Increase Bar Sales Using the 80/20 Rule and Pricing Psychology

Think your pricing strategy is solid because your drink cost is sitting at 20%? 

I used to think that too until I realized the standard markup model was leaving serious money on the table. 

In this episode, I’ll walk you through how a few small shifts in pricing psychology can increase your profits without raising prices across the board or scaring off your regulars. 

 📌  What You’ll Learn 📌  

• Why a 20% pour cost isn’t the win you think it is.
• How to raise margins without raising prices.
• The happy hour habit that’s killing your profits.
• What guests really think when they see your prices.
• How menu layout changes what people buy.
• Why scarcity makes people spend more.
• The smarter way to price your top sellers.

You’ll hear exactly how I use strategic menu design, pricing tiers, and value perception to help bar owners boost their average check size and profit margins. 

If you're looking for simple ways to make more without burning out or overhauling your whole menu, this episode is for you.  

🔴 Learn More: 🔴

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Learn 75+ strategies to run it more profitably
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Thank you to our show sponsors, SpotOn and Profit Assist. SpotOn's modern, cloud-based POS system allows bars to increase team productivity and provides the reporting you need to make smart financial decisions. Profit Assist 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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Chapters

• 0:00 Value-Based Pricing vs. Traditional Models
• 1:04 Why Cost-Plus Ignores Psychology
• 2:50 The 80/20 Rule and Price Elasticity
• 3:48 Rethinking Blanket Happy Hour Discounts
• 4:45 Anchor & Decoy Effects Explained
• 5:43 Time-Based Pricing Psychology
• 6:40 Charging More for Limited Items
• 7:32 Practical Menu Pricing Tips
• 8:28 Menu Layout & Story-Driven Cocktails
• 9:31 Choosing One Pricing Strategy to Test This Week

Transcript

Chris Schneider 0:00
Traditional bar pricing models can leave serious money on the table. And today we're going to talk about why just having an 18 to 25% cost may not be what you want to do. We'll discover how understanding customer psychology and implementing value based pricing can increase your profit margins by, in some cases, 15 to 20% without alienating your regulars. And learn the specific menu design and placement strategies that top performing bars use to boost their average check size by 20 to 30% without changing their prices. Hello and welcome to the Bar Business Podcast, where we help bar owners increase profits, attract loyal guests, and simplify operations so you can avoid burnout and finally enjoy your life outside of your bar. I'm your host, Chris Schneider, the bar business coach. Before we get started, a quick thank you to our sponsors, Spot On, who provide a great modern POS solution for the bar and restaurant industry in Starfish. Use AI to turn your books into actionable steps to increase profits. Just recently we talked about menu engineering and it was kind of an update to the menu engineering model talking about, hey, we've talked about menu engineering a lot, but here's kind of the other side of this. 

Chris Schneider 1:05
If we want to look at it from a more advanced standpoint today we're doing the same thing but with pricing. So we're going to talk about why the standard pricing model could be holding back your profits and how to leverage customer psychology to maximize your revenue. And the thing here is most bar owners, right. And this is what I preach. So mind you, I'm not saying that everything I've said to date is wrong. I'm just saying yeah, that's right. But here's the advanced version. So most standard pricing models are going to be just based on a markup. Right. So we're looking at an 18 to 25% cost. And we're just marking that up. But if we change our methodology a little bit, once we have that solid footing and we know our inventory is right and everything's moving, we can tweak that a little bit to even get more impressive numbers to our bottom line. And the reason behind that is that kind of cost plus model that we all use by applying a standard markup, completely ignore psychology. 

Chris Schneider 1:55
And so the good news here is that when we understand that psychology, we apply some fundamentals to our pricing. We can increase profits without raising overall prices or alienating our customer base, or find ways to raise prices without alienating our customer base. Right. All of this is possible. So what do we want to think about here? What's different when we start talking about the advanced model versus the basic model? Well, here's one thing that's absolutely true. Your customers do not give a shit what your corporate cost is. They could care less how much it costs you to put a drink on the bar. So saying I mark everything, you know, I have a 20% cost. That's what I do. Your customers don't care about that. What they care about is, are they getting a value? And what you'll see is the 8020 rule applies to most bars actually pretty cleanly. And that nine times out of ten, when we look at it, roughly 20% of your products are going to generate basically 80% of your profits. 

Chris Schneider 2:50
Now, when we just look at traditional pricing, we're kind of hiding that reality. And we've talked before. Not all products should have the same markup and that sometimes premium things we want to markup more or we want to mark them up less depending on what piece of psychology we're playing to here. Now price elasticity varies dramatically across product categories. You know, domestic beer drinker is going to be a lot more impacted if you raise your price by a quarter at a dive bar than, say, a cocktail enthusiast going to a brand new or a very well known cocktail bar that has mixologists that's focused on that high end stuff. You can move the price two bucks and they probably won't even care, versus the $0.25 that made your beer drinker disappear. So we need to understand that we have different ability to change prices in different parts of our offerings. Now, generally speaking, I will say always glide path it up. Don't don't raise prices too quickly because generally that is true. But if you understand your specific guests, you understand where that elasticity exists. 

Chris Schneider 3:48
You can play with that a little bit. Now here's a contra theory that a lot of people, when I say this are probably going to say that I'm off, but hear me out. Blanket happy hour discounts often cut into your margins more than they help you, and there's no reason during happy hours necessarily to discount your most popular and profitable Unprofitable items. So when we look at value, that's a function of what the customer thinks something should cost versus price, which generally we're looking at as just a cost plus model, a markup model. So how do we leverage that psychology to work for us in the bar industry? Well, as I mentioned, different customer segments have vastly different price sensitivities, right. And after a group of blue collar guys that drinks a bucket of beer is going to be a lot more price sensitive than if your target is couples going out on a date night. That date night couple has is not as worried about a dollar as the guy is drinking the bucket of beer after work. 

Chris Schneider 4:45
That's just period. True. Now, we've talked about this before, but when we look at pricing, there are two really important things to always keep in mind the anchor effect and the decoy effect. The anchor effect is strategically placing higher priced items to make other options seem more reasonable. And the decoy effect is when we use price tiers to steer customers towards your most profitable options. So decoy effect outside of hospitality. You see this all the time and software you get on any software applications like here's our base version, here's our middle one, here's our high end version. Well, seek it out on the tech company is that middle option is normally the one they're making the most profit on. And they put a high and a low because they know psychologically if there's a high and a low, most people go to the middle. That's where we all end up. So it's also where you're making the most profit. You can do that with cocktails, like if you have some cocktails that are in, say, the 5 to $6 range, a bunch in the 7 to 9 range and some in the 11 to 12 range. 

Chris Schneider 5:43
If you're in a rural place like me and drinks are still cheap and that's going to push people towards that middle group. The same is true if you're in a New York City or something where instead of being, you know, 5 to $12 on your cocktails, you're 12 to $20 on your cocktails, the same philosophy applies. Now, the other thing to keep in mind here is that you can use time based pricing psychology. So customers expect and are willing to pay more during peak hours. Now, not all states allow you to charge more during your peak hours, right? Obviously, local liquor laws come really into play here, and the idea of surge pricing cocktails is just a terrible idea. So don't think about raising prices when it's busy, but realize discounting prices when it's busy is like the best idea in the world because you're not. You're just leaving money on the table. And those folks would probably be there anyway because you're the busy spot. That's where they want to be that night. There's more elasticity on Friday night than there is on Tuesday afternoon. 

Chris Schneider 6:40
And the last piece I want to hit on here is use the psychology exclusivity. So a lot of times we have specials and our specials are cheap. That doesn't really make sense when you think about how humans work and they buy things. When we buy things, if something's limited, availability it in first test that it should be a higher price and it's going to drive our urgency to purchase that item. So if you only have ten of something and you want to run a special, you don't necessarily need to discount it. You can just say, hey, I got ten of these and charge more than you otherwise would if it was on the menu and you had a bunch more. Now, obviously you can't do that all the time. The last thing you want you to do from a psychological perspective is have your customers think that you're ripping them off. But none of that changes the fact that limited availability items can command a higher price and drive urgency. So let's talk about a couple practical implementation steps here before I let you all go for the day. 

Chris Schneider 7:32
So first thing you want to do is your menu engineering right. We want to identify our high margin high popularity products. That's where we want to focus a lot on this. We want to segment your menu into good, better best tiers. If you want to use that decoy effect to your advantage, you can redesign your happy hour to feature high margin, easy to make drinks rather than blanket discounts. So what we're doing is we're not giving blanket discounts, so all those popular items are still going to be there. And we're focusing in on drinks that we can discount and still make a great margin on that are not taking our bartenders time so they can be super efficient. That's making sure that Happy Hour Special is serving us, not just serving the guest. You can implement strategic menu placement, so where we put things on a menu page is going to change how much they get ordered. Boxed items obviously top and bottom of columns. People see more if you will. So that's going to help increase the sales of those items. 

Chris Schneider 8:28
You can create signature cocktails with compelling stories that justify the premium pricing. So people love stories. We've talked to that about that before. All sales is is good storytelling. And so if you want people to justify a higher price in their mind, give them a story that justifies it. And finally, test and measure your different pricing strategies and analyze them so you can base your future. You can base what you're doing down the road on data driven analysis and not your own feelings. We need to be more data driven and less gut feelings in this industry as a whole. It's the only way we can be competitive in the current, well, financial environment in this current economy. So we've covered the way traditional pricing models are not necessarily fundamentally flawed, but can be improved upon, and how customer psychology can transform your profit margins and specific strategies can help you implement value based pricing in the right way. The 8020 rule shows that a small percentage of your products are responsible for the majority of your profits, and so your pricing strategy should reflect that reality. 

Chris Schneider 9:31
By focusing on perceived value rather than standardized markups, you can significantly increase profits and prices without alienating your customers. So I would encourage all of you listen to this again and then figure out from this, what's one psychological strategy here that I've mentioned? Go in Google, do some research and implement it in your bar this week. And I guarantee. Well, guaranteed is a strong word, but if you do it properly, you should be seeing results immediately. That about wraps it up for today. If you enjoy today's insights, make sure you like, subscribe and leave a review. If you are ready to take your bar to the next level, schedule a strategy session with me by clicking the link in the show notes below. Until next time, have a great day and we will talk again later.