How to Price Your Drink Menu for Maximum Profit: A Comprehensive Guide for Bar Owners

As every bar owner knows, your drink prices play a major role in your bar’s profitability. The more you can charge for your drinks, the higher your potential profits. Simple math, right? However, that doesn’t mean you can simply set your drink prices to whatever you please.

(...Well you can but that’s likely to have some undesired results).

When it comes to drink pricing, you need to look at it as a double-edged sword. Set your prices too low, and you risk losing out on potential profits. Set them too high, and you may end up driving potential customers to your competitors.

Drink pricing is a fine art of finding balance between charging too little and charging too much. Achieving that fine balance requires careful consideration of several factors. In this guide, we'll walk you through the key steps to finding that sweet spot for your drink prices, ensuring you maintain a balance between customer satisfaction and healthy profit margins.

Research Competitor Prices and Target Demographic

To set competitive and profitable drink prices, it is essential to study both your competitors' pricing and target audience. By gathering insights on both, you'll gain valuable insights that will help you to craft a pricing strategy that works for your bar.

Step 1: Analyze Competitor Pricing

The first step to setting competitive drink prices is to find out what other bars in your area are charging. This will give you a clear idea of what local customers are willing to pay and help you decide how to position your prices.

How to Research Competitor Pricing:

Online Research: Start by looking up your competitors' drink menus online. Many bars post their menus on their websites or social media pages, giving you a quick way to compare multiple bar’s drink prices. Pay attention to the types of drinks offered by each bar (cocktails, beer, wine, shots), what they specialize in, and how that affects their pricing structure.
Check Drink Specials: Many bars offer daily or weekly specials, such as happy hour deals. These promotions can influence your pricing strategy, so make sure to note which bars offer discounts and when.
Read Customer Reviews: Checking reviews left by customers can provide you with some additional insight into how customers actually feel about certain bars’ pricing structures. Customers often mention whether they felt the prices were fair for the quality of drinks and service they received. Using the feedback customers provided for other bars, you can set prices that you know customers will actually be comfortable paying.
Visit Competitors in Person: If you can, visit other bars in person to get a firsthand look at what they offer. Observe what kinds of drinks customers are ordering and how much they're paying. Also, take into account the atmosphere of the establishment, as the type of bar it is can have a serious impact on what type of pricing structure they use.

Step 2: Identify Your Target Market

Your drink prices should align with the type of customers you're trying to attract. Not all bars serve the same demographic, so it's important to understand who you are targeting, and what their expectations are.

Consider the Type of Bar You Run: A dive bar with a laid-back atmosphere and inexpensive drinks will appeal to a different customer base than a high-end cocktail bar with premium spirits and a chic ambiance. Each type of establishment has its own pricing expectations. Determining where your bar falls into this scale is the key to ensuring you are pricing your menu based on customer expectations and actual competitors.
Understand Customer Preferences: Think about what your target audience values. Are they looking for affordable drinks for a casual night out, or are they willing to pay more for expertly crafted cocktails in a sophisticated setting? Knowing your audience’s preferences will help you fine-tune your pricing to fit with their typical spending habits.
Local Demographics: Don’t forget to take into account the demographics of your area, including the average income levels, age groups, and spending habits. These factors will all have an effect on whether your prices should be on the higher or lower end of the spectrum.

Step 3: Set Prices Based on Market Research, Not Blind Imitation

While it’s essential to stay competitive, you should avoid simply copying the prices of your competitors. Pricing should be based on informed decisions that reflect the value your bar offers, your target market, and your business costs.

Just because a nearby cocktail bar charges $15 for a signature drink doesn't mean you should do the same. If your bar has a different atmosphere, target market, or location, your pricing should reflect that.

Additionally, if you were to offer your drinks at a slightly better price, you might attract more customers, meaning you would get more profits because even though you make less selling one drink you will likely be selling more drinks.

Determine Your Actual Recipe Costs

Once you understand your target demographic and local competition, it’s time to dive into the cold hard numbers. This requires you to accurately price out what every drink costs you, including the cost of every ingredient used to make the drink. Using your actual recipe costs, you can determine what prices you would need to charge in order to cover costs.

To calculate the cost of a drink, you will need to break down the cost of each ingredient and the amount used to make the drink. The cost of each ingredient is also known as the cost per unit. To determine the cost per unit simply divide the total cost by the recipe unit.

Total Cost / Recipe Unit = Cost per unit

After you have calculated the cost per unit of your ingredients you then need to calculate the actual recipe cost. Which is the cost per unit multiplied by the amount used.

Cost per unit * Amount used = Recipe Cost

For Example: If you wanted to know the cost of a vodka soda, you would need to know the total cost of a bottle of vodka and how much vodka is used to make a vodka soda. Let’s say a bottle of vodka costs $18, and our vodka soda uses 1.5 fl oz of vodka.

$18 (per bottle) / 26.4 (fl oz in the bottle) = $0.68 per fl oz (Calculate the cost per unit)
$0.68 per fl oz * 1.5 fl oz = $1.02 (Calculate the recipe cost)

The liquor cost involved when making a vodka soda is $1.02. Since liquor is the majority of the cost involved in making a drink many bars simply cost out the liquor to price their drink menu as it saves time. However, for accuracy it is still important to account for the cost of mixers, garnishes, and any other ingredients used in the recipe.

Instead you can determine the average cost of extra ingredients used in your drinks and add that to the cost of the liquor, which will be quicker than pricing out the exact ingredients for each drink but will still give you a better idea of what your actual costs to make a drink are.

For example: if you determine that on average you spend $100 on mixers, $25 on garnishes, and $15 on napkins and other misc. ingredients when you sell 200 drinks, your average cost would be as follows:

Mixers: $100 / 200 drinks = $0.50 per drink (divide the total cost ($100) by the amount used (200 drinks)
Garnishes: $25 / 200 drinks = $0.13 per drink
Napkins and other misc. : $15 / 200 drinks = $0.08 per drink.
Total cost for additional ingredients per drink = $0.50 + $0.13 + $0.08 = $0.71 per drink.

Now that we have the average additional cost incurred when making any drinks on our menu, we can simply add this cost to our liquor cost to get the total recipe cost.

Liquor cost + average cost of additional ingredients = Total recipe cost
$1.02 + $0.71 = $1.73 cost of vodka soda

Determine Your Target Cost Percentage

In order to utilize your recipe costs to set profitable prices in your bar you must first choose your target cost percentage (TCP), which is the percentage of the drink price that represents your cost of goods sold. Although there is no set answer when it comes to deciding on your target cost percentage, anything between 15-30% cost percentage is considered pretty standard in the bar industry, but this will vary depending on drink type, liquor, and venue.

How Drink Type and Venue Affect Your Target Cost Percentage

Here is a brief overview of how different types of drinks and venues can influence your target cost percentage:

Dive Bars and Rail Drinks: These bars often serve low-cost, high-volume drinks like rail cocktails and basic mixed drinks. Rail liquor typically has a lower cost percentage because the liquor itself is inexpensive, allowing for more profit per sale. As a result, dive bars tend to operate with a lower TCP, often between 15-20%.
Pubs and Beer-Heavy Menus: If your bar serves mostly beer, your cost percentage will likely fall somewhere in the middle of the average TCP range, 20-25%. Beer is relatively inexpensive to produce but because it’s sold in larger volumes, you can still maintain a good profit margin while keeping prices reasonable.
Upscale Cocktail Bars: These establishments often use premium spirits and serve craft cocktails, the higher costs incurred when using premium spirits usually leads to a higher cost percentage, sometimes as high as 25-30%. The premium ingredients and complex drink recipes justify higher prices, but you will still need to carefully manage costs to ensure you are staying profitable.

While these guidelines offer a general idea, it’s essential to research the specifics of your bar type, location, and clientele to determine your ideal target cost percentage.

Calculate Drink Prices Using Target Cost Percentage

Once you have determined what your TCP is, you can use this number to calculate what your ideal selling price would be. Using your target cost percentage to determine your ideal selling price will give you a baseline price that you would need to charge in order to achieve your ideal profit margins. You can then use this price with all the other information you gathered to create the perfect selling prices for your drinks.

Let’s break it down with an example. Using the vodka soda from before, the recipe cost is $1.73, and you decided to use a target cost percentage of 25%. You can now determine your ideal drink price using the following formula:

Recipe Cost / Target Cost Percentage = Ideal Selling Price

For a vodka soda:

$1.73 (recipe cost) / 0.25 (target cost percentage) = $6.92 Ideal selling price

In this case, you would price your vodka soda at $6.92 to maintain a 25% target cost percentage.

(Keep in mind that your Ideal selling price is based on target cost and profit margins, but that does not mean you will actually be operating at this cost percentage and generating the expected amount of profits. You can learn how to understand your actual profitability in this article about how to compare this ideal cost percentage with your actual cost percentage.)

Why Recipe Costing Tools Are Essential for Accurate Pricing

One down, an entire menu to go… yikes!

Although not an especially difficult task, manually calculating recipe costs for each item on your menu can be extremely time-consuming and is prone to human error, because of this it is a very difficult practice to maintain.

Needless to say, it is crucial for maintaining accurate pricing that reflects both your costs and desired profit margin. Without a clear understanding of your costs, you risk underpricing your drinks and leaving money on the table or overpricing your drinks and potentially driving customers away.

This is why utilizing recipe tools can be such an asset to your profitability. While you can use spreadsheets to calculate costs, dedicated recipe costing software can integrate with your inventory management system and provide several advantages.

Ideal Inventory, for example, provides you with powerful recipe costing tools that are already a part of an effective inventory management system. These recipe costing tools save you time and increase accuracy by reducing human errors. They automatically update prices based on fluctuating costs and provide accurate, real-time reports, ensuring you can maintain your ideal profit margins without manual calculations.

Determine the RIGHT Selling Price for Your Drinks Using All the Facts

Now, it’s important to keep in mind that pricing shouldn’t just be based on cost calculations. While target cost percentage is a useful starting point, it is imperative that you consider all the factors that play a role in determining the best selling prices for your bar.

Utilizing your competitors’ pricing, local economic factors, and customer preferences alongside your target cost percentage and ideal selling price to refine your drink prices will ensure that your prices are both competitive and align with what your customers are willing to pay.

Example: Calculating Drink Prices Based on All Relevant Factors

Let’s finish off creating the perfect selling price for the vodka soda from earlier.

Starting with Ideal selling price which provides a baseline for maintaining our target profit margin.

In the example above our vodka soda had a recipe cost of $1.73 and we used a target cost percentage of 25%. Using actual research we learned that rail liquor actually has an average cost percentage of 15-20%. So we will use 20% for this example.

$1.73 (recipe cost) / 0.20 (cost percentage) = $8.66 Ideal selling price

Now we can use the information we gathered from researching competitor bars which provides a baseline for what customers are willing to pay.

When researching local bars in the area, we found that on average, per rail drink, dive bars were charging $7, casual bars were charging $9, and high end bars were charging $12. With our target demographic being the same as the casual bars, we know we can charge around $9 and still keep customers satisfied.

Now we know that we should be pricing our drink between $8.66 - $9 to stay both competitive and profitable. Using some additional factors, we can lock in that perfect price.

Seeing as how we are just opening our doors and our competitors are already well established, pricing our drinks slightly less may create an incentive for people to try our bar instead. So we want to stay on the low side of our range.

Additionally, research shows that customers often prefer easy-to-remember prices (e.g., $8.75 instead of $8.66). It is important to note that even these small price tweaks can make a big difference in customer perception and sales volume.

Using all these factors we can determine that $8.75 may just be the perfect selling price. It is within our target cost percentage, it is competitive for our demographic, and is a number that will appeal to the customer. Voila!

Other important factors to consider when pricing out your menu:

Consider Your Profit Margin: Pricing is about more than just attracting customers, it's also about ensuring profitability. Don’t undercut your profits just to match the competition. Calculate the cost of ingredients, labor, overhead, and other expenses to ensure that your prices support your business goals.
Experiment with Pricing: You don’t have to settle on one price point right away. Feel free to test different price levels for certain drinks or specials and see how customers respond. Adjust as needed to find the sweet spot between competitive pricing and profitability.

Setting the right prices for your drinks is essential for both staying competitive and maximizing your profits. By analyzing competitor pricing, understanding your target market, and making informed decisions based on research, you can find the pricing strategy that works best for your bar. Remember, the goal is not just to match what others are charging, but to offer a pricing structure that reflects the value you provide and meets the expectations of your customers.

Now that you understand how to price your drink menu effectively, it’s time to start putting these strategies into action. Schedule a consultation to get personalized pricing advice tailored to your bar’s unique needs or schedule a free demo of our recipe costing and inventory software in action!