There is a commonly held conception that bars are highly profitable since there is a relatively large markup (and therefore profit margin) on alcohol sales. But in reality, nothing could be farther from the truth. Alcohol sales only paint a small portion of the profitability picture for bars. For a variety of factors including exorbitant rents, high food and labor costs, and massive staff turnover (to name a few), most bars operate on razor thin margins. Toast, one of the industry’s leading restaurant software companies, estimates that bar and restaurant profit margins range from 0-15%, with the average profit margin falling between 3-5%.

Anytime your business is working on such low margins, any steps you can take to improve your profits is critical to the success of your business. The following tips will provide you with some of the most effective ways to improve your bar profits. Keep in mind that these tips are geared towards establishments that do a solid volume (at least $25k per month) in alcohol sales and focus on optimizing that portion of their business. 

Measure Your Liquor Cost Every Week

A bar’s business model is geared around selling drinks at a considerable upcharge from their purchase cost. In order to boost profits, you should establish a goal of improving sales and increasing your profit margin. When determining how successful your bar is at achieving this goal, it’s critical to have the right data. It’s easy to look up your sales data, but it’s much more difficult to determine your profit margin.

If you don’t measure your sales volume and profit margin metrics regularly and accurately, you’re setting your bar up for failure. These metrics aren’t going to be optimized without regular monitoring and taking the necessary actions to improve them. Performing bar inventory on a weekly basis is one of the most critical steps you can take to improve these metrics at your bar.

Doing inventory on a monthly basis simply doesn’t give you enough data to actively manage and improve these metrics. If you’re trying to use your bar inventory efforts to actively manage your liquor cost and improve your profitability, you need to do inventory every two weeks at minimum, and ideally every week if you really want to optimize these results.

Optimize Your POS Programming

Optimizing your POS programming is one of the most important things you can do to maximize your profits. The good news is that you can do this without spending any money. However, it will require a decent time expenditure by your managers.

A lot of bars make two errors in their POS setup that negatively impact their profitability:

• Not having buttons for every single product sold at your bar
• Not having individual buttons for different drink sizes

Both of these mistakes can be corrected by optimizing your POS system according to the “one drink, one button” approach.

Anytime you add a new product to your selection, you need to add a dedicated button on your POS system for that product. Otherwise, your bartenders will be forced to ring in the product using a button for a similar product you carry. This is problematic, and damaging to your profitability, for several reasons:

• If there isn’t a similar product at the same exact price point, bartenders will usually err on the side of choosing a less expensive product since they’re sensitive to overcharging customers.
  
  
• If you don’t have a button for a specific product, you won’t be able to track your usage of that product, and your bar inventory efforts won’t give you any insights into how much of that product is missing each week. Therefore, you won’t have the data necessary to make adjustments that will reduce the level of shrinkage for that product.

Equally critical is making sure you have separate buttons for each drink size for every product you sell. A lot of bars will use generic modifiers such as “rocks,” “neat” or “double” that are applied to every product. The problem with this approach is that you end up charging customers the exact same upcharge for every drink of that size, regardless of the type of liquor being poured. In this situation, you will lose money on these drink sizes when a premium liquor is being poured since the same upcharge is being applied as if it were a well drink.

To ensure you charge correctly and maximize your profits on every drink, you need separate buttons for every drink size you pour for every type of liquor you serve.

Perform Level 3 Bar Inventory

Most bars, regardless of whether they’re using inventory software, are doing level 2 bar inventory. This consists of using your inventory efforts to calculate the liquor cost for each category of products you sell (draft beer, bottled beer, liquor and wine). The problem with this approach is that the liquor cost of different products in each category can vary significantly. For example, the liquor cost of well products is often in the 10% range, while the liquor cost of premium products is often in the 30% range. If you collapse those costs into one figure, you lose all the details necessary to understand how every product you carry is performing.

On average, bars experience 15% inventory shrinkage. If you don’t have the ability to track the performance of each individual item, it’s very hard to make the changes necessary to reduce this level of shrinkage.

Performing level 3 bar inventory is an important step you can take to reduce inventory shrinkage. Level 3 bar inventory involves comparing exactly what was sold vs. poured for every product at your bar in order to identify how much of each product is missing every week. The benefit of doing level 3 inventory and tracking the performance of each product down to the serving is that you have the data necessary to fix issues causing a higher level of missing product than is acceptable.

We typically see bars reduce their liquor cost by 3% when they switch from calculating liquor cost by category (level 2 inventory) to tracking the performance of every product down to the serving (level 3 inventory). This can have a significant impact on your profitability. For example, if your current profit margin on alcohol sales is 5%, making these improvements would raise that profit margin to 8%.

Leverage Bulk Discounts and Negotiated Discounts

This tip applies in most, but not all states. In many states, you can significantly boost profits by taking advantage of bulk and negotiated discounts.

Bulk Discounts

Often, distributors will give you discounts for buying cases. For example, you may get a bottle or two for free if you purchase a whole case. Sometimes you may also get discounts offered at certain times of the year for buying in bulk. We often see distributors offer end of the year discounts when you purchase certain products in bulk.

Monitoring these bulk discounts is important since the free bottles you receive will be sold at 100% profit. Make sure to speak with your distributors regularly about the bulk discounts they’re offering, as this can be an easy way to improve your profit margin on these items.

Negotiated Discounts

High volume bars can often negotiate discounts with distributors by offering some sort of exclusivity. For example, if you reduce your product selection for a specific type of liquor, such as vodka, and have a featured house vodka used in your signature drinks, you may be able to negotiate a discount on that type of vodka with your distributor.

You can also potentially negotiate discounts on liquors used in specific cocktails that experience a very high sales volume at your bar. For example, if you sell a lot of Moscow mules, you may be able to negotiate a discount with your distributor on a specific type of vodka if you agree to always make your Moscow mules with that type of vodka.

Leverage Upsell Opportunities

When done right, upselling is an effective way to boost profits. If your bar carries several signature drinks, this provides a significant upsell opportunity. For many bars, signature drinks are usually just a list of drinks that very few of their customers will care about. In this situation, these drinks won’t be very profitable. However, the bars that generate large profits on their signature drinks are able to do so because these specialty drinks become so popular with their customers that the bar becomes known for them.

For example, if your bar does a significant weekend brunch business, you can boost profits by having an amazing signature bloody mary that a lot of your customers order during brunch. If you’re a full-service restaurant, having a signature espresso martini on your drink menu can be very profitable since customers who don’t want dessert have the option of ordering a premium dessert drink instead.

The key to making signature drinks successful and profitable is to think about what drinks your bar can become known for that will be a good fit with your concept. Once you identify and perfect these drinks, you need to make sure your bartenders and servers suggest these drinks to your customers consistently so that you eventually become known for these drinks and are able to sell them in high volume.

Other Profitable Upsell Opportunities

Signature drinks aren’t the only way you can boost profits by upselling. You can also significantly increase sales by leveraging the following upsell opportunities:

• Guiding undecided customers – When customers aren’t sure what to drink, this presents an opportunity for your staff to make suggestions and guide these customers towards a specific drink selection with a high profit margin. The key to leveraging this opportunity is that you need to tell your staff what your most profitable drinks are so that they can suggest these drinks to indecisive customers.
  
  
• Suggesting another drink when meals arrive – If your servers aren’t asking customers whether they want another drink when they drop off food at a table, you’re missing out on an easy opportunity to boost alcohol sales.
  
  
• Upselling brands – If a customer asks for a generic drink such as a vodka soda, ask them if they want a call brand such as Tito’s rather than just pouring them a well vodka.
  
  
• Pairing with food – If your bar caters to a foodie clientele, suggesting specific drink pairings with each food entrée can help you generate sales for specialty drinks or higher end wines that are more profitable than the drinks customers may typically order without this guidance.
  
  
• Interrupting the round – When you have a group of people, it can be effective to ask the fastest drinker if they want another one when they have about a third of their drink left. This tactic will often get them to order one since the other people in the group still have a decent amount of their drink left. This increases the likelihood that others in the group will order another round when they’re done rather than leave since their friend now has a full drink. Often you can get a group to order several extra rounds using this tactic.

Timing is Crucial to Effectively Leverage Upsell Opportunities

The key to upselling effectively is to get the timing right. Trying to upsell every customer that walks in your door can often do more damage than good. If you upsell all the time, it can be seen as pushy and your customers may become annoyed. Therefore, knowing when an upsell suggestion is most likely to be received well will increase the effectiveness of this tactic and make it seem less pushy. Instead, it will be viewed by customers as a way they’re receiving good service.

Use Promotions to Get New Customers into Your Bar

Promotions are great ways to add revenue for your bar. The key to generating profits from promotions is to use them to get different people into your bar who normally wouldn’t be there at that moment by offering them something that is appealing to them in addition to what they would normally get when they come into your bar.

Some common promotions many bars run include:

• Trivia night
• Karaoke night
• Ladies’ night
• Tap takeovers
• Taco Tuesdays
• “Mug Club”

For bars that have live music, another promotion that can be an effective tool to get people into your bar on a traditionally slow night is to feature a specific music theme, such as reggae night, bluegrass night, funk night, or any type of music genre that is popular in your area.

Focus on Adding Value to Ensure Your Promotions Boost Profits

The key to making promotions profitable is to focus on something that will add value so that you get customers to spend more money at your bar rather than just offering them cheap drinks which eat into your profits. This doesn’t mean you can’t do price discount promotions occasionally, but if you choose to do this, we recommend that you don’t just discount your lowest price point items. This will just cause more people to order these drinks because they are now so cheap that people won’t be able to pass up the discount.

The problem with this approach is that when you discount your cheapest products which typically already have a lower profit margin, you’re now selling them so cheap that you’re not really making a profit on these drinks anymore. Instead, we suggest approaching price discount promotions in one of the following ways to help you maintain better profit margins:

• Offer discounts on mid to high tier products that have a higher built in profit margin
• Offer a set percentage discount on a variety of products in different price tiers so that you can get customers who would normally order higher end products to continue doing so (these higher tier products will be more profitable at a discount than the lower tier products)

Implement Pouring Practice at Your Bar

The average bar experiences approximately 15% inventory shrinkage, and not all of this is due to drinks being given away or mistakes. Often, bartenders will overpour, and this can significantly eat into your profit margin for drinks. Implementing regular pouring practice will help your bartenders become more accurate with their pours and reduce the frequency of drinks being overpoured.

Pouring practice is a relatively easy process to implement. Fill a few empty liquor bottles with water (you don’t want your staff practicing with actual liquor). Place an empty glass on a scale and have your bartenders pour drinks out of these practice bottles. Using a scale to measure the pours will give your bartenders instant feedback regarding how accurate their pours are.

You can make this task a little more fun by creating a bit of a game or competition where the bartenders who are the most accurate pourers receive small prizes. The key to making pouring practice successful is to have your bartenders do it regularly so that they can maintain consistency and accuracy with their pours.

Create Incentives for Your Managers and Staff

Good managers and good staff are worth their weight in gold. One of the ways you can help people be better employees is to give them an incentive to improve their performance. Setting up an incentive system where you link a bonus to how well your staff achieves certain metrics or goals can make them more motivated to put in the effort to achieve these goals. For example, you can create a policy where reducing shrinkage by a certain percentage will trigger a bonus for your managers and/or bar staff.

We’ve outlined an effective way to set up an incentive system for your managers. We recommend you read that post for a more detailed explanation of how this can work at your bar.

Optimize Your Marketing

Marketing is an important tool that will help you attract new customers, grow your business, and boost your profits. However, it’s important to be strategic about your marketing efforts. Each of your marketing efforts involves a specific cost – both in time expended by your staff and money spent. It’s important to evaluate the value you’re gaining from these efforts to ensure you focus your energy on the tactics that will deliver the greatest increase in sales and profits.

We’ve found that the following marketing strategies can be extremely effective in generating business for bars:

• Social media marketing
• Partnerships
• Offer private event hosting services

Optimizing Your Social Media Marketing

Social media can be an effective tool to grow your business when done properly, but it can also end up being a significant waste of time and money if you don’t create a clear plan for how to optimize these efforts. The key to effective social media marketing is to create engagement with your audience. This can be done in a variety of ways:

• Posting fun pictures of events being held at your bar or of your staff having a good time
• Sharing content that members of your community will find interesting or valuable
• Running contests that give your followers an opportunity to win a prize

The more engaging your social media posts, the more likely they are to make your bar appealing to your followers. When this occurs, it can be a powerful tool to generate new customers and get existing customers to stop by more frequently.

Creating Effective Partnerships

Influencer marketing is a hot trend these days, and we’ve seen quite a few bars try to partner with influencers in order to generate additional business. However, we’ve found that these influencers often aren’t a great fit to promote bars. Rather than working with an influencer who may not necessarily have an audience that would be the right fit for your bar, you may want to consider a partnership with a local organization or club sports team.

These types of partnerships can be very effective ways to generate business. Offer to host their gatherings and give them group discounts when they come to your bar for their events. If you’re partnering with club sports teams, you can give them a discount when their team comes to your bar for food and drinks after their games.

These types of partnerships are much more likely to drive additional business to your bar than partnering with an influencer because you’re tapping into a group of people in your local community who are looking for a place to congregate, and you’re giving them an incentive to congregate at your establishment. As a side benefit, if these groups have a great time when they gather at your bar, they may be more likely to stop by on their own when the group isn’t meeting.

Promote Your Private Events Services

Another great way to market to your local community is to host private parties or local events. Doing this consistently is an effective way to increase these types of bookings at your bar, and often these private parties can be very lucrative. The more effort you put into promoting your private event hosting services, the easier it will be to grow this aspect of your business.

As an added benefit, the private events you host can serve as their own marketing opportunity. Often, guests at these events will be new to your bar. If you do a great job hosting these events and the guests have a great time, your bar will now be on their radar, and they may be more likely to stop by and visit on occasion. You now have a new batch of customers who will patronize your bar.

Bar-i Can Help You Maximize Your Profits

Many of the tips discussed above have nothing to do with your inventory efforts. However, it’s important to keep in mind that implementing a bar inventory system that allows you to compare exactly what was poured vs. sold for every item at your bar is one of the most effective ways to boost profits.

At Bar-i, we’ve designed an inventory system that makes maximizing your profits the primary goal of our service. Our software is designed to not only cut your counting time in half, but also generate the highly accurate and actionable data necessary to evaluate the performance of every product you carry. Our team will provide you with detailed inventory reports that make it easy to understand what steps you need to take to reduce shrinkage, lower your liquor cost and boost profits.

If you would like to learn more about how Bar-i’s liquor inventory system can help streamline your processes and maximize your profitability, please contact us today to schedule a free consultation. We serve clients nationwide from our offices in Denver, Colorado.