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How to Price Wine: How Much to Charge for Wine Menu Items

Grace JidounAuthor

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How to Price a Wine: Calculate Costs to Charge for Wine

Enjoying a glass of wine is one of life's great pleasures, but figuring out how to price that glass is far from easy. With so many grape styles, vineyards, terroirs, and premium brands, each glass or bottle requires a thoughtful approach. What's more, the wine industry has been going through a sour patch in recent years. Shifting consumer tastes and the impacts of climate change on grape harvests are two primary reasons, according to Wine Industry Network.

The good news is restaurants and bars average a whopping 70% profit margin on wine. Premium wines are leading the charge, especially with Gen Z, who seek out artisanal wines from independent vineyards and small-batch producers, reported WIN. Get the pricing and product right, and your business can become a goldmine. Get it wrong, and you may lose out on hitting the sweet spot with consumers.

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How To Set the Right Price for Wine

Correct pricing can result in more customers, a larger share of the local market, and, ultimately, increased profits. But just as no two vinos are exactly alike, there's no plug-and-play formula when pricing wine. One wine bar may specialize in natural, organic, fair-trade wines, while a restaurant offers a "house wine" two doors down — 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 crack the code on wine pricing.

Wine Cost Calculator: Understanding the Basics of Pricing Wine

Simply put, pricing is the process of determining how much money you'll charge for your wine, by the bottle, and by the glass. 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, vineyard 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 wine goes beyond the amount you paid to the wholesaler or vineyard. To determine your pricing, consider every action that goes into serving a flute of Champagne or a bottle of Burgundy. This will include the cost of ingredients (fresh juices, garnishes, or mixers for wine cocktails), 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 glass 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 wine at a loss. Here, we break it down.

Recipe Costing

Whether you're a vineyard with a tasting room that sells your bottlings to the public or you specialize in wine cocktails (think Bellini, sangria, negroni, mimosa), you'll need to master the art of recipe costing. 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 serving a refreshing wine spritzer and paid $4 for a 16-ounce bottle of premium tonic water. If you use one ounce of tonic water in each spritzer, the unit cost would be 25 cents per cocktail. Continue to add up the individual cost of each ingredient — the wine, the garnish, etc. — to get the total cost for each drink.

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.

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 menu item.

Overhead Cost Calculation

For a truly accurate pricing strategy, operational overhead expenses must be factored into every bottle or glass of wine you serve.

Fixed costs are constant no matter what you decide to sell. These include rent, property taxes, business loan payments, and monthly equipment rental, such as refrigerated storage units. Then come the variable costs, which fluctuate monthly depending on your output. They include maintenance costs for your equipment, replacement wine glasses due to breakage, water, electricity, and more. To calculate the overhead costs per wine, 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.

Total Cost Per Item Calculation

Now comes the moment of truth where you discover the total cost per bottle or glass, 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 bottles of wine are 200% to 300% over the retail sales price, according to Sommelier Business. For wines by the glass, one industry standard is to price a glass at the wholesale cost of the bottle. For instance, if you purchased a case at a rate of $10 per bottle, then many business owners default to pricing a single glass at $10. However, what happens if you don't sell six glasses of that wine after you open the bottle? With so many unknowns, it's essential to do more legwork when it comes to pricing.

Pricing Strategies

Cost Plus Pricing: This is the most popular pricing strategy but has 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 your wine list. It is customer-focused, meaning your business will base pricing on how much your customers believe your wine 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 wine cellar that sets them apart from the competition, such as rare bottles or artisanal wines from small producers.

The trick is that it requires a deep understanding of the wine market (or a sommelier on staff), which only comes from time and research, two things you might be short on when launching 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." To charge more than competitors, bars and restaurants must deliver a premium wine-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 part 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 wine's quality, especially in comparison to a competitor. If you're known to have the most refreshing summertime sippers, the smoothest Cabernets, or award-winning wines 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 wine beyond a bar or restaurant: festivals (with a proper license), catered parties, and corporate events, to name a few. In some states, like California, "Merlot to Go" laws allow customers to take home partially consumed bottles of wine from a restaurant.

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.

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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 wines, 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, if sales are slow, brand-new establishments might delay price hikes to gain market share.

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 wine list, develop your marketing strategy — and, of course, set prices. This will also come in handy with channel pricing as you figure out which wines 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 bottles and 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 or restaurant. After pinpointing your key seasons, establish a base rate for your wines 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, loyalty perks, and discounts are all ways to engage customers and increase sales. The trick is to use them wisely. For instance, offering wine flights featuring vino 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 an exclusive bottling.

Communicating price changes to customers

Honesty is the best policy. Customers appreciate transparency around price changes. Who among us isn't thrilled about an incredible happy hour? On the other hand, 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 careful, well-thought-out approach will keep your customers happy and lead you to profitability. There's no "magic number" for any one vintage or label, but following these strategies will get you pretty darn close.

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