Recently, we’ve devoted a fair amount of time on this blog to discussing liquor pricing decisions, and for good reason. Of all the different variables that affect your profitability, pricing is by far the most important and the most strategic. Therefore, it is worth delving into this subject in detail.
There is a lot of decision making that goes into setting the appropriate price point for your drinks. You can go in many directions with your pricing, and ultimately these decisions will significantly impact your profits.
The Strategic Nature of Setting Liquor Prices
There is no straightforward way to approach pricing decisions. It is far too simplistic to simply make recommendations such as “price Jack Daniels at $5 a drink.” To do so would be to ignore many of the factors which determine whether $5 is a sound pricing decision for this particular drink at your bar.
Instead, you must make pricing decisions that are very tactical. You must understand that in general, pricing works against volume. If you increase prices, you will make more per drink but potentially sell fewer drinks. Therefore, you must accurately recognize the relationship between price and volume in order to ensure your pricing changes positively impact your profits.
It can be very challenging to strike the right balance between price and volume. If you miscalculate on this balance, it can have disastrous consequences for your business. But when you get these decisions right, you will have taken an important step to maximizing your bar’s potential.
Bar-i works with more than 60 clients nationwide, and in our experience we have found that many bar owners overlook 6 important strategies which will help you determine the right liquor pricing to address the unique needs of your bar.
The importance of conducting geographical research cannot be stressed enough. If you have ever watched the popular TV show Bar Rescue, you have probably noticed that the show’s host, Jon Taffer, always researches the local area before making recommendations to bar owners. If you don’t understand your target demographic, you will never be able to truly meet their needs.
Geographic research can provide you with a great deal of information about the people living near your bar, including:
• Average income
• Gender balance
• The number of singles vs. married couples
We recommend using City-Data. It’s a great tool to help you identify this information in your local region. By conducting this geographical research, you will have a better understanding of how you want to position your bar and who you are trying to target as a customer. Ultimately, this will help you make more informed pricing decisions.
This strategy may seem fairly obvious, but in our experience, many bars fail to perform competitor reviews. These are very easy to do, and they will help you understand the pricing strategies used by some of the most successful bars in your area.
A great way to conduct competitor reviews is to give one of your staff members a sheet of paper containing the information you would like to know, and have them visit some of your competitors to provide you with this data.
Some good questions to include on your competitor review data sheet include:
• What is the cost of a well vodka drink? What is the happy hour price?
• What does a domestic draft beer cost? What is the happy hour price?
• What does a well whiskey drink cost? What does a premium whiskey drink cost? (ask for the cost of a specific brand, not just “premium whiskey”)
These are just a few questions to get you started. Ideally, you should include questions about any products that you consider to be big sellers at your bar. Remember, it is important to get precise information and to compare like with like. In other words, have your staff find out the prices of the same exact products at each bar they visit so that you can have the actionable data necessary to make smarter pricing decisions at your own bar.
Avoid Selling Commodities
Whenever possible, you should avoid situations where the bulk of your sales come from commonly identifiable products, also known as commodities. This is often a problem experienced by dive bars. They typically are forced to keep their prices low because they stick to selling commodities. If you mainly sell drinks like Jack and Coke, there will be a limit to the amount you can sell this particular cocktail for.
A good way to manipulate pricing in a way that maximizes profits is to add value to your drinks. This will enable you to charge more. Two good ways to reduce your dependence on commodities and add more value to your drinks include:
• Signature drinks – When done properly, signature drinks can significantly improve your profits. Bar-i has a client that does a high volume of frozen mojitos. They use inexpensive rum and make the drink fancier by freezing it and adding fresh mint. These mojitos use the same well rum that is used in a rum and Coke which sells for $4. But their signature frozen mojito is priced at $8.
The ingredients added (ice and mint) don’t substantially increase their margin compared with a rum and Coke, but by doubling the price of the drink, they are able to significantly boost profits. Creating a signature drink which is attractive to their customers has paid big dividends for this bar.
• Unknown wines by the glass – If you sell well-known brands of wine, your customers will know what these wines should cost. But if you have strong wine knowledge and can carry some lesser known brands of wine that are both good quality and have a good price point, you can price your wines by the glass a little higher, improving your margin.
You can make this strategy successful as long as the wines you sell are good quality. The fact that they are unusual wines which typically can’t be found elsewhere will then add value for your customers, and it will eliminate the situation where your patrons expect a particular price based on the brand of wine they are being served.
A common mistake made by many bars is to only offer specials on cheap products. This affects your product mix in a negative way because you entice customers to only drink the cheap products carried by your bar.
The point of a good promotion is to offer value. Your customers will respond to added value as much as they will to low prices. Therefore, you should always approach promotions from the perspective of providing value. This is best done by promoting mid-range products which may be attractive to your customers as well as promoting some of your cheaper products for the truly price-sensitive drinkers.
For example, let’s consider a bar that focuses on only offering $2 domestic draft specials. The problem with this strategy is that there are many beer drinkers who might commonly start off with a few craft beers that are better tasting, but if your craft beers cost $5, they may choose to buy the $2 beer on special simply because it is much cheaper.
However, if you also offer a craft beer special at $3.50 to go along with your $2 domestic draft special, these people may consider having a few craft beers to start off with. If they find one they are really enjoying, they may decide to drink it all night.
Any pricing promotion that doesn’t have a marketing campaign behind it will not be successful. When you discount your drinks without marketing these promotions, you are just giving your regulars cheaper drinks, which will ultimately hurt your profit margin. It’s important for promotions to also bring new customers to your bar, and marketing is crucial to achieving this goal.
Your marketing efforts can be as simple as an ad in the local paper or a sign outside your bar. But you should also consider other marketing methods which may help you spread the word about your promotions to a wider audience.
One effective marketing tool that gives you access to a broader range of people than can be reached by a sign outside your bar is Groupon. Keep in mind that you probably won’t make much money from these customers the first time they come to your bar for the promotion. But if you can create a good experience for them, you may gain a return customer who will purchase full-price drinks on future visits to your bar.
Test, Measure, and Improve
You will need to get a feel for how your pricing decisions impact your business. This is a constant process. Therefore, you need ways to test your pricing decisions and measure their impact in order to continually improve upon these decisions. Without proper testing, you will never truly know how effective your pricing strategies are.
To find out how our liquor inventory services can benefit your bar and help you maximize profits, please contact Bar-i today to schedule your free consultation. We provide services to bars nationwide from our offices in Denver, Colorado.