Bar Owner's Guide to Profitable Menu Pricing: Set Your Margins Right

Are your menu prices actually making you money, or are you just breaking even?

Many bar owners struggle with pricing their menu items correctly, leading to razor-thin margins that threaten their profitability. Without proper margin analysis, you could be losing money on every sale.

In today's episode:
• Learn the proven formula for calculating profitable menu prices 
• Discover how to analyze your true costs beyond just ingredients 
• Master the psychology of pricing to increase sales while maintaining margins

Listen now to transform your menu pricing from guesswork to a science.

Learn More:
Email Chris
Schedule a Strategy Session
Bar Business Nation Facebook Group
The Bar Business Podcast Website
Chris' Book 'How to Make Top-Shelf Profits in the Bar Business'

Thank you to our show sponsors, SpotOn and Starfish. SpotOn's modern, cloud-based POS system allows bars to increase team productivity and provides the reporting you need to make smart financial decisions. Starfish works with your bookkeeping software using AI to help you make data-driven decisions and maximize your profits while giving you benchmarking data to understand how you compare to the industry at large.
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A podcast for bar, pub, tavern, nightclub, and restaurant owners, managers, and hospitality professionals, covering essential topics like bar inventory, marketing strategies, restaurant financials, and hospitality profits to help increase b...

Transcript

Chris Schneider (00:01.304)
Today, uncover why traditional markup formulas might be killing your profits. Learn the critical components of proper margin calculation. And master the art of strategic pricing that drives both sales and profits.

Chris Schneider (00:16.45)
Today we're diving into the essential elements of menu pricing and margin calculation to ensure that every item on your menu contributes to your bottom line. It is so interesting to me when I talk to bar owners and hear how they've come up with their pricing strategies. One that I hear often, and I was just talking to somebody this week who said this to me, well, I just wanted to be a little bit cheaper than everybody else. And my response to him was,

Well, do you think there's a reason why everyone else is making more money than you?

mean, obviously, if you're cheaper than everyone else and you're serving the same types of food and you have the same suppliers and you have the same margins, if everyone else is charging more, they're making more money than you are.

And the bar business, as much as we want to talk about it being about community and teamwork and building an environment for people and all of that's true, hospitality is the most important thing.

Chris Schneider (01:22.926)
But if you don't charge enough, you don't make any money and you're closed. So this is why I always go back to the numbers because the numbers have to be right. Otherwise you don't stay in business.

And pricing, well, scary, especially with the inflation we've had and how much pricing has changed and how much prices have had to go up.

Chris Schneider (01:52.214)
It's a scary thing to raise prices.

Chris Schneider (01:57.336)
But at some point, if you don't raise prices and your costs go up, you're out of business. And that causes financial stress, it causes unstable operations, and it causes you to spiral downwards. You're better off charging for things than not.

So let's talk through some key points today on pricing. The first one is you have to actually understand your cost.

You have to actually understand your cost. And with bar owners where I see this incorrectly applied the most is poor cost on a cocktail.

If someone orders a Jack and Coke, you have to price both the Jack and the Coke. If put a lime on it, that lime is also part of the cost of that drink. Which means the Jack, the Coke, and the lime all need to be calculated into your cost to figure out the right price to charge.

Chris Schneider (02:52.098)
And we've talked about this before, but the more complex you get in your cocktails, if you start doing like tiki cocktails, the liquor isn't the majority of your cost in that situation. So you have to have accurate poor costs in order to have correct prices. The other thing you have to do is factor in waste and spillage.

Chris Schneider (03:19.35)
If we think about draft beer, most draft beer...

is impossible to pour at a 100 %

Chris Schneider (03:32.718)
yield. You're never going to get 100 % of the beer in a keg out of that keg into a glass and serve to a guest. If you do it well, you're probably 95-ish, 92 % yield.

Chris Schneider (03:51.63)
So if you don't understand that you're not pouring 100%, but you're pouring 92%.

You can't factor in that waste and spillage that will always occur into your prices. And that's going to make you think you're making more money than you are or that you should make more money than you will.

So you have to factor in waste and spillage as part of your true costs.

You cannot just price off of what the liquor costs in a cocktail. You have to price off of the waste and spillage, the liquor, the mixers and the garnishes. And if you're putting a little plastic straw on it, that's a garnish that gets included too. So make sure you're accounting for everything when you set a price. Otherwise, your margins will never be what you think they are.

Now, talking about margins never being what you think they are, how do you even go about setting proper margins?

Chris Schneider (04:53.454)
Well, you need to determine your target. Now that's going to change a bit from place to place. We've talked about this before when we go over the starfish benchmarking data that some areas you see 15 % average liquor cost, while other areas you see 25. Usually that has to do with the other expenses involved and the fact that they can get more for a drink.

You know, if we think about it, in New York City, your rent and all your non controllable expenses are far higher than in, I don't know, New Braunfels, Texas. Texas is cheap. New York City, eight. So you better charge more for that drink in New York City and you better have a higher margin on every drink you pour in order to cover those non controllable costs versus in Texas. You could have a 25 or 26 % margin.

And when it all calculates out, makes more money than somebody in New York City with a 15 % margin. So you have to adjust for those local market conditions and you have to determine profit margins. Now, that means that you need to understand your costs in order to understand what that percentage needs to be in order to calculate that out. So part of setting proper margins is having the rest of your financial picture in play.

to get that right. And the other thing, when we're setting proper margins, we also need to look at the relationship between volume and margin. If you're going to sell a lot of something, you can accept a lower margin on it. If you have a lost leader, it's all about volume and it's not at all about margin. You're just doing that to get them in the door so that you can sell them something else too. Now, the final thing to consider when we talk about understanding profitable menu pricing.

is that you need to strategically implement your pricing.

Chris Schneider (06:55.736)
Now there are a lot of folks out there, like I said, that are facing this issue now where they have not raised prices and inflation has raised their costs. And if we adjusted their costs to meet inflation overnight, they would be raising the price on every drink by two or three bucks. And that's not something that the guests are going to go for. So when we're going to raise prices, we need to think about how can I do this in a way that's psychological?

And usually the answer there is A, do it on natural points where people expect prices to go up. For instance, January 1st is one of them. July 1st is another. The beginning of every quarter. That makes sense in people's minds. They don't question it as much.

Chris Schneider (07:45.006)
Now the other side of psychological pricing is how you put prices on your menu. So if you put a dollar sign, you know, if the price is $9.99, you put dollar sign, $9.99. When someone looks at a menu, their eyes are drawn to that because we look for dollar signs. And when we see two decimals, we know it's money.

Chris Schneider (08:13.134)
Depending on where you are, you might be better off just putting 10 there, without a dollar sign, because people won't see that as a price in their brains.

Chris Schneider (08:23.714)
The other thing we need to do when it comes to strategic menu pricing is we need to implement menu engineering. And I know I talk about menu engineering a lot because not a lot of people do it and everybody freaking should.

because that is how you understand the relationship between price and popularity of every item on your menu.

And so really you should be doing menu engineering every quarter and along with menu engineering, you should be doing regular pricing reviews. So if every quarter you do menu engineering and every quarter you address where your prices need to go, you're never behind the eight ball. You're always taking charge of your pricing and making sure that quarter to quarter you were set up with pricing that allows you to actually be profitable.

So by understanding your true costs, setting up appropriate margins, and implementing strategic pricing, you can create a menu that drives both sales and profitability. But you just have to remember to regular review and address your prices to maintain a healthy margins as costs change and get satisfaction.