In our last post, we discussed the factors which impact your liquor cost. But understanding these factors is just part of achieving effective liquor cost management. You also need to make strategic decisions regarding these factors in order to strike the right balance between maintaining a low liquor cost and maximizing profits for your bar.
The following liquor cost management tips will help you achieve the right balance based on the unique needs of your bar.
Pricing decisions are very important, and they can have a significant impact on the success and profitability of your bar. The two ends of the spectrum on the pricing debate are margin and volume. The higher your prices, the more money you will make per drink. This will lower your liquor cost, but it might not always be best for business.
When you have lower prices, you might get more people to come drink at your bar. If you sell twice as many drinks, you will make more money in the long run, even though you are making less money per drink and have a slightly higher liquor cost.
However, it is important to balance these two factors – volume and margin – when making pricing decisions. Trying to compete with other bars on price alone is not necessarily a formula for success, as many dive bars find. You should always strive to do as much as possible to differentiate your bar from your competitors. While price is certainly one factor, it should not be the only factor.
Bar-i has found that our successful clients have a wide range of liquor costs. This range typically falls between 16-25%. These are some of the most successful bars in Colorado, and the bar owners have thought long and hard about the tradeoff between margin and volume. Most of these bars aren’t striving to achieve the lowest possible liquor cost. Instead, their primary goal is to seek the right balance between margin and volume that will maximize their profits and grow their business.
Your product mix is likely to be fairly set since most people have their favorite drinks which they order every time they come to the bar. However, there are some people that are open to being guided towards a particular drink choice. It is important to capitalize on these opportunities to influence what your customers drink.
There are two ways to effectively take advantage of this opportunity:
• Signature drinks
• Staff training
Signature drinks are a great way to get a person to upgrade from a well drink to a premium drink since the overall presentation and mix of flavors in the signature drink will be more appealing than what they will receive from a traditional well drink. When creating signature drinks, consider which premium liquors offer you the highest margin. This will help increase your profits. If each up-sell drink nets you an additional $1, you will find that the increase in profits will add up quickly.
Staff training is a crucial component to this as well. Make sure your staff is aware of which drinks have a lower cost for the bar and which ones bring in a better profit for the bar. This way, your staff can promote these drinks and try to get undecided drinkers to choose options that make the most money for your bar.
Effective promotions will drive profits, while poorly chosen promotions will just increase your liquor cost. When developing Happy Hour deals and nightly drink specials, you should always think about which promotions will drive profits.
A successful promotion should increase your overall profits. You will make less money per drink, but if you sell more drinks, you should make more money overall. However, it is important to monitor how much each promotion actually increases your volume to determine their effectiveness. In general, the most effective promotions will bring additional customers to your bar. If only your current customers are ordering your drink special, then they are just receiving cheaper drinks. This will increase your liquor cost, but not your profits.
One type of promotion to consider is offering a free drink. These should be a very small (maximum 1 oz.) shot that contains a mix of well liquor and a few inexpensive mixers that create a tasty drink. The Red Lion in Vail does this very effectively using O-Bomb shots (well vodka with a splash of Red Bull, sprite, and orange juice). The cost for these drinks is relatively low since they mostly contain inexpensive mixers, but your customers will appreciate getting something for free. Overall, this can help attract people to your bar and keep them coming back without significantly adding to your liquor cost.
In Part 2 of this post, we will discuss several other liquor cost management tips that will help increase your profits.
For additional tips on how to streamline your processes or to schedule a free consultation, please contact Bar-i today or call 303-219-0916. We provide services to bars nationwide from our offices in Denver, Colorado.