How to Develop a Profitable Pricing Strategy For Beer
Attention bar and restaurant owners: here’s everything you need to know about pricing beer in today’s market.
Grace JidounAuthor
Brewery Menu Templates
Use these brewery menu templates as a starting point for your menu design or to give your menu a refresh.
Get free downloadWelcome to the wild and wonderful world of beer, with seemingly endless varieties from pale ales to stouts and everything in between. The number of craft breweries has reached an all-time high, and the average bar profit margin is an enticing 78 to 80 percent, much higher than food. If you’ve decided to tap the market — and you’re launching a bar, brewery, or alcohol program at a restaurant — you’ll need to figure out how to price beer. Get it right, and your business could turn into a goldmine. Get it wrong, and you may lose out on the fierce competition for customers.
The good news is inflation has not slowed consumers from dining and drinking out; in fact, sales at “food service and drinking places” have surged 36% since 2020, according to Statista. Though it’s a labor of love, fine-tuning the pricing is more critical than ever to keep your barstools full.
Correct pricing can result in more customers, a larger share of the local market, and, ultimately, increased profits. But just as no two craft brews are exactly alike, there’s no plug-and-play formula when pricing beer. One bar may specialize in rare Belgian ales, while a pub a few doors sells Bud Light on tap — and they both have similar profit margins. Think of pricing as a strategic tool that reflects your business’s unique identity and position in the market.
In this article, we’ll examine the key factors that influence pricing decisions. These include clear-cut factors like the cost of ingredients and labor. We’ll also tackle the stuff that’s difficult to pin down, like overhead costs and indirect labor. Then, we’ll share step-by-step methods to calculate costs and set prices for your business. Read on for key strategies and insights to maximize your chances of success.
Brewery Menu Templates
Use these brewery menu templates as a starting point for your menu design or to give your menu a refresh.
Understanding the Basics of Pricing Beer
Simply put, pricing is the process of determining how much money you’ll charge for your beer. It’s a crucial part of being a business owner for many reasons.
Business Longevity
Market conditions change, and bar and restaurant owners must be flexible enough to adjust prices in response to economic shifts, grain production, drinking trends, and customer demand to achieve sustainability. We’ve all experienced first-hand the supply chain issues of recent years. Unfortunately, bar owners that charge 2019 prices today cannot expect to thrive.
Competitive Strategy
Finding the balance between profitability and competitiveness will be an ever-present challenge. Bar owners must look to rival businesses to ensure their offerings are competitive and adjust pricing accordingly while always keeping profitability in mind. This may mean cutting prices to gain market share or, on the flip side, raising prices to signify higher quality.
Pricing Considerations
The true cost of your beer goes beyond the amount you paid to the supplier. To determine your pricing, consider every action that goes into serving that frosty mug of cerveza. This will include any ingredients (limes, lemons, mixers, garnishes), labor costs, and overhead expenses, such as rent, utilities, and insurance. You can’t stop there. Zoom out even further to evaluate overall market demand and what your competitors are doing right and wrong. Pricing one single stein requires a holistic approach with big-picture thinking.
Calculating Your Costs
Start by pondering this question: how much does it cost to produce one unit of X? The amount you paid your supplier will likely jump to mind first, but you might be surprised by all the factors impacting the Cost of Goods Sold (COGS). It’s no picnic figuring out your COGS, but it’s essential to pricing, providing a baseline amount you should never go below. There are many unknowns when launching a business, but one thing is for sure: You don’t want to inadvertently sell your beer at a loss. Here, we break it down.
1. Recipe Costing
If you are joining the ranks of the nearly 10,000 breweries in America that make their own beer, you’ll need to know how to recipe cost. Even for the most basic bars, it’s worth boning up on the method since you might be mixing a trendy “beertail” (beer cocktail) sometime soon. Recipe costing software takes the pain out of the process, but you can do this manually with a spreadsheet or Recipe Cost template.
Write down each ingredient in your recipe, and next to each ingredient, put the measure used (weight, volume, or number). Compute the actual food cost of each ingredient by determining the unit of measure per recipe portion size based on the total cost per purchased unit. Say you’re brewing a typical light lager, and you paid $150 for 50 pounds of Dried Malt Extract. Each gallon of beer would cost you $3 of dried malt, which means each pint costs about 37 cents for that ingredient. Continue to add up the individual cost of each ingredient to get the total cost for each pour.
Be sure to account for ingredient waste in your calculations since some spoilage, mismeasurements, and spillage are inevitable. For tips on monitoring spoilage, check out our guide to conquering food waste.
2. Labor Cost Calculation
Labor costs include more than just hourly wages, typically making up about 30% of a business’s revenue. Anything that can be categorized as “labor-related” goes into your labor cost calculation, and there are two main buckets: Direct labor and indirect labor. Direct labor encompasses regular wages, overtime hours, insurance, and paid time off. Indirect labor includes fringe benefits like bonuses and uniforms.
Once you’ve done the heavy lifting to determine your labor costs (direct and indirect), plug your numbers into this formula:
Hourly labor costs x hours of labor per unit = cost of labor per beverage.
3. Overhead Cost Calculation
For a truly accurate pricing strategy, operational overhead expenses must be factored into every beer that you serve.
Fixed costs are constant no matter what you decide to sell. These include rent, property taxes, business loan payments, and monthly rental of brewing equipment and storage units. Then come the variable costs, which fluctuate monthly depending on your output. They include maintenance costs for your equipment, packaging for your beverages, water, electricity, and more. To calculate the overhead costs per beer, use this formula:
The total amount of overhead costs (fixed and variable) incurred during a period / the total number of units produced = per unit overhead.
4. Total Cost Per Item Calculation
Now comes the moment of truth where you discover the total cost per item, which is crucial to setting the price of your beverages.
Recipe Cost + Labor Cost + Overhead Cost = Total Cost Per Item
Setting Your Prices
Congratulations. Just by determining your COGS, you’ve already won half the battle. Now it’s time for the fun stuff: setting the right price so the cash can flow in.
Determine Your Markup
The markup percentage varies from business to business and is influenced by other costs such as target profit, overhead, and more. With those disclaimers out of the way, average markups on beer are exceedingly high, from 200% to 300%, according to Binwise.
Pricing Strategies
Cost Plus Pricing: This is the most popular pricing strategy but has its pros and cons. On the plus side, it’s simple and straightforward: the business owner calculates all costs (fixed and variable) for a beverage and then applies a markup percentage to determine the selling price.
The drawback is that when a product costs less money to make, you earn lower revenue and total profit. On the other hand, a bloated cost structure may force you to set higher price points to cover unnecessary expenses.
Value-Based Pricing: This method sets prices based primarily on the consumer’s perceived value of a product. It is customer-focused, meaning your business will base pricing on how much your customers believe your beer offerings are worth. Rather than costs dictating how much you charge, this approach gives you more control over pricing and is a great fit for bars with a unique approach that sets them apart from the competition, such as distinctive craft brews or rare imports.
The trick is that it requires a deep understanding of the local market, which only comes from time and research, two things you might be short on when running a business.
Competition-Based Pricing: As the name suggests, this involves setting price points relative to your competition. You have three choices: below the competition, at the competition, or above the competition. It’s a popular approach when business owners offer bottles that customers can get anywhere and when the price has reached an “equilibrium.” For instance, there’s not much price variation for a 12-ounce bottle of Anchor Steam.
To charge more than competitors, bars, breweries, and restaurants must deliver a premium beer-drinking experience. Pricing below competitors, on the other hand, risks taking a loss and hoping customers will buy other services to make up for it (known as the Loss Leader Strategy). Those who match competitors’ pricing must distinguish themselves in different ways, like through marketing, excellent service, or a better ambiance.
Considering Price Elasticity
Buyers' responsiveness to price changes can be elastic, meaning the demand for products and services can be very sensitive. Or it can be inelastic, with no change in demand. To give you a better idea, necessities like groceries and utilities are generally considered inelastic, with demand remaining the same even when prices increase. Drinking out is not considered a necessary bar of the daily routine (though many would beg to differ), so the demand is considered elastic. In other words, customers will likely be sensitive to changes in price.
Factoring in Perceived Value
This is where a great marketing strategy comes into play. Perceived value is your customer’s perception of your beer’s quality, especially in comparison to a competitor. If you’re known to have the most nuanced seasonal refreshers, perfectly poured stouts, or award-winning beers on tap, the theory is customers will be more willing to pay a premium.
Setting Different Prices for Different Sales Channels
These days, there are various channels through which you can sell your beer beyond a bar or restaurant: food festivals, retail shops, and grocery stores, to name a few. In some states, like California, for instance, customers can take growlers of beer to-go or buy beer from a food truck.
Each distribution channel will have different profit margins, and you can customize pricing for each channel to maximize profits while appealing to various types of customers.
Restaurant Cost Control Guide
Use this guide to learn more about your restaurant costs, how to track them, and steps you can take to help maximize your profitability.
Adjusting and Optimizing Your Prices
The decision to raise or lower prices is fraught with worries, but if price adjustments are implemented correctly, you can actually strengthen your connection with customers.
Monitor and Analyze Sales Data
A spreadsheet or another data analysis tool can help you spot sales trends and buying patterns for individual beers, providing insight on how and when to adjust your prices. For instance, many businesses raise prices slightly during the holidays when people pay less notice to prices. On the other hand, brand-new establishments might delay price hikes to gain market share if sales are slow.
Conduct Regular Market Research
Market research may involve surveys, soliciting feedback, and customer interviews — it sounds like a lot, but getting to know your target audience and their buying habits will help grow your business in many ways. You’ll use the data to hone your drink options, develop your marketing strategy, — and, of course, set prices. This will also come in handy with channel pricing as you figure out which products to market to which segments.
Adjusting Your Prices
Changes in cost: adjusting prices due to inflation or other factors requires a nuanced approach. One method is to tailor adjustments to customers who may be less sensitive to pricing. Another approach is to slowly implement price changes on a few special dishes or services and then assess the response before making sweeping changes.
Seasonal factors: The first step of a seasonal pricing strategy is to identify your busy times of the year. It could be based on holiday demand or weather conditions, or there could be an annual community event that drives people to your bar. After pinpointing your key seasons, establish a base rate for your beers or the lowest you’re willing to go to break even. Seasonal rates are typically higher or lower than your base rate, depending on demand in that season.
Market demand: In this approach, you’ll charge higher prices during high-demand periods and lower prices during low-demand periods. This is not the astronomical surge pricing used by airlines and ride shares, where prices double during busy times. When bars and restaurants do this, they take a slow and measured approach to avoid sticker shock, increasing prices by 10% or 20% during busy times. Your market research data will help you understand your customers’ behavior so that you can predict the ebbs and flows of future demand.
Competitor pricing: whether undercutting, benchmarking, or charging a bit more for higher quality, it makes sense to look at your rivals when adjusting pricing. That said, it’s always important to do your due diligence to ensure their prices are accurate and align with what consumers are willing to pay. Keep in mind that any changes need to work within your cost structure, not only covering your COGS but also ensuring a healthy profit margin.
Implementing promotional pricing strategies
Offering happy hours, online coupons, and loyalty perks and discounts are all ways to engage customers and increase sales. The trick is to use them wisely. For instance, offering beer flights featuring brews that you want to move or get rid of may appeal to budget drinkers who get more variety for the money. However, it won’t appeal to those willing to splurge for exactly what they want.
Communicating price changes to customers
Honesty is the best policy: Customers appreciate transparency around price changes. Who among us isn’t thrilled for a killer happy hour? On the flip side, informing customers about price hikes ahead of time and explaining the reason why goes a long way toward building trust.
Pricing is more complex than it seems, but a nuanced, well-thought-out approach will keep your customers happy and lead you to profitability. There’s no “magic number” for any one beer, but following these strategies will get you pretty darn close.
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DISCLAIMER: This information is provided for general informational purposes only, and publication does not constitute an endorsement. Toast does not warrant the accuracy or completeness of any information, text, graphics, links, or other items contained within this content. Toast does not guarantee you will achieve any specific results if you follow any advice herein. It may be advisable for you to consult with a professional such as a lawyer, accountant, or business advisor for advice specific to your situation.
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