitability by up to 25%.