What does the term pour cost mean? In this article we'll define the meaning of pour cost and discuss why it's one of the keys to profitability for every bar.
One of the most shocking conversations I have with bar managers is their lack of understanding the meaning of the term pour cost. Worse yet, they’ve been selected to manage someone else’s hard-earned money. This edition of the Design Buzz defines pour cost, how it’s calculated, and why this and accurate inventory methods are the keys to bar profitability
Pour Cost: What It Means and Why It's So Important to Bar Profits
Pour cost is a term developed by the hospitality industry and is defined as the amount of alcohol to make a drink to its selling price, and is expressed as a percentage. In reality, this is what’s known as ideal pour cost percentage. Many bar owners and managers who are cognizant of the term pour cost, but don't understand its true meaning, often fall into the trap of using percentages they’ve heard or read. It’s not uncommon to hear people say that their pour cost is 30%, without having a clue how it’s really calculated. Often times, people simply think that that is the industry standard and they want to be like everyone else! The reality is there is another term that is even more important – actual pour cost, which I’ll discuss below. The reason all of this is so important is because it enables you to monitor your true profitability. For now, first things first: let’s understand the basics of pour cost.
How to Use Pour Cost to Calculate the Selling Price of Drinks
The way to calculate your ideal pour cost percentage for pricing drinks is a two-step process:
1. Take the number of shots you get out of a bottle and divide that quantity into the cost of the bottle to develop your unit cost.
2. Divide the unit cost by your desired selling price; this is your ideal pour cost.
3. Next you need to decide if you are tracking your ideal pour cost with or without sales tax. You should calculate it without sales tax as you can’t keep that money.
A more direct and useful method is to divide the unit cost by the desired percentage; this will tell you your selling price for any given drink. Here’s a useful example:
If you get 27 shots out of a bottle (a pour size of 1.25 oz) and the bottle cost is $7.50, then your unit cost per shot is 27.7 cents. If you want a “well” pour cost of 8%, then divide 27.7 by 8%, the desired drink price is $3.46. To develop the actual selling price (with sales tax), simply multiply this result by your state’s sales tax. If your state sales tax is 10%, then multiply your desired drink price ($3.46) by 1.10, you arrive at a selling price to the customer of $3.81, which you may wish to round up to $4.00.
As you know, in the bar business we have different value groups and different pricing for each, so it’s impossible to make consistent profit margins across the board. Simply stated, the art of upselling is where the greatest profit margins lie in the bar business; I discuss this is greater detail in a previous post in Design Buzz, which you can reference below. According to my good friend and industry expert, Chuck Deibel, among his hundreds of bar clients the ideal pour cost percentages for the various alcohol groups are as follows:
· Well liquor is around 10% or less.
· Call liquor will fetch in the 12% to 18% range.
· Top shelf will be in the high teens to mid 20’s and Premium will be in the low-to-high 30’s.
Chuck further states, “Depending on product mix and pricing, I see bottle beer anywhere from the mid 20’s to mid 30’s. Draft beer ranges from the high teens to the high 20’s.”
Productive Bar Design: What Are The Most Profitable Drinks?
What Bar Owners Need to Know About Liquor Inventory Control
So far we’ve discussed the concept of ideal pour cost, and I also alluded to the term known as actual pour cost. Are you aware that over 85% of bar owners are losing 20% of their profits? Folks, this is NOT an infomercial! I know this sounds crazy, but this is a very well documented fact. Chuck Deibel, a CPA having performed thousands of inventory audits over 20 years, stated this in a 2014 State of Ohio Sales Tax Audit, which you can download below. The reason inventory loss runs rampant and undetected is due primarily to two factors:
· Extreme high profit margins cloud the owner's perception.
· The complexity of product mix and product pricing.
To illustrate the latter point, just think about the following:
· The various levels of pricing (well, call, top-shelf, premium, etc.).
· Also consider that you might be selling the same drink at different prices, such as Happy Hour and Daily Specials.
· You serve batch drinks in the form of margaritas, long island ice tea, etc.
Given all of the above, now consider attempting to calculate how much money you should make at the end of one shift. Oh, and by the way, how about those free drinks your bartenders are giving away (to increase their tips) and the over-pouring and other wasteful habits! Can you now tell me how much you should have made last night alone? You see, as a bar owner you are living in a parallel universe:
Not only are many bar professionals unaware of their ideal pour cost, most don’t know their actual pour cost – the one that takes all of the above factors into account. There is a difference between ideal pour cost and actual pour cost, and the difference between the two results in the amount of your lost sales and inventory.
According to Deibel, “Many bar operators don’t calculate their ideal cost for pricing and most, if not all, don’t recalculate it on an ongoing basis. Not doing so can cost you thousands of dollars.”
Why BevInco Inventory Control Can Help Bar Owners Improve Profitability
So just why is knowing your actual pour cost so important? For one, the odds are that you're among the more than 85% of all bar owners who is losing 20% of their inventory. Worse yet, the stability of your business could become impaled if you are ever audited by your state liquor authority. Although the state allows for shrinkage (according to the above-mentioned state tax audit), it’s far less than the amount you are probably losing. The state expect its tax based on the amount of shrinkage they allow, and unless you're up-to-date of your actual pour cost (and tightening your inventory controls), an audit fine of $98,000 is not uncommon, as stated in a previous blog post, referenced below.
There is a routine method of calculating your actual pour cost, and that is a unique service offered by noted industry expert BevInco. BevInco, which operates an international network of factory-trained local dealers, innovated a systematic methodology of helping bar owners calculate their actual pour cost and shrinkage. The mystery of knowing everything about your inventory, shrinkage – and ultimately your actual pour cost – can, in fact, be unraveled. Your local BevInco dealer performs an on-premise inventory service by systematically entering all of your drink and batch recipes into their proprietary software and also weighing all open bottles, batches and kegs. The result computed by the software is the actual pour cost. There is no other way to compute actual pour cost. With BevInco, you get meaningful pour cost information; a sample report (shown above) can be downloaded below. BevInco clients frequently reduce their shrinkage from 20% to 2-3% within the first four months!
As you can see, unless you know exactly what you’ve sold there is no way of knowing your actual pour cost, and certainly no way of knowing the habits of your bar staff. It's critical to the success of your bar to get in control of your pour cost and inventory.
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