Educating Bartenders Worldwide.
By Beverage Trade Network
You’ve worked hard on creating an innovative drinks menu, hiring the best bartenders and servers, and designing a great customer experience. Now it’s time to ensure that you are making the biggest possible profit from the operation of your bar. In order to do that, you will need to understand the key factors and variables that can impact overall bar profitability. The two most important factors are profit margin and pour costs.
The starting point for thinking about bar profitability is the profit margin. In general, the profit margin is calculated by dividing net income (i.e. “profit”) by total revenue. This gives you an immediate sense of how many of those dollars that customers are spending are actually turning into bar profit. Obviously, the goal is to get the profit margin as high as possible, and most bars aim for profit margins of anywhere from 75-80%. This means that for every $10 a customer spends, anywhere from $7.50 to $8.00 is being captured in the form of profits.
If you are making a profit margin of 75-80%, then where does the other 25-20% go? In order to answer that question, you need to consider the creation of each cocktail or mixed drink, figure out the total value of the ingredients, and then work backward to figure out if your drink is being priced high enough to give you the desired profit margin. You’ll quickly find that the No. 1 factor that influences profit margin is a factor known as “pour cost.” If you can measure and control your pour costs, then you will have an enormous ability to boost your profit margins.
For many bars, pour cost is the second-most-important metric for overall bar profitability, right behind profit margins. The two factors are related, though, so you can really think of profit margins and pour costs as just two different ways of thinking about the same issue. Mathematically, pour cost is the inverse of your profit margin. Thus, if your profit margin is 75%, then your pour cost is 25%. And if your profit margin is 80%, then your pour cost is 20%. Thus, you can see at a glance that the lower your pour cost, the higher your profit margin (and vice versa). This is why experienced bar operators know that pour costs are the key to unlocking greater profits.
In general, pour costs can range from 15% (for premium spirits) to 28% (for wine). Beer generally has a pour cost of 24%. As a rule of thumb, you will want to aim for a pour cost of 20%. This will help to generate the 80% profit margin that is the benchmark of a well-run bar. However, you can immediately see the problem here – if most customers are only ordering beer or wine, then you will never get to that 80% benchmark. If every customer orders beer, for example, your profit margins are capped around 76%. Thus, you need to be thinking about ways to encourage customers to order mixed drinks and cocktails.
To get an idea of how you can change your pour costs (and by so doing, improve your profit margins), consider the calculation of a classic mixed drink made with a neutral spirit like vodka. There are only a few “moving pieces” here – the cost of the spirit, the cost of the mixer, and the cost of the garnish. Each of these will contribute to the overall pour cost.
For example, let’s say that you combine 1.5 ounces of vodka with 4 ounces of a mixer to make a mixed drink. You would need to calculate the cost of each can of the mixer, then calculate the cost of each ounce of that mixer, and then multiply that number of ounces in your mixed drink. In a hypothetical example, a 12-ounce can that costs $1.32 each would have an implied cost of $0.11 per ounce. Since there are four ounces in your mixed drink, that would imply a total cost of $0.44 per mixed drink. You would then repeat the same calculation for the bottle of vodka, converting the size of the bottle into ounces first (e.g. a 750 ml bottle converts into 25.3605 ounces). This will give you an easy way of figuring out the pour cost per mixed drink.
Based on the above, you can see why pour costs matter so much. If you can decrease the cost of pouring of every single drink, you can also boost the profitability of every single drink. Thus, most bar operators tend to focus primarily on pour costs.
However, there are other options available as well. For example, the easiest solution is simply to raise drink prices. If you are not getting the types of profits that you want with current pricing, then it may be time to boost prices across the board. The only problem with this approach, of course, is that it can alienate long-time customers. Imagine walking into a bar after a few months and finding out that the $10 cocktail you always order now costs $13 or higher!
That is why premium spirits are so appealing to bar owners. They offer an obvious way to justify higher drink prices because most consumers are very willing to pay a premium price for an exclusive, high-end or artisanal spirit. By adding a few artisanal cocktails to your bar menu, you can help to capture these higher profit margins.
At the end of the day, better bar profitability comes down to knowing your numbers. For bar owners, this means routinely generating key reports, running the numbers, and then determining which drinks are the real “winners” and which drinks should be replaced. The three reports to keep in mind include the product mix report, the menu item report, and the daily sales report. With these three basic reports, you can generate a wide range of metrics beyond just pour cost. Just remember – there will always be some drinks on your bar menu that are “too popular” to ever remove. So it will require a bit of savvy and expertise to keep these drinks around, while simultaneously looking for sources of additional profit elsewhere. By doing so, you can help to bring down pour costs and unlock higher profit margins.