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3 Tips on How To Increase Your Bar Profit Margin

Posted by Sarah Pekala on 5/15/18 5:00 PM in Restaurant Metrics

9 minute read Print

bar profit margin

Delighting your bar guests usually entails creative drinks, an inviting environment, and memorable ambiance.

But delight goes both ways: While creating a memorable experience for bar guests is paramount, you should also focus on driving a profit doing so. Boosting your bar’s profit margins is a lot easier than you think; here are three simple ways how.

How to Calculate Your Bar Profit Margin

Your restaurant or bar’s profit margin is calculated by dividing net income (or profit) by total revenue.

Net Income ÷ Revenue = Bar Profit Margin

Use the calculator below to see your bar's profit margin.

This number represents how many cents per dollar of revenue is net income. Most bars aim for a profit margin of around 80 percent; the key to reaching that number is to measure and control your pour costs.

Pour cost is an essential benchmark for your bar’s profitability. Monitoring and controlling pour cost — which means keeping it as low as possible — is the difference between a profitable bar and a failing one.

Pour costs are the inverse of your profit margin: If your bar’s profit margin is 75 percent, your pour cost is 25 percent.

What is the Average Bar Profit Margin?

bar profitability

The average pour cost varies by bar type, drinks served, and location; but when we analyzed our customer base here at BevSpot, we found that the average pour cost is between 18-24 percent, in line with the industry standard 18-20 percent pour cost; the average bar profit margin is therefore 78-80 percent.

Here’s the breakdown of the average pour cost by drink category:

  • Beer :  24 percent
  • Liquor : 15 percent
  • Wine :  28 percent

How to Increase Bar Profitability

The single best way to increase your bar’s profit margin is to decrease your pour costs.

Some other options include increasing your menu prices or increasing the volume of drinks you pour, though decreasing costs is the easiest to control and therefore our first choice for bar and restaurant owners looking to increase their bar’s profit margin.

To calculate your pour cost, divide your total inventory usage—or cost of goods sold (COGS) — by your total sales.

 Inventory Usage ÷ Sales = Pour Costs 

Remember: Small changes can add up to some big positive change. Consider this scenario: Two bars are located next door to one another, Bar A and Bar B.

Both bars sell around $1M each year, but Bar A runs at a 20 percent pour cost and Bar B runs at 30 pecent pour cost.

In one year, with the exact same sales and customer base, Bar A will make $100K more in profits. #BeLikeBarA

Here are three easy to implement tips that will lower your pour costs, increase your bar’s profitability, and help you #BeLikeBarA  

Tip #1: Know Your Numbers

If you want to be profitable, you need to know your numbers like the back of your hand. The most important reports you should run in your bar’s POS system to boost profitability include:

  • The PMIX (product mix) report.
  • Menu item report.
  • The daily sales report.

To get a better feel for whether the drinks on your menu are bringing you closer to reaching your goal of profitability or moving you away from it, do the following exercise:

food-cost-calculator

Calculate the pour cost for each drink on your bar menu; compare each drink’s pour cost to the sales volume for it’s drink category (i.e beer, wine, liquor, frozen drinks, etc.). Consider calculating the following for each drink on your menu, and for the menu as a whole:

  • Number of items sold
  • Popularity (or, percentage sold across the overall beverage program)
  • Recipe cost
  • Total cost of all items
  • Menu price per drink
  • Profit per drink
  • Total profit of all items
  • Total revenue of all items

Using these data points, sort each drink into profitability categories:

  • Winners
  • Losers
  • Too popular to get rid of
  • Need re-pricing

Another exercise you can do is to calculate both the pour cost and sales volume for each item on your menu; the drinks with a low pour cost and high sales volume are the winners, and the ones with a high pour cost and low sales volume are the drinks you’ll want to get rid of or re-price.

Tip #2: Revisit Your Prices

menu-engineering

What happens when you have a popular drink with a high pour cost? Reprice it!

Every single drink on your menu should be priced, down to the fruit and/or herb garnishes. Calculate the cost per ounce of a bottle of alcohol by dividing the cost of the bottle by the number of ounces. Once you have your cost per ounce calculations, you can price your drink recipes ounce-by-ounce.

Once each drink recipe is priced out, divide that number by your goal pour cost; this will give your drink’s ideal cost.

Here’s an example of the calculation for the popular Moscow Mule:

Ingredients

  • 4 oz. Gosling’s Stormy Ginger Beer: $1.32 per can [12 oz. = 0.11 per ounce = $0.44 total cost]
  • 1.5 oz. Green Mark Vodka: $12.99 [25.3 ounces = 0.51 per ounce = $0.77 total cost]

  • 1 lime wedge: $0.50 per lime [8 wedges per lime = 0.50 / 8 = $0.06 total cost}

Total drink cost = $1.27 ($0.44 + $0.77 + $0.06)

Drink price = $8.46 ($1.27 ÷ 15%)

Pour cost = 15 percent

Bar profit margin = 85 percent

Let’s imagine for a second that your distributor was out of Green Mark that week and you had to change your Moscow Mule recipe to include a different vodka, like Tito’s which costs $20.00 for a 750 ML bottle.

Your vodka cost for the same recipe would increase from $0.77 to $1.18 per drink. To maintain the 15 percent pour cost and 85 percent profit margin, you would have to increase the menu price of that same drink to $11.22: A $2.76 difference.

If you were to keep Tito's as your vodka of choice in your Moscow Mule recipe, over the course of a week you could potentially lose hundreds of dollars of profits if you don’t adjust the price.

Tip #3: Monitor Variance

Shrinkage, loss, variance — no matter what you call it, here’s what it means: The difference between the amount of product sold over a given period of time and the amount of product used over that same period. In an ideal world, these two numbers would match up perfectly.

Variance can be caused by over pours, broken bottles, comped drinks, or theft. In fact, according to the National Restaurant Association, 75 percent of inventory shrinkage in restaurants is caused by theft.

At BevSpot, our clients average variance is 25-30 percent. These figures can add up over time, so it’s important to find ways to reduce your variance as much as possible. Here are some easy ways how:

  1. Purchase only to reduce sitting inventory: Taking weekly or bi-weekly bar inventory will show you what you really have in stock and help you make smarter purchasing decisions.
  2. Be wary of quantity discounts: Many distributors offer special deals or pricing when you purchase a certain percentage of product. That extra case or bottle may seem like not a big deal in the moment, but you’re not really saving any money if you’re actually spending more to meet a discount minimum.
  3. Invest in training for your bar team: Glass behind a bar is bound to break, but you can avoid over-pours or waste with a little bit of staff training. Consider making a recipe bible to help keep your team honest or adding pour spouts to your bottles.
  4. Be a mathematician: Constantly check your key business numbers, such as pour costs, variance, and usage to grow your profit margins.

Pour Up Some Profits

bar profit margin

Follow these three tips and you’ll be well on your way to higher profits, happier customers, and a better experience for everyone. Share your tips for how you increased your bar's profit margin in the comments below! 

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Written by: Sarah Pekala

Sarah Pekala is the Senior Marketing Manager at BevSpot, which builds easy-to-use online technology solutions for the global food and beverage industry. After spending 5 years working as a writer and editor for a digital publishing company, she made the move to content marketing and has been working in startups ever since. Today, Sarah manages the content marketing strategy at BevSpot, including the BevSpot Blog. In her free time, you can find Sarah running the streets of Boston in search of that elusive PR.


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