Drink Pricing for Optimim ProfitsOctober 10, 2011 By: Robert Plotkin
You needn’t be reminded how critically important establishing appropriate pricing for goods and services is to your success. It’s likely we all consider ourselves savvy consumers, not ready to be taken advantage of or to needlessly overspend our hard-earned money. We make purchasing decisions on a daily basis.
The objective when developing price lists for the bar is to establish a set of prices that will yield the highest profit margins and result in products selling at their optimum sales volume. If you raise the sales price substantially past this equilibrium point, you can anticipate the sales volume will drop, thereby decreasing the amount of profit realized. After all, how many people will be willing to pay $20 for a vodka and tonic?
On the other hand, if you price that same drink well under a dollar, you can expect the drink to sell fairly vigorously, but you’ll virtually make no profit on the many transactions.
Establishing the various price lists for your operation is as much an art as it is a science. The process is dependent on your knowledge of the business, marketplace and the following three pricing considerations:
• Portion cost. The first consideration when establishing the retail liquor, beer or wine prices is portion cost. It stands to reason that the more an item costs to serve, the higher the retail price must be to realize the desired profit margin. Portion cost is determined by multiplying the product’s cost per ounce by the quantity poured.
• Direct competition and market positioning. How you position your beverage operation in relation to your competitors will have a direct bearing on the pricing structure. Market positioning inevitably renders down to the “meet or beat” decision.
Some beverage operators decide to “meet” the competition by featuring the same type of products and pricing them similarly. This strategy most often is used when the establishment enjoys significant advantages over the competition, such as location, concept, interior design, lighting and sound; the operator believes he or she will control a majority of the market, drawing large customer counts and healthy gross sales.
Other operators make the decision to “beat” the competition by charging less for comparable products or charging similar prices for bigger or higher quality products. For example, they may charge less for a name brand product like Tanqueray Gin or charge the same well price as their competitors, but serve the clientele a larger drink and/or a drink made with a better quality liquor.
• Clientele demographics. An affluent, professional clientele is in a better financial position to afford higher prices. Operations that charge above-market prices tend to attract patrons who are accustomed to paying higher drink prices in exchange for being able to enjoy the exclusivity of the establishment.
All things being equal, operations that charge lower than market prices will experience increased customer counts, thereby stimulating the volume-end of the profit equation.
Establishing Pricing Structures
When constructing pricing structures for your operation, thought should be given to “user friendliness.” The more involved and complicated you make the price lists, the more likely it is that your employees will charge your guests the wrong prices. Your research and hard work are negated when your employees fail to charge the right sales prices; even if those errors result in higher gross sales, treating the clientele fairly and safeguarding the business’s reputation is worth more than a few extra dollars.
Many operators believe that investing in point-of-sale (POS) systems will alleviate the need to train their employees on the operation’s pricing. With a few keystrokes servers or bartenders can find any drink, product or menu item price. The problem with relying on technology is that guests frequently ask servers and bartenders about prices. If the employees can’t quickly and competently answer the question, they will have to excuse themselves and check the POS for the answer. Not only does this needlessly waste time and reduce the employee’s productivity, it is also extremely unprofessional. Guests are left wondering that if the server doesn’t know the prices, what other surprises are in store for the evening?
The following suggestions can help make your price lists easier to use and less prone to employee pricing errors:
• Establish major price categories. Group products together based primarily on their wholesale costs. Use a standard increment such as 50 cents to separate the price categories, such that the well price plus 50 cents equals the call price, call plus 50 cents equals the premium price, etc. Often the high cost of super-premium liquors will necessitate an incremental increase of 75 cents or more. The price points are commonly referred to as well liquor, call liquor, premium liquor, super-premium liquor and top shelf liquor. Grouping similarly priced products together requires the staff learning fewer prices.
• Price drinks in 25-cent increments. Prices ending in 25, 50 or 75 cents are easier for bartenders and servers to add. Also, rounding prices up to the nearest 25 cents make them less sensitive to wholesale cost increases.
• Hinge product prices to specific portions. All sales prices for each product in the liquor inventory should be listed with a corresponding portion. For example, the listed sales price for an ABSOLUT and tonic, made with 1 ounce of ABSOLUT, is $4. An ABSOLUT Martini made with 1 1/2 ounces of ABSOLUT is listed at $4.50.
• Train staff and avoid employees’ pricing errors. Regardless of the reason, employees’ pricing errors hurt the beverage operation’s profitability and its reputation with the clientele. It is therefore important to work with the service staff on learning the bar’s prices. To accomplish this, review the pricing structures with the staff and explain the rationale for the prices. A test should be given several days later after the staff has had a chance to study and learn the prices.