If there’s one job that isn’t exactly the most glamorous for a bar or restaurant owner, it’s setting the liquor prices.
But it’s something you can’t ignore. More importantly, it’s easy to get wrong if you don’t know what you’re doing - or, worse, you decide to ‘wing it’.
As you’d guess, there’s a lot of strategy behind liquor pricing, and it’s relatively simple to get your head around. You just need to follow our guide, do some homework, and keep a close eye on the competition.
Let’s get into it.
The concept behind liquor pricing - it all starts with COGS
Most restaurateurs and bar owners will tell you that managing your profitability is one of the greatest differentiators when it comes to success.
Get it right, and you’ll be able to grow a consistently profitable business. Get it wrong, and you’ll struggle to get through the first year of operation.
The team at Toast POS have a brilliantly detailed list of calculations that’s worth diving into, but we can summarise the key points for you here.
You need to start with the calculation for costs of goods sold (COGS). It goes like this:
Opening inventory (OI) + Purchases (P) - Ending inventory (EI) / Sales (S) = COGS
This is basically your product usage. So, if your opening inventory is $2,000 and you’ve purchased $6,000 liquor stock in a month, you add those numbers together, and then subtract the $2,000 total stock value you have left at the end of the month. Lastly, you divide the resulting number by the $20,000 of liquor sales you made:
$2,000 + $6,000 - $2,000 / $20,000 = $7,999.90
Therefore, $7,999.90 (or 40%) is your COGS for liquor. Now that you know this figure, you can make sure you’re turning a profit on every drink sold.
Why COGS matters so much with liquor pricing
Now you know that for every dollar in sales, around 40 cents goes towards paying for liquor, you’ve identified a gross margin of 60 cents.
This is important, because it takes a lot less to earn those 60 cents on liquor items than it does to earn the same amount for food items. In turn, that means you’re having to invest in significantly less labour to make and deliver each drink, compared to food.
Wine is a great example of where this can be very valuable indeed. For instance, it’s not unusual to see a 4x markup on some bottles of wine, but that’s still low compared to spirits. However, when you consider the reduced effort required to open and pour a bottle of wine versus mixing spirits, the profitability immediately becomes clear.
Why gross profit is almost always more important
If we stick with the wine theory, we discover why gross profit is a far better element to focus your attention on when pricing liquor.
For instance, bottles of wine generally sell at higher prices than other drinks, so while the gross margin might be lower the gross profit will probably be higher.
Imagine if you sell 10 special cocktails for $10 each and they contain a margin of 80% each. The gross profit in that instance would be $80 (10 x $10 x 80%).
But if you sell a bottle of wine for $160 at a margin of 50%, you’ll enjoy the same gross profit. The difference is that the server took just a couple of minutes to serve the wine, versus the six-minute preparation for the cocktail.
What would you rather sell more of? Those cocktails or a shed load of those wine bottles?
So, now we have a basic grasp of profitability, let’s consider how to price the most common types of liquor in most restaurants and bars.
This is liquor pricing at its most varied, due to the various markups on bottles, and the various glass pours.
Here’s the general rule of thumb for the most common:
Wine by-the-glass. Try a variety of price points. The price of wine-by-the-glass has been increasing and you need to consider the cost of throwing away the rest of a bottle if no one orders another glass that shift. And remember - people are more likely to buy two glasses of $10 wine than they are a second that costs $15.
Wine bottles. Industry standards for marking up bottles of wine are usually around 2.5x to 3x the price charged by the wholesaler. Head back to the gross profit section above for more on this!
It’s also important to add a good selection of premium and economy wines to your menu. The former will have a smaller markup but may direct people to the economy wines which could have a higher markup.
Thankfully, beer isn’t expensive and can offer some pretty decent margins - up to 80% when it comes to draught.
Bottled beers usually has an average gross profit margin of about 75%, but don’t have the same options for drinks specials as draught beer. That said, bottled beer is less likely to suffer from spillage or waste.
Always take into consideration the size of the keg when pricing your beer, along with the size of glassware it’s served in. The more glass sizes you have, the more control you have over your pour costs.
Take all of the above into account when pricing your beer and, just like wine, don’t be afraid to experiment.
The industry standard cost for spirits sits at around 18% - 20%. Just like beer, that gives you plenty of margin to play around with.
It’s also why nightclubs generate some of the highest profits in the sector.
There are a few factors to consider while pricing yours. Most spirits will be ordered in tandem with a mixer, but others will be served on the rocks, alone or as a double. The pour cost for each therefore varies considerably.
For example, if a customer orders a bourbon on the rocks, you’ll need to adjust the portion and associated price. On the rocks usually adds an additional 0.5oz to the volume, taking it up to 2oz in total.
Keep in mind these costs
There are three key costs to keep in mind while pricing your liquor, which are easy to forget about.
Food costs. If you’re only serving alcohol with a limited bar menu, the latter isn’t likely to be very profitable. You’ll need to take this into account while pricing liquor, because it’s the latter’s job to pick up the slack if you want to grow the business.
Waste. It happens - particularly with wet sales. Make sure you track your waste and work out which types of liquor are costing you the most in that area. Then, work to reduce waste or focus your efforts on marketing drinks that offer less chance of waste (for instance, bottled beer).
Labour costs. Remember that pour cost? You need to attribute the wages of the server to it, as well. This is particularly the case if you sell a lot of drinks that take time to prepare, such as cocktails. If you’re paying handsomely for a master cocktail maker, that’ll immediately impact the profitability of your liquor.
Other factors that impact your bar pricing
It isn’t just hard numbers that drive the pricing of your liquor - you need to consider the less tangible stuff, too.
For instance, the location in which your venue is situated will dictate your liquor prices. What’s the competition charging? Do you need to raise or lower your prices to remain competitive and attractive to passing trade?
The demographics of your customers will play a big role, too. Think about the age, occupation, gender, and disposable income of the people who pass through your doors. What kind of pricing is likely to sway or deter them?
Lastly, the identity of your venue will play a role in the pricing, too.
What kind of experience are you offering? Can the price of that experience be attached to the drinks you sell? They are, after all, part of what makes your venue special.
We hope this guide has helped with your liquor pricing. The key thing to remember is that it’s largely about how much you paid for the alcohol in the first place, but don’t forget those calculations and brand-based elements - it all dictates how profitable your business will become.