If you’re uncertain about your beverage pricing you’re not alone. Confusion over this aspect of operations is common and widespread, says Aaron Allen, global restaurant consultant with Orlando-based The Allen Group of Hospitality Companies. It’s a complicated proposition, says Allen. Set prices too high and you could drive customers to tap water (or to your competitors). Set them too low and you risk giving product away.
Many restaurant operators treat beverages as an afterthought — an oversight that can show up in your bottom line, says restaurant consultant Annette Fazio, owner of York, Maine-based Using Your Noodle in Business.
Maintaining Pricing Accuracy
Looking at sales volume, costs and profit margins can help operators determine if they’ve priced correctly, says consultant Annette Fazio. Monitoring costs is especially critical for pricing accuracy, especially considering fluctuating commodity costs, says Aaron Allen, also a restaurant consultant. Because of the day-to-day fires popping up, operators often neglect to analyze as closely and as deeply as they should, he explains. Allen suggests establishing key performance indicators, monitoring them in real time. Other tips to ensure pricing accuracy include:
- Use the correct glassware, says Allen. Have recipes for everything.
- Calculate in things like refills on coffee, tea and fountain drinks, say both consultants, adding this is something commonly overlooked. Remember, when pricing beverages, people use things like cream, lemon, sweeteners and stirrers.
- It’s challenging to generalize about profit margins, says Allen, since different beverages — alcoholic, juices, water, sodas, bottled, fountain, and so on — all have different profit ranges, he explains. Fazio says for beverages as a whole, profit margins should average 20 to 25 percent. “Although if you’re a really upscale operation you should look at the competition,” she says. “Because even at 20 percent, you could still be charging several dollars less than the competition.”
“They should really take a look at beverages because this is where you can bring in a little more money and can do so without loading up your inventory and creating more work,” she says.
There are several factors restaurant operators should consider when establishing beverage prices, say Fazio and Allen. These are:
- The concept, format and clientele. Are you mainly dine-in, takeout or delivery? Fast casual, QSr or fine dining? Positioning is also important, Allen says. “Some may want to be perceived as higher end, some may want to be more value-added.”
“You have to know what your business is,” says Jeff Miller, who owns two extreme Pizza franchises. Both in Northern California, they do mainly delivery; dine-in comprises about 20 to 25 percent of the business. They serve beer, wine, soda, juices and bottled water. Beer and wine sales account for two percent of their overall sales; nonalcoholic beverages contribute six percent, says Miller, adding that his customer base is a mix of business, family and college students.
“I knew going in that beverages would be less than 10 percent of our overall revenue,” he says. “Our business model is gourmet pizza; we’re not a sports bar.” Then there’s Shorty’s. with two Georgia locations (in Atlanta and Tucker), Shorty’s offers full bars, plus live music and dancing in the Tucker restaurant, says owner Brian wilson. Beer/wine and liquor sales account for 20 percent and seven percent of the total sales respectively at the Tucker restaurant, which is in a suburban area.
The Atlanta restaurant is more urban, wilson says. Beer/wine sales are about 18 percent; liquor is three percent. There, thanks to a more business clientele, wine sales are higher. For both operations, nonalcoholic beverage sales are classified with food; at the Atlanta restaurant, food sales are just under 80 percent.
“This reflects our focus on food,” he explains. “even though we’re close to emery University, kids don’t go to a pizza restaurant to pound beers.”
- The competition. “Competitive analysis is important; we don’t want to charge more than the competition,” says wilson. “See what competitors are charging and don’t charge more; charge less if you can.”
- Compare concepts in the same tier as yours; like to like, says Miller.
- Be thorough, advises Allen. Check type, size, if refills are free and what incidentals and add-ons are provided.
- Consider your marketing and positioning strategy; the experience you’re offering guests, says Allen. If the experience is upscale or unique, you may be able to get away with charging a bit more. And keep your competitors confused; make your own signature drinks, says Fazio, and “you can charge more for these. Plus customers like them and it won’t be as easy for the competition to shop you.”
- Consider your costs. when wilson first opened, he priced on what the market would bear. Now, although he doesn’t want to charge more than the competition, he does factor in costs, raising prices if costs demand it (wilson’s end-of-month beverage costs run 30 to 33 percent).
“In the last couple of years we’ve gone up on our draft beer prices considerably,” he says. “People love craft beers and microbrews, so we’re completely comfortable the market will tolerate it.”
Miller runs his cost of goods at around 28 percent with beverages making up about two percent of that. “If my costs go up by five percent, I’ll evaluate if I can raise my prices,” Miller says. “I scout the competition first. But if they haven’t raised their prices I’d still raise mine if the cost of goods warranted it.”
Allen’s reluctant to generalize about costs, explaining these can vary based on the concept, and what’s being served and how. However, he says that on average, the combined costs of beer, wine and liquor should be around 22 percent; Fazio’s estimate is around 23 percent (including nonalcoholic beverages). Offering nonalcoholic beverage only? Fazio estimates costs should be no more than 18 percent, depending on type (fountain, bottle, juice boxes, etc).
Ultimately, all the above factors considered, pricing remains very individual, says Fazio. “You have to go with what you’re comfortable with and be able to defend it.”
Pamela Mills-Senn is a freelancer specializing in writing on topics of interest to all manner of businesses. She is based in Long Beach, California.