January 30, 2019 How to Boost Profits Without Selling More Drinks – Your Guide to Strategic Drink Pricing
With a few pricing adjustments, and a slight shift in pricing strategy, most bars and restaurants could add significant profits without selling more drinks.
The key is moving from an overly simplistic pricing model to a more strategic pricing model. The industry standard is to group brands into different categories and then apply a standard mark-up in each category. For example, a bar might mark-up their well liquor brands by 9x the cost and their premiums by 4x the cost.
This approach was necessary years ago when most bars used a simple cash register with keys limited to “well”, “call”, “premium”, “domestic beer”, etc. But with today’s Point-of-Sales (POS) technology, you can, and should, set the optimal price for each and every drink to maximize profits.
How much are you charging for Tito’s vodka?
Before we get into an analytical look at the important variables to consider, let’s start by asking a simple question: how much are you charging for Tito’s Vodka?
In Southern California, Tito’s costs $21.50, roughly the same cost as Absolut vodka. So most of our clients apply the same mark-up and charge the same price as Absolut – let’s say $6.25.
Sounds reasonable but that thinking is too simplistic: the fact is that most of your guests regard Tito’s as a premium brand. They regard Tito’s as a “better” brand than Absolut but perhaps not quite as “premium” as Grey Goose – more or less at the same level as Ciroc vodka which is priced at $7.25 at many establishments. Because your guest believes Tito’s is as good as Ciroc, you should charge $7 or $7.25 for Tito’s.
If a bar sells 150 Tito’s every week and they adjusted their pricing to that of Ciroc, they would make an extra $7,800 in pure profit per year. That’s just one example of how a strategic pricing approach can be more profitable.
You should be charging more for your premium brands
Economists talk about a concept called the “price elasticity of demand” which translated into English means “how sensitive are your customers to price changes?” When you think about someone who might buy an $80 Wagu steak, for example, you can imagine that sales wouldn’t drop much if the price was increased to $95, nor would sales increase all that much if they lowered the price to $65. That reflects low price elasticity: the customer ordering a Wagu steak just isn’t that worried about the price.
Many premium alcohol brands are also like this. A Grey Goose drinker, or the single-malt scotch drinker, is not going to worry too much about whether the drink costs $8.50 or $9 or $10.
On the other hand, our guests who drink well vodka, or Budweiser, or other inexpensive brands do care about the price. If we raise the price from, say, $3.50 to $5.00, that guest will likely find another bar to patronize. These guests have high price elasticity: they pay attention to pricing and will buy less if the price increases.
What can we learn from this? First, that it is critical that pricing on well liquor and domestic (non-craft) beer is about the same as your competitors. Guests ordering those products often decide which bar to patronize based on pricing.
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Matching your relevant competitors when pricing wells
It’s important that you identify relevant competitors when pricing your wells. If you run an upscale restaurant, your relevant competitor is not the dive bar around the corner because your guests are unlikely to leave you to drink at a bar that is so radically different. Your relevant competitor is other upscale restaurants within a reasonable driving distance. If you run a dive bar, your relevant competitor is likely to be other dive bars, sports bars, and taverns within a few blocks.
With that said, there is no reason to discount your premium brands. When customers call for premium brands they are stating their preference for quality (or, more often, status) over price – in other words, they are not particularly sensitive to the price. Cutting your premium brand pricing is unnecessary: nobody is going to switch to well if Grey Goose is an extra dollar or two. Similarly, the guest who orders Pliny the Elder is not going to switch to a cheaper IPA for a couple of bucks.
Why it’s a good idea to be at the higher end of your competitors pricing range for premium brands
Grey Goose is actually a perfect example. By definition, vodka is an odorless, colorless, neutral flavored spirit (Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) definition). Obviously, that isn’t quite true when you are drinking vodka straight up. But most guests are consuming vodka in a mixed drink. And it is impossible to tell the difference between Grey Goose and Absolut in a Screwdriver or mixed with Red Bull. And yet a Grey Goose drinker will still specify Goose in those mixed drinks. They just like ordering Grey Goose; price is not particularly relevant.
Bar owners should love “Veblen goods”
There is actually a subset of goods that have negative price elasticity. In other words, the more you charge for them, the more you sell. That sounds crazy but it’s pretty easy to think of real-life examples of so-called “Veblen Goods”: many consumers will insist on buying an expensive Chanel handbag even if they cannot tell the difference between the Chanel and a well-made, but way cheaper, knockoff copy.
Most bars have several Veblen brands. Guests who buy Cristal champagne, for example, are choosing Cristal because it is expensive, not in spite of the price. They buy Cristal to make a statement: that they are rich; or they want to impress their companions; or that they’re a hip-hop star.
Premium wells are a bad idea
The price-elasticity theory also tells us that having a “premium well” is a bad idea because your price sensitive guests just don’t care that much about a premium well. So if you charge more for a premium well, many will just choose a different bar where wells are cheaper. And if you don’t charge more for a premium well, you are throwing money away.
The importance behind your pour size
We service thousands of bars in the U.S. No two bars have the same pour sizes for every drink. But it might be helpful to understand the statistics we see in regard to standard pour sizes. For a single-ingredient drink such as a highball:
- 40% of our clients have a 1.25 ounce standard pour size
- 45% of our clients have a 1.5 ounce pour size
- 5% of our clients have a 2 ounce pour size
- 5% other pour size
Which pour size is best? A lot depends on whether or not your guests will notice the difference. Or, perhaps more importantly, even if they do notice the larger pour, will they be willing to pay a higher price for the extra alcohol?
If you want to have a “heavy pour” you will need to charge more. If you are pouring an extra ½ ounce and that equates to 25% more than your competitors, obviously you will need to charge 25% higher prices to make the same profit margin. So the question is whether the majority of guests will recognize that your bar is pouring a slightly larger drink and, if so, will they be ok paying a higher price?
Furthermore, heavy pours mean fewer drinks will be sold. Guests drink until they reach a certain comfort level. Sometimes that might be because they intend to drive home and so they will drink only until they feel a little buzz from the alcohol. Sometimes it might be a big night out and they will drink until they can’t drink anymore. But either way, they will reach a level where they don’t order any more drinks. If your bartenders over-pour, or your pour size is heavier than your competitors, your guests will reach that limit sooner and you will sell fewer drinks.
One could argue that pouring a larger portion for the same price should result in a busier establishment but that rarely seems to happen – and even when it does, it usually means that the average guest buys fewer drinks.
Read the full eBook here to learn more strategies including:
- Why a POS system enables you to price base on perceived value
- Why over-pouring kills you in two ways
- Issues to consider when setting prices
- Why wine pricing is both an art and science
- The importance of the “decision corridor”
- Training your staff on up-selling
As the pioneers in the hospitality inventory business, Sculpture Hospitality, has been helping bar and restaurant owners make more money for thirty years. Our first priority is to help eliminate losses from over-pouring and lost sales because that offers an immediate and substantial increase in bottom-line profit. Once that has been accomplished, we often turn our attention to drink pricing issues. If you’d like more information on Sculpture Hospitality’s service, or some advice on drink pricing, please contact us at http://www.sculpturehospitality.com/