Beer Planning - Coming Soon!

Hi there,

You may have heard that I’m moving my beer planning toolset from a rag-tag (if totally functional) collection of Python and Google Sheets to a clean, user-friendly website in the coming months (as of this writing), and if you’d like to join the waiting list in order to have first dibs on the Alpha and Beta launches, you can toss an email into the form right here, and I’ll let you know when there are ready!

In the meantime, the somewhat informal posts on this blog should be fun reads, and I’m reachable at adrian@bits2bbls.com if you have any questions.

Cheers!

Adrian

Can Pricing - the Easy Way and the Better Way

When in doubt, default to the Crowd

A young brewery is a small brewery, which is a short-staffed brewery, which is a brewery that understandably doesn’t have much time for data analysis and the building of pricing models. Fortunately for most, there’s a huge, easy workaround to the need for pricing models, if an imperfect one: market prices.

The idea is simple enough: if a bunch of other similar breweries have similar costs and are selling similar products to a similar market, and if we assume that, on average, their pricing must be high enough to allow for a survivable amount of profit to squeak by (since those breweries are years old; a dangerous assumption we’ll examine shortly), if we just take some sort of average of their prices (say, one for Hazy 4-packs, one for general pints, etc.), we’ll arrive at a set of menu prices that’s probably not too horrible.

And that seems to have worked for MacLeod, for example, for quite a while, but there are several problems with this simplistic approach, namely:

• Beer production costs can be surprisingly variable across what look like similar beers, so a model based on your actual costs may produce more consistent profits across SKUs

  • Though, again, the power of this simplistic model is that it operates like a de facto Buffet (not the Warren variety, mind) - we make extra money on this beer to absorb the losses in that beer, and it all averages out to some net profit

• In California, labor is incredibly expensive (as it should be!), so a brewery that’s twice as big as ours will see tremendous reduction in beer cost (due to labor efficiencies in the brewing department), which makes our pricing an undershoot if it’s based on an average that includes their prices

• As we’ve discovered, the industry tends to price beers and cans at levels that yield different margins, with cans having a generally lower margin (no shock there - ours mostly work out to $3.75 per pint), and I suspect that this is a result of a distribution-heavy industry that’s both used to selling cans for cheap, and is selling to customers who are also used to buying cans cheaply

For these reasons and more, I suspect that you’d be leaving money on the table, as it were, if you were to employ a pricing model that’s just a regional average (which is exactly what my first model was). But what’s the alternative? Even if we know our beer cost to the cent, what kind of target should we shoot for?

Pricing Everything Out

Naturally, there’s a better way. Using some sort of target that we’ll discuss shortly, if we could figure out our actual beer production costs, we could combine that number with can volumes and prices which we know (as well as, in a perfect world, a modified taproom cost model) in order to estimate the actual profit on cans, and thus aim for some sort of profit target (more than 0%, probably less than 100%, to start with).

So, how might we estimate beer production costs? Just add hops, grain, yeast, and labor for each beer? Not quite.

The problem, as I discovered when I inherited the very, very rough original MacLeod beer pricing sheet, is that beer production cost (COGS) covers a wide range of expenses, from grain and hops, to utilities and labor, and all the way to depreciation, excise, and health insurance. Worse yet, the brewery’s cut of an entire brewery’s electric bill might be relatively small if that brewery has a restaurant and taproom; ditto rent.

There really is no better way to work all of this out than with a spreadsheet. A simple version would contain a column listing the names of all relevant expenses per month or quarter, followed by a column listing the percentage you think should be attributed to the brewery, and finally a cell that multiplies the two and gives you a monthly or quarterly beer cost. Finally, divide this by the BBL of beer brewed in the period, et voila - production cost per bbl.

(How might you assign these percentages? If the brewery takes up 28% of the square feet of your building, maybe use that for rent; you can use the labor percentage to work out the Health Insurance and Workers’ Comp numbers; and you can make up some estimate for utilities use, which isn’t a huge bill anyway.)

After this, there’s one more trick. Cans cost a fair bit more to package than kegs, so if you’re up for it, you’ll really want to exclude canning costs from that per-BBL figure, and then add it back by dividing that sum by the BBL of cans brewed, and adding it to your baseline per-BBL figure. Elaborate! Spicy! But crucial.

Finally, while you could also run this same logical game and build a spreadsheet that allows you to calculate each beer’s cost from the bottom up, by turning all of those expenses into per-BBL figures and then adding them to individual beers’ hop, grain, and yeast costs, there’s good news: one interesting and simple method to compute these individual beer costs is simply to work out your average beer cost, work out what portion of that is due to ingredients, and then simply add or subtract the difference in ingredient cost to your base beer price, et voila (again).

Now, you have your costs per bee; now what?

We know what the beer costs to produce, and if you’re selling to a distributor, that’s basically the whole story - tack an appropriate markup onto your beer (oh, 30%), which is to say, multiply your per-case cost by 1.3 and charge that, and if you make beer that’s cheap enough to be competitive in distribution, you’ve just made profit. My suspicion, I should add, is that you’re far, far better off not distributing unless your brewhouse is at least 30 BBL; any less, and you’ll keep more, maybe 10%-20% more, by selling it through your taproom.

Speaking of, the second any of that canned beer enters your tasting room, there’s an added layer of complication worth accounting for: Cost of Sales. Which is to say, yes, your can display fridges don’t take up much space or use much electricity (relatively speaking), so not all taproom costs should be conferred to your cans, but labor certainly should, as well as a number of other costs. My solution is comprehensive - I attribute yet another subset of our overall costs to cans, divide by the number of BBL of cans sold, and…well, you know the game. But heck, you could always just say, if 10% of beer you sell is cans, that something like 5% of your total taproom costs should be attributed to cans or something. Don’t you dare @ me.

Phew! Now you know, in theory, how I do everything (wanna see some spreadsheets? Let me know!), and we can finally get to the fun part: margin-based pricing.

Margin: Profit’s Prophet

The idea is simple: if we know our costs for each case of cans (and not just an average, but per-SKU costs), we can set prices based on some sort of profit target, as follows:

• Profit = Price x Margin

• So, Margin = Profit/Price

• And Profit = Revenue - Costs = Price - Cost

• So Margin = (Price - Costs)/Price = 1 - Costs/Price

  • Price = Costs/(1 - Margin)

So the question becomes, which thing should we target? A set profit per case, or a set margin per case?

I prefer the latter, because the former requires that we charge a relatively high price for cheap beer and a relatively lower price for expensive beers, which isn’t ideal, because it defies the market by under-valuing things like Hazies (which fetch a premium) and under-valuing things like American Light Lagers (which certainly do not fetch a premium, quite the opposite), which probably leads to over-selling expensive beers and under-selling cheap beers, in terms of cases per day, say. And this is all fairly bad news. To account for this, if you wanted to stick to something like a fixed profit target model, you’d need some sort of weighted-average adjustment based on sale speed, which seems like a poor approximation of the better strategy, which is margin targeting.

The idea came to me slowly (though I’m sure it’s a well-established concept that I’ve stumbled upon), and from a variety of angles - how much more should we charge for nebulously “special” Hazies, say? How appropriate is $14.99 for the wide variety of styles for which we charge that for a 4-pack? And perhaps most importantly, can we make sure that selling cans, which is a hassle, doesn’t drag down taproom profits?

This last idea is key: I’d propose that you work out your taproom profit margin, and use that as a target for can pricing. Explicitly, let’s say:

• Your taproom margin is 40%

• Your cost-per-case, before that taproom attribution, is $45 (middle of the pack for us)

• You’ve decided to attribute $5 of taproom costs to each 4-pack case

Then, one of a number of things you could do is reverse-engineer the price you should charge, as so:

• Price = Costs/(1 - Margin) = (45 + 5)/(1 - .4) = 50/.6 = $83.33

• And per 4-pack, it’s just the case price over six, or $13.89

• Let’s round that up to $13.99, or even $14.99, and keep the gravy! Huzzah!

And that is how a numbers person prices out cans.

Conclusion

So, sure, there’s some behinds-the-scene pain that went into building relatively accurate pricing models, but hey, not only does that give us a beautiful way to price cans, but it also gives us our taproom margin per month or quarter, our keg costs and thus pint costs and target prices, and an alarm system for overly expensive beers. That’s pretty sweet, and the end result is a rare thing: the virtual guarantee of profit across all SKUs in a highly competitive environment.

Cheers,

Adrian “P=R-C” Febre

Pricing Beer - a Toy Model

Welcome back, to both of us! I’ve been reading up on small brewery finance, and one of the big topics, beyond accounting, is pricing beer, and the exactly what goes into COGS, aka beer production costs (basically). In the brewery setting, this is a two-parter, namely correctly attributing each cost into the correct category so that, for example, brewery labor is in the COGS category, and so that glassware is in the Selling Cost category, and then collecting this data and, using some shoehorning, producing a cost-per-BBL figure which you can then use to price out your distro offerings, determine how much you should charge for that new Hazy, etc.

But that first thing is about the most boring thing in the world, and is covered in grueling detail in both Small Brewery Finance and the Brewers’ Association’s COGS manual. Plus, as a homebrewer, I’ve always wondered what my beer actually cost, since it feels a hell of a lot more emotionally expensive than the ~$20 in grain, hops, and yeast per batch

So, today we’re going to use my homebrewing setup as a mock brewery, and price out my beer! Spoiler alert: there’s probably no way to make money with a one-gallon brewery

What’s a cost? Better yet, what isn’t?

So obviously, as mentioned, grain, hops, and yeast are the most “visible” costs, followed closely by labor (which is just harder to divide up). But in the glorious world of accounting, all kinds of whacky things count as costs, and that’s not even touching economic concepts. Here are the costs we’ll be considering today

• Ingredients - malt, hops, yeast, other. Duh.

  • But also chemicals, like StarSan, PBW, and Phosphoric Acid (mash pH adjustment)

• Utilities - water, electricity (I’m all-electric baby!!1!), and CO2

• Labor - I’ll use minimum wage ($14.25/hr) as a placeholder - the real answer is $0 since I’m not an hourly employee (opportunity cost is an economic, not accounting, concept anyway)

• Rent - I’ll use a quarter of my apartment at an hourly rate

  • Fun fact: dividing rent by square-foot-usage is actually the completely legit way to divide up costs like rent and to a lesser extent utilities

• Depreciation! Surprise, motherfucker! - that’s right, my gear has value, and we’ll be using the good old 7-year depreciation system to price out the implicit cost of just using my gear - we’ll talk below

By the numbers

• Ingredients

  • We’ll use as an example an Altbier I brewed, with a dead-simple recipe: 2.66 lb Munich Malt, 1.04 oz Hallertau Mittelfrüh hops, and half a packet of Lallemand Kölsch yeast

    • We’ll discuss this below, but reusing or splitting a package of yeast is an important method the “big boys and gals” use to save money

  • Another fun fact: it’s not just the ingredients themselves, but also freight and tax that you’re supposed to account for

  • Thus, using a recent order as an example, we’ll call this $5.03 + $1.53 + $4.99/2 + $2.06 + $19.38/6 = $14.35

    • (malt, hops, yeast/2, tax, freight/5 since I get about five batches from that much grain, in that order)

  • But there’s also the chems

    • Star san - I use .25 oz, ~$12 for 8 oz, so $0.38

    • Phosphoric Acid - at, let's say, 3 mL, that's ~$3.49*.1/4 for a portion of a four oz container, or $0.09

      • While we're at it, a fl oz = 30 mL or so, and that's super useful in life. Also tight: a gram of water is a mL, and a cubic centimeter is also a mL. 3.79L/gal. You're set for life now

    • Brew salts are stolen, so $0 (they’re a few cents if you add them, and of course you can use tap water if you hate yourself or brew malty beers and live in NYC/Prague)

    • Finally we have PBW, which I use 1 oz of - at $8.99/16 oz, that’s $0.56

    • What, no shipping cost or tax?? Good call - I accounted for it in the malt/hops/yeast shipment, and the tax in that figure was for a whole order - again, even at this level of detail, I ignore some small details and corrections

    • So that’s $1.03 - small, but nonzero

  • Grand Total: $14.35 + $1.03 = $15.38

• Utilities

  • Let's say I use double the electricity I use to boil, so ~7.5*2 kW-h's, or 15 kWh's, which costs perhaps $3.00 (woah! Jesus! I did not expect that...)

  • Water is simpler - say, two gallons, so $0.002*2 = basically zero

  • Sources for those figures: 1 2

• Labor

  • Again, we’re using my labor at minimum wage, so for a five hour brew day plus another five hours spent in recipe design, prep, packaging, and bottler/keg cleaning, that’s 10 hours

  • $14.25*10 = $142.50, no tax

  • This is the biggest number here, and indeed can be a massive percentage of beer costs for certainly small breweries, and probably breweries of all sizes

    • This is perhaps, then, an endorsement of heavily automated systems - higher up-front costs, permanent savings in labor. In a place like LA with absolutely massive minimum wage, that’s a night-and-day difference, along the lines of $50k/year, say, per person

• Rent

  • I’ll leave you to reverse-engineer my rent, but for five hours and a quarter of my space, that’s $5.68 if I were to brew at my place

  • Again, I steal electricity, water, space, brewing salts, etc. from the brewery, so much of this is hypothetical, but certainly true were I to have to brew in an apartment

• Depreciation

  • My gear was embarrassingly expensive to build, for two reasons: I built everything from scratch, meaning both no savings on bundling as well as having to purchase from multiple sources for most things, meaning tons of shipping and time, but also because I have what amounts to two or three brewing setups - two chilling setups, two kettles (electric and non-), HERMS and RIMS setups, multiple temp-controlled fridges, thermowells, and kegs…you get the picture. So let’s just lowball and call it $2,000

  • Using the depreciation model, which “assumes” the gear lasts 7 years, that’s $285.71/year (this is a huge deal for tax purposes, by the way - losses are deductible)

  • So, if I brew an aggressive 26 times per year (which is a realistic COVID rate but not at all true otherwise), that’s $10.99 per brew which is pretty freaking massive. That’s on par with ingredients and well above utilities. Imagine if my brewing equipment were worth six figures!

• Drumroll, please

  • The total per brew, then, is $15.38 + $3 + $142.50 + $5.68 + $10.99 = $177.55

  • Without labor, it’d be a way lower $35.05 - this is far “truer”

So what does a beer cost?

That answers a question I haven’t even posed yet: how much does it cost to manufacture 1.25 gallons of beer? Because crucial in this is the per-oz or per-12 oz cost for me, and the per-BBL or per-CE cost for a brewery. To compare apples to apples, that’s the important figure, and for pricing kegs and pints, I don’t care what it cost to make 7 or 15 or 30 BBL, but one BBL or one oz.

So, there are 160 oz in 1.25 gallons, so including labor I pay $1.11 per oz, and without, $0.22 per oz. For reference, a craft beer might cost $0.50, and a Corona might be less than $0.08

Which I find hilarious - many home brewers aren’t accountants, and I’d advise you to completely ignore the “homebrew is cheaper” argument unless you’re brewing 5-10 gallons of weird beer (sour, very hoppy, hazy, hard to find), with gear that costs relatively little (like this beautiful beast)

But I digress - the answer to the question, then, is that a 12 oz bottle costs me either ~$13.32 or a more realistic $2.64

Conclusion

I hope this has shed some light on beer costing, and more generally what the invisible costs are when producing really any product, since this applies to food trucks as much as to Budweiser, and I hope it was at least a little fun to read!

I intend to turn next to a much more math-y, but decidedly more fun (to me, maybe to you) topic - predicting beer competition winners, so stay tuned

Cheers,

Adrian

A 2nd Location - Fool's Gold, or the Real Article?

Hello again!

Forgive the two week interval - there’s no great excuse, though brewing and classwork have had me quite distracted, and my initial belief that this may lead to more business opportunities has eroded entirely, so I’m still thinking about how to move forward with this! Opportunity Cost, my friends, opportunity cost…

In any case, there was, to my point actually, a lone response to my “what should I write about?” poll - the economics of a 2nd location, which I strongly suspect to be a troll from my family. But hey, it’s a good topic! So this week, I’ll set it up, and next week we’ll get our hands dirty and work out some numbers

But first, the why:

Pros of a second location

• The margin is higher than in distro, possibly way higher. A relatively small, $50k/mo bar stands to make more than, say, a quarter-of-a-million per month distro operation (here using, roughly, 10% and 50% as margins)

• There’s no or little duplication of pesky location one fixed costs, like brewers and administrative costs. It’s a slimmer business - basically a bar, minus administration and with cheaper beer, plus the cache of the brand

• A 2nd location allows you to test the general market performance of both your brand and beers; with distro, without a reference point (i.e. a control in drug trial terms), and without access to distributor's data, it may be unclear how you'd fare away from home (and good luck getting a distribution firm’s data!)

Cons of a second location

• Risk! Distro can be packed up quickly and at low cost; a second location could take months or longer to disassemble, and chances are you took out a loan or something like that to raise the capital which, if you have to throw in the towel, you presumably never recouped. I worked briefly for a great LA chain (two locations, and not MacLeod!), that attempted to break into Denver or some such place, and were set back a few years as a result of the failed attempt. Ouch!

• If you don't have your home in order, the added complexity means the small interpersonal issues you usually band aid over may become unfixable breaches

• Similarly, if this is a Hail Mary for cash, chances are you'd be better off cleaning up your core business as opposed to praying that a new one will solve your problems

in short, I see a sea of negatives unless you are so successful, and run such a beautifully tight ship, that you're just trying to add fudge to the sundae and not trying to add expensive, untested bilge pumps to your leaky ship

The Numbers, Broadly

The setup for the sheet we’ll see next week is fairly straightforward: copy and paste your costs, and see what a range of revenues do to your bottom line

Chiefly:

• Beer cost, and for that, estimated beer consumption

  • this will be related to revenue expectations

  • we’ll use the average per-BBL cost, which we may adjust down

• Rent (location dependent)

• Labor

  • we’ll normalize this probably to the ratio of square footage from location A to B

• General COGS and expenses from your first location

  • subscriptions are null, but things like cleaning supplies and even merch are fair game

We'll get into this next time, but you may want to adjust those based on

• Size - if your 2nd location is 40% as big, your costs, labor, and max revenue will be smaller

• Ramp-up time - your costs and revenue will slowly ramp up as you obviously sell more, and thus need to hire more bartenders and potentially servers

• Some sort of inefficiency factor - if you shrink your business to half its size, what are the odds your costs are cut exactly in half? 0% - you’ll pick up some inefficiency, which I honestly of this writing have no idea how to quantify!

  • We may use this, we may not - I kind of did in my original spreadsheet, and if I keep that in I’ll at least address it

So there you go! I’ve learned from a similar voice in the industry to leave your readers more often than not with semi-useless fluff/filler content, so while this is interesting, it sure isn’t directly helpful or useful beyond my opinion! Alas, I had an Econ quiz today, so you’ll have to wait til next week for the juicy stuff!

Cheers,

Adrian

Beer Pricing and Sizing: Visualization and a Qualitative Discussion

Hello again, dearest reader!

Last time, we worked up a formula for the “negative boost” required for breakeven if you decide to change your prices. Here’s what that actually looks like with a range of base prices and price changes:

So hopefully not much explanation is needed, but:

• margin is obviously the taproom margin - the fact that this changes is actually incorporated into the model! Which is cool

• base price: your original prices

• the percentages: mathematically, -L, or the drop you can weather (or boost you need) in order to break even after changing your price

• qualitatively, a bigger base price leads to smaller relative Ls, since the change itself is smaller

• also, obviously, you have to sell more pints if you lower your prices and vice versa

• and yeah, discounts! If you lower your pint price by $2, especially if it’s already “low” by LA standards (see, oh, I think two posts ago), you’re gonna have to absolutely crush it to break even

So, what should I actually do? A qualitative discussion

Fair question! And I think if you accept the premise that you should change your prices (and that’s for you to say, unless you want to be an absolute gangster and change them for like 3 months in order to gather data - in doing so, you may actually come up with ideal pricing for all beers, but I have no interest in writing up even pseudocode to describe that process), the question is, how do you mitigate volume loss if raising the price, or ensure volume increase if decreasing the price?

Here are my thoughts:

• If you’re under or over the market prices for a certain style, maybe try more closely matching those prices, and after a few months see if you broke even by running, say, a simple t-test (though do it in Python or some other language (R, say) if you can, so you only have to “build the machinery” once

• Generally, high ABV, barrel aged, and sour beers are served in small glasses for high prices - take advantage of this, and do the same. If you’re charging your base price +$1 for these, or serving them in larger glasses, reconsider your approach

  • I forget exactly where, but I’ve made the point that the big game is volume - if you sell a tough-to-drink beer in a Big Gulp, good luck selling another!

  • Quite simply, I’d rather sell two 10 oz $8 beers than one $12 10 oz or 16 oz pour. Which is to say, I suspect you’re better off shrinking the glass than changing the price too much

• As our previous Hazy IPA example showed, even if a beer is kind of pricey, don’t go too crazy on price, and definitely offer 12 oz to 16 oz pours of anything that doesn’t fit the set of beers in the last bullet. Volume is king. BUT, IPAs are generally, I dunno, about $1-$2 more than other beers, so consider bumping your IPA prices if they’re the same as everything else. Going from $7 to $8, you can weather a 19% drop - what are the odds of that steep a drop for a popular beer? Slim

• As another interesting example, as your base price increases, single-dollar changes up and down require smaller and smaller volume changes - if you’re charging $21 for something, it’s quite likely that $19.99 will make you a good deal more money. Same for anything that’s like $24/$26, $29/$31 etc - move it up or down a dollar, slap a 99¢ at the end, and let me know if that doesn’t make you more money

• Finally, we have a beer that’s $7, vs $8 for virtually everything else, and without running the numbers (I can, but I mean…) I’m fairly confident that the fact that it’s our standout “cheap” beer bumps its sales the requisite ~26% (though that’s actually a good question… again, a simple T-Test, though I’d probably want to normalize Van Ice sales to taproom revenue to remove seasonality… if I do that, I’ll say so)

And that’s about it! If you have questions, feel free to email me at numbers@macleodale.com (I should probably fork over for an @adrianfebre.com address…some day)

And feel free to fill out this poll if you’d like to see something specific as I pivot back into general, loose posts for a while

Cheers,

Adrian

Beer Pricing and Sizing: More Discounts and a Brief Pricing Primer

Hello again! This week we’re talking about discounts again (I had another thought on the topic), and finally, the basics of beer pricing, i.e. what constitutes a “correct” price in a simplistic sense

Discounts redux: partial discounts

So here’s another weird scenario. What happens if you sell Crowlers, but want to introduce a similar product, Growlers, at what amounts to a slight discount - if you originally sold 100% Crowlers, and by selling Growlers you get an x% boost above your base revenue, what % of Crowler sales can you “lose?” i.e. what is the break-even % of revenue that Crowlers comprise? (If you end up selling 100% Growlers at a discount, with no boost, you’ve lost money; if you sell 99% as many Crowlers but see a doubling of revenue, you’ve very likely made money; how do we attach an equation to this?)

First, let’s name the variables:

• C = Crowler revenue

• G = Growler revenue

• b = % boost above 100% (base sales) - always taken as positive (otherwise we lose money)

• d = % discount divided by margin

Why divide the discount % by margin? Stay tuned

Let’s begin with a pretty standard percentage equation: on the left hand side (LHS), we’ll put the new x% of Crowler revenue, the 100%+b%-x% of Growler revenue, and on the RHS we’ll put the original 100% Crowler revenue (why is b only applied to the Growlers? We’re assuming that selling them boosts overall revenue, and that we’re essentially cutting out a portion of Crowler revenue to give to the Growler revenue, on top of the boost - it’s the acceptable degree of this cannibalization that we’re trying to determine).

So:

• x*C + (1+b-x)*G = 1*C = C

Immediately it behooves us to get G in terms of C. In our case, and this is particular to our business, our Crowlers are $14 (two are the same volume as a Growler, at $28), our Growlers are $22, and the jug is apparently $3.50, so our “real” revenue for Growlers is $18.50. Thus, our Growlers are effectively a ~34% discount on Crowlers. BUT, since we want to get the same profit and not just the same revenue, we must “normalize” this to our margin - if our margin is 60%, and we have a 60% discount, we make $0; further, if Growler profit (g) is g*m, Growler profit is also Crowler profit (c) minus the amount lost as a discount, or c*(m-d) = c*m - c*m*d/m. In other words, we can just use revenue and ignore margin in that equation above if we use a normalized discount instead of just the discount. So d mentioned above in the variables is actually 34%/60% ~ 57%. But I digress!

• x*C + (1 + b - x)*G = x*C + (1 + b - x)*(1 - d)*C = C

• Interestingly, C cancels out (good - this should be super general), and we get:

• x + (1 + b - x)*(1 - d) = 1

• x + (1 - d) + b*(1 - d) - x*(1 - d) = 1

• x - x*(1 - d) = 1 - (1 - d) - b*(1 - d) = d - b*(1 - d)

• x = (d - b*(1 - d))/(1 - (1 - d)) = (d - b*(1 - d))/d = 1 - b*(1 - d)/d = 1 - b/d + b

Cool! So this is the breakeven condition for x, the pct of Crowler sales you can afford to have vs your base revenue (100%). BUT, this is hardly the most useful form - we want to be able to just look up Crowler sales as a percentage of the total, not have to figure out what the “boost percentage” was - so we really want x/(1+b)

i.e.:

• x/(1+b) = (1 - b/d + b)/(1+b) = 1 - (b/d)/(1+b)

Yikes! Kinda hairy, but very easy to crank out with a calculator. And does it make sense? (The physicist in me will always ask if it’s Gauge invariant)

• if b is small relative to d, x is close to 100% - if your boost is small relative to your discount, you can’t afford to sell too many discounted items

• as b->infinity, x/(1+b) -> 1-1/d = (d-1)/d, which I' don’t really get off of the bat - though since d ranges from 0%-100% (in this case, discount being equal to margin), the range is basically negative infinity to 0%…I think that’s because we’re trying to make the same profit with an infinite boost in revenue, so we have to “buy” a ton of Crowlers to make that work. Interesting. Not too useful though! Let’s not take b to infinity

In fact, here’s a spreadsheet!

So yeah! Pretty cool! I guess as we discussed above, a negative norm’d x means we make money no matter what (and I’m sure you could verify that using our previous discount/boost work)

Pricing: a brief primer

So, this is comically simple now - while the real fun stuff will have to wait until my econ class covers elasticity, we can make a quite simple claim:

if we charge $a for a pint, and our margin is m%, our profit per pint is a*m. If we want to consider charging $b for the pint, how many more/fewer pints could we sell before breaking even?

Assuming b>a, our profit on b is very interestingly not m*b - since our costs are identical, our new profit is b - a*(1-m), or b minus our original costs. Thus, to make the same amount of profit overall, we set

• a*m*100% = (b - a*(1-m))*(100% - L), where L is basically a “negative boost percentage” (we take L as positive, though - think that’s tough? Thermodynamics will rip you to shreds)

• so, solving for L,

• a*m = b - a*(1-m) - L*(b - a*(1-m))

• a*m - b + a - a*m = a - b = -L*(b - a + a*m)

• L = (b - a)/(b - a + a*m)

So in the straightforward case where b - a = $1, L = 1/(1+a*m)

If margin is, again, 60%, and if a is $7, then L = 1/(1+7*.6) = 19%

So we can afford to lose 19% of our number of pints sold (right? Not pint revenue, right? I mean…our margin is now higher since our costs are a lower percentage…)

Similarly, if we charge a dollar less, or $6, we need a 19% boost in the number of pints sold, so the math doesn’t actually care about the direction of change, I just wanted you to see it in a straightforward way before generalizing it

And yeah, that’s a bunch of symbols - I’ll think of a visualization for the next post

See ya there!!

Beer Pricing and Sizing: Sizing up the Competition

Welcome back!

Last week, we worked through another example using some of our discount equations, namely this big Kahuna:

Upsell % = margin/( (100% - discount %) - (100% - margin) )

… = margin/(margin - discount) = 1/(1-d/m)

Oof! It’s way simpler than I thought. Well, your reward for reading this week’s post too!

with 100% being not another 100%, but exactly what you’re selling now. Some interesting things about that equation, before we move on (I love its simplicity and can’t resist further analysis):

• if your discount approaches your margin, the upsell % approaches infinity

• The bigger your margin, the smaller your upsell % for a given discount, and vise versa

  • So if you have two departments, one with a ~60% margin and one with a ~33% margin (a bar and a kitchen, say), keep in mind that a discount that works for one dept may not work for the other - though if your kitchen comprises like 20% of your revenue, you can always use a weighted average (in that case, .8*.6 + .2*.33 = 55%)

• Here’s what that looks like for a 60% margin business:

The last column is what you have to sell above your usual volume, so just the column to the left minus 100%

(Also, sorry that the picture is so huge and that my equations aren’t formatted - I’ll break into Tex some day!)

So, how about those other businesses?

Oh yeah! I almost forgot. So as I was saying, we now have the tools to gauge whether or not a new pricing scheme is making more or less money than before (and we’ll go over that in more detail next week - I’ve deliberately been dodging the core idea, namely using this to price things), but first we should probably know what others are charging.

So, here’s a link to a price analysis I did a few months back (so it looks a touch rough!). There are two basic sections: the big chunk of yellow data (all editable blocks are yellow in my sheets), which contains all of the raw data from the breweries/beer bars I visited, and the succint “Competitors” section at the bottom, reprinted here:

Again, sorry for the size!

The core questions at the time were: 1) can we get away with charging $8 for beer? And; 2) How much money is everyone else making per oz of beer? (Today I might have standardized profit to a 16 oz pint or something; heck, maybe even C/Es)

So for the 7/8 ratio, I manually counted the number of beers <=$7 and >=$8, and divided. For the price per oz, I averaged the price/volume ratios for each beer. Kinda painstaking! But relatively quick, and the consequences are in the 5 figures potentially, per year.

So yeah, how do bars make money?

• they offer a range of prices, giving a sense of choice - maybe the cheaper things are light lagers, and the more expensive things are sour or hoppy nightmares. The prices of the kegs are passed on to the consumer

• they serve pricey things, really anything above lagers and pale ales, in smaller-than-pint-size glasses, anything from 12 oz IPA glasses to 5 oz sour pours, to maximize their price/oz ratio, and honestly probably to increase the number of pints sold (try selling sours in 20 oz goblets and see how many people buy two!)

So yeah, maybe do those things! And hey, you now have a benchmark for the LA beer scene - try not to sell beer for less than 60¢ per oz on average, and have a menu comprised of ~2:1 pricey vs … less pricey beers

Computing the latter is trivially easy, and for the former, just divide the price you charge for each beer by its volume, and average the results. Ignore the space foam takes up - if the glass holds “16 oz”, use that, simply because I did when coming up with these figures

Thanks for reading, and see ya next week for beer pricing proper!

Cheers,

Adrian

Beer Pricing and Sizing: Discounts, a Worked Example

That may have been a bit dense…

There were lots of equations last time, and while obviously nobody reads these or probably ever will, I learn a good deal by doing them, so for now I’ll keep writing these to a pretend audience that may have had trouble parsing my ramblings. So this week we’ll pump the brakes and look at a worked example

Namely, we’re going to look at the “discount” resulting from selling both Crowlers and Cans of the same beer, which is essentially a discount scenario given that we charge about the same for both, but give about twice as much beer in the can format as in Crowlers (64 oz vs 32 oz)

So first, we get to play a fun game: attempting to place numbers on slippery things! A very fun game indeed. The slipperiness is due to the fact that the items kind of have different margins - the Crowlers are essentially pints in that they take the same labor as pints do, more even, and take up tap-and-hence-coldbox space, whereas the cans take a few seconds to bag and charge (maybe 20 seconds altogether vs perhaps 30-90 seconds per Crowler), and thus use lower labor; also, they’re stored in otherwise unused space, so I’m reluctant to “charge'“ them for rent, utilities, etc.

So, how do we quantify this? Very loosely. If our Crowler costs $14, and the margin is 60%, the costs are 40%, or $14*40% = $5.60. Since about $3.10 of that is just beer, the “base” costs are ~$2.50. So let’s just kind of arbitrarily say cans have a cost of about a third of that (beer aside, since beer cost is a relatively small portion of those costs), or 85¢, plus the beer cost of $6.25 or so, giving us ~$7.10 as the cost of a 4-pack. Thus, the profit on Crowlers, we claim, is $8.40, and the profit on 4-Packs is about $7.90 (since we charge $15 for those).

So cool, we’ve just cooked up the books. But before evaluating the extra profit (or lack thereof), I’ll make a claim - despite the higher volume in the cans (which we’ve “accounted for” in cost), I propose that people will buy a fixed number of “items,” treating Crowlers and Cans identically. This is probably only kind of true; it doesn’t hurt that for both Crowlers and Cans, you can only get one beer (mix and matching would hurt this idea), and as corroboration, people often buy more expensive, lower quality Growlers of beer vs 4- or 6-packs at literally half the price, so this isn’t entirely unsubstantiated. But my point is, we’ll take this for granted

So, did we make money?

Anyway, let’s get to the meat. The point of that last paragraph was to set up this: 4-Packs act as slightly discounted Crowlers. How big is the discount? We can “fake it” by taking the difference in profit between cans and Crowlers, and treating the cans as if they were priced accordingly

Here, the profit on Crowlers is $8.40 and for cans, $7.90 (as mentioned), so we make 50¢ less on Cans - as such, they’re basically a 50¢/$14 = 4% discount, which is pretty tiny!

So now we can ask two questions: how much more beer do we need to sell in order to break even, and given that about half of our beer revenue right now is cans, and thus we can safely assume a doubling in sales if we sell a beer in both cans and Crowlers (more than, actually, given the like ~3 can options and ~12 taps), how much extra profit did we conservatively make?

Break even is defined by our equation from last week, 100% = margin/((1-discount) - (1-margin))

So: upsell % = 60%/((100%-4%) - (100%-60%)) = 60%/(96%-40%) = 60%/56% = 107%

So we just need to sell 7% more “items” of that beer to break even!

(And it’s even rosier than that, because you’re selling half of the items at full price, so the discount’s actually ~2% on average! I’ll use this moving forward)

And the extra profit?

Again, using a (more useful) variant of an equation from last week: baseline profit is $14*n*60%, where n is the number of Crowlers you would sell, and the new profit is $14*n*200%*(60%-2%) = $14*n*200%*58% = $14*n*116%

So the increase in profit is simply 116%/60% = 193%, or a 93% boost in profit (and given the tiny discount, we’d expect doubling volume to make us about twice the profit)

And the point is, while the original cost analysis was, while not sloppy, certainly vague/loose, the whole magic in this numbers game is, how wrong could I be? I’d have to be wildly incorrect for us to not be making some extra money from cans - though placing more faith in this analysis may become necessary if we have to pay to transform kegs to cans - at what price is it not worth it? Then, we’ll simply use sharkier, less-rosy numbers in order to come up with a more conservative estimate of the boost in profit

And as a final, absurd cherry on this cake - we have a draft beer on for which we don’t have taps (reasonable), but at the moment we’re selling ~100 4-Packs per week - in this scenario, virtually any amount of cans sold is a good idea (assuming you sell for more than cost), since that brings in more profit per day; lower profit per keg, sure, but more profit per day, which I’m beginning to suspect is by far the most important aspect of business! Maybe! Econ 101 starts in April, so who knows…

Thanks for reading!

Beer Pricing and Sizing: Discounts

COVID-19 may have absolutely DUNKED on the nation’s bars, but taprooms have so far found two potent revenue streams: food to-go, and cans/crowlers/growlers. While this is a phenomenal and crucial lifeline, and while people (at least here) certainly seem willing to pay full price for stuff, you may be tempted, as we are, to offer discounts and sales in order to drive short-term sales and draw in cash, in order to insure against, say, a stay-in order.

SO, the big question: obviously, you have to sell more of a thing if you discount it to make the same profit, but how much of said thing? Well, the answer is (mercifully) very straightforward

As per usual, let’s outline assumption (a great habit from my physics days):

• Your margin is 60%

• You’re selling a thing that’s normally $15 (our 4-packs, say)

• that’s it!

So, question 1: how much of your revenue is profit? Simple: $15*60% = $9

Next, there are two ways to offer a discount: $x or x%

Dollar-based discounts

First, the $x model (simpler mathematically):

If you offer a $1 discount, your profit drops from $9 to $8 (since you only keep the money above break-even, here $6), and thus ~11%. BUT, this doesn’t mean you have to sell 11% more beer; in order to make the same profit, you need to sell:

• 100% = 89% * x%

  • here, 100% means you make 100% of your profit, and 89% is your reduced “margin” (not exact in this sense)

• or, x% = 100%/89% = 112.5%

• Interestingly, this is simply (profit before)/(profit after), here $9/$8

So you need to sell 12.5% more 4-packs in order to make the same profit with this discount. Totally possible, but not insignificant!

What about a heftier $3 discount? Using the rule above, your increase needs to be $9/$6 or a whopping 50%! Again, possible, but a massive increase in order to justify a mere 20% discount off of sticker price

Percentage-based discounts

This would have been hairier to start with, but now that we know about the profit before/profit after trick, it’s a bit simpler.

So, let’s start with a 10%: if your original price was $15, your new price is $13.50, so your new profit is $7.50. Thus, you need to sell 20% more beer to make this worth it - by now I’m sure you’re getting the rhythm

For 25%, your new price is $11.25, your profit is $5.25, and you need to sell a shocking 71% more 4-packs!

Finally, there’s a more general formula we can use when dealing with percentage-based discounts, that applies very generally to any product, really:

(profit before)/(profit after) = (rev*margin)/(rev*(1-discount) - rev*(1-margin))

the denominator on the RHS is derived directly from profit = revenue - costs, where costs = revenue*(1-margin)

so, simplifying this, we get = margin/((1-discount) - (1-margin))

and plugging in our 10% discount and 60% margin, we get upsell percent = .6/(.9 - .4) = .6/.5 = 120%

which is exactly what we found above! So great, we can now calculate the volume increase needed for literally any product in the world, assuming the volume increase doesn’t change our margin appreciably

Profit above break-even

Let’s say, with that 10% example, you end up selling 50% more cans than your average beforehand (A/B test post coming soon). Congrats! How much money did you make?

As hinted at before, your new profit (and let’s say you sold normally sell “n” 4-packs) is $15*60% - $15*10% per 4-pack, or $15*(60% - 10%) = $7.5 per 4-pack

If you sold 30% more than the break-even of 20% (so, that 50%), you made an extra n*150%*$7.50 - n*$9, or $2.25*n, which can be considerable if n is large, obviously. More generally, your extra profit is:

• Price*(margin - discount)*(percent sold above 100%)*(items sold) - price*margin*(items sold)

  • or more simply, price*(items sold)*( (margin-discount)*(pct sold) - margin)

• So just plugging in the numbers from above, we get: $15*n*((.6-.1)*1.5 - .6) = $2.25*n

• Or, with a $20 item, a 25% discount, and a 10% increase, we’d have (and henceforth we’ll drop the n):

• $20*((.6 - .25)*1.1 - .6) = -$4.30 per unit

• Again, here n is the average number of, say, 4-packs sold (if that seems contrived, you need to compare your sales to something in order to know relative profit)

• So with numbers that, on paper, aren’t all too jarring (more items sold, a 25% discount), we’d lose a ton of money! Ouch!

• And a very potent takeaway - if your discount is bigger than your margin, you lose money no matter what!

So we’re in a position now to understand the opening plot: it shows the extra profit, per $15 “thing” that you sell on average given both the percentage discount and the percentage sold above average. Obviously, a 0% discount maximizes your profit, a 60% discount means you lost all of your profit no matter what, and there’s everything in between. The max is obviously doubling your sales with no discount, meaning if you normally sell 100 things, and after a 0% discount you sell 200 (don’t worry about the logic), you make an extra $9*100 or $900, the profit on the extra things. The below plots are the same graph from different angles - see if you can’t find the break-even point for a 20% discount! (two “lines” in from the edge)

Closing thoughts

Two thoughts for you:

• While the short-term boost in sales due to discounts is sure to taper, I have no doubt there’s a “sweet spot” discount, where you get a maximal profit. Clearly, from the last example, a big discount and small gains may leave you with a tiny relative profit and potentially a stock issue, so be careful with discounts!

• One extreme in the world of discounts is what it seems Pico Brew does, which is to have eternal discounts, which amounts to pricing low, claiming to price high, and using “discounts” to drive sales artificially. Does this work? I have no idea!

• And one thought that may have occurred to you - if you see a permanent increase in sales, why not just keep your pricing that way permanent? This touches on ominous economic theory, and will be covered post haste, as it is clearly of massive importance - it’s arguably the centerpiece of this whole line of thinking!

See ya shortly!

COVID-19 Brewery Strategy

Hello all,

With this COVID-19 Brewery/Bar shutdown, obviously every brewery in the country (the world?) is about to feel some serious hurt, us included. So here are some thoughts and ideas on quantifying that pain, cutting costs, seeking aid, and maximizing life-giving revenue in the meantime

Calculating Likely Debt

It’s important to know just how screwed you’re about to be, and perhaps the #1 such concern is the bills you’ll “have” to pay in the coming weeks. In order to do that for us, since I’d just worked out our 2020 Budget, I did the following (which you can do if you have a budget)

• take the total expenses for March (discounts, COGS, and expenses)

• subtract out (something like) half labor (taproom or all, depending), half taproom COGS, and half discounts

• then, run a P&L for March and add up the expenses already on the books

• the difference is roughly what you should expect to “have” to pay - for us, ~$75,000

Alternatively, without a budget you can do the same thing but average costs for Dec, Jan, and Feb to get a rough average total expense for March

Using this, you can start to play with the effect of cutting this-and-that, which leads me to

Things to consider cutting

What can go? Certainly not rent and utilities, but perhaps:

• extraneous subscriptions

• consultants (like me!), or perhaps niceties like assistants and book keepers, if you are willing to do all of that work for months after this ends, and you should really try to avoid cutting these

• unprofitable departments, like a kitchen that’s never turned a profit (all that money you spent? It’s what they call in the biz a fixed cost), or maybe even distribution if they don’t draw significant money, but you may be hurting advertising by doing this

Things not to cut

• advertising

  • you’ll desperately need the income they generate after you re-open (which you will!)

• labor, to the bone

  • you’ll need a staff when you re-open, so taking a slight loss in order to keep your staff busy might be worth it; losing, I don't know, $100 per day net, but keeping two people working in that kitchen, may very well be worth it for morale

• bills to the government, or with massive late fees, or that are important (like utilities)

  • you may have to pay some stuff late; figure out exactly what those are (or vice versa, as the “crucials” is probably a shorter list) now

Resources for you and your staff

Loans may be crucial for survival; as of writing this, there aren’t any specific to LA, but keep an eye on the CCBA’s update site, and there’s always the SBA loans (see the link)

And as for your staff, there are two moves: either the standard CA unemployment or, something I haven’t looked into too deeply, this US Bartender’s Guild thing

My door’s open

I hope all of this has helped, and because of the dire nature of this crisis, feel free to book an hour to talk with me completely for free

Beer Pricing and Sizing, Intro

After the last set of posts, which became pretty darned technical, I thought we’d do something that’s both a touch simpler mathematically and perhaps wildly more practical: beer pricing and sizing, largely as pertains to sale “on-premise,” in taprooms (or bars, as it’s perhaps healthier to think of them as such)

And as such, this’ll be something of a primer on making money on beer in a tasting room, all other things being equal (which is to say, ignoring everything but pricing and sizing, which is after all the chief objective control)

So first, let’s review the obvious: Profit = Revenue*Margin

• Assuming we make small fixes, the margin change shouldn't be too pronounced (obviously if sell double the number of pints in an hour with the same labor, our margin goes up, but here we'll consider selling a few percent more)

• Thus, the big lever is revenue, which in this case is beers sold times price per beer

While we could now get lost in a separate set of weeds, namely revenue-per-oz and what competitors are charging (and may well!), we'll start by considering just ourselves, and maxing out those two numbers: beers sold, and dollars per beer

So, while the issue of pricing turns out to be a deep rabbit hole going back to another Econ 101 topic, elasticity, today and probably next week we'll focus on maxing the number of beers sold

• and worth mentioning: while all sorts of things, from ambiance to staff education to promotion have potentially huge effects on this, we'll restrain ourselves again to just considering the volume of each beer

So, as a preview/warm up, here are some topics worthy of discussion re: glass sizing:

• What the market determines

• Equalizing choice (example coming soon)

• The pitcher of sour beer example (see below)

• The "a beer is a beer" mindset

And here are some topics concerned with pricing:

• Again, the market price

• Again, equalizing choice (looking at you, discount IPA)

• Elasticity of beer pricing! Eek!

• Discounts/special event pricing (like liters of beer on Oktoberfest, say)

This is obviously the tip of the iceberg, and more may strike me as worth discussing, but for now we have a plenty formidable list! So today, I thought I'd warm you up with a hypothesis on sour beer serving size

Serving size: a tough-to-drink beer, and the opposite

Let's say sour beer costs you $1.30 for a "16-oz" (14.5 after head loss) pint; thus, a "10-oz" pour (8.5) costs $0.54. The question here is, from a pure volume perspective, should you sell the sour beer in the big or small glass, or the big glass?

First, let's assume you'd charge the same for either (but not offer both, obviously), and let's say you charge $8. With a profit margin of 60%, you're making $4.80 off of an average $8 glass, but use the beer cost difference from above, and say that, since the 16-oz version costs you $0.76 more, that you make $4.42 off of a big pint, and $5.18 off of a small “pint”

The big question, then, is how many 10 oz glasses would the general public buy of this sour beer vs 16 oz glasses?

Well, if the industry standard for these beers is about a 5-10 oz pour, and further sour beer can be quite difficult to drink in bulk, so I suspect you'd sell an extra 10-oz glass for every three 16-oz glasses - that is, 10-oz glasses would outsell 16-oz glasses by 4:3. A hypothesis! Not exactly real! But plausible, I think

So what's the consequence of this? Let's say you sell 20 10-oz glasses of the sour per day; in this case, by switching to 16-oz glasses, I claim you'd sell 15 pints. Thus, the 10-oz pour nets you $103.60 per day, while the "generous" 16-oz pour would net $66.30. Not a staggering difference, but that $40/day or so really adds up, and you can imagine the effect of applying several small such strategies to your whole menu

Let’s generalize!

A similar question is, let's say the 10-oz glass sells a little worse actually than the 16-oz glasses; at what point should you just sell 16's despite the lower profit?

Well, the 16 is the smarter move while: $4.42*m - $5.18*n > 0 (where m = number of 16-oz glasses per day, and n = number of 10-oz pints per day)

or, while m/n > $5.18/$4.42, i.e. m/n > 1.17

This is to say, as long as your 16-oz pints outsell your 10-oz pours by about 17%, you make more money despite the lower profit (~76¢)

• an extension/inversion of the argument: if we just invert each side of the equation, we get n/m < 85%, or it makes sense to sell the 16-oz glasses as long as the 10-oz glasses under-sell the 16’s by 85% or less; if you sell 90% as many small glasses as large, you should sell the small glass. This is a very plausible number! So there’s no flat-out easy answer

Adrian errs

Which leads to a very interesting point our brewer recently made to me - we had a Hazy IPA which I had put in 10-oz glasses in order to maximize profit per keg since it's an expensive beer, but in doing so, I forewent overall profit - in other words, I wanted to sell packets of sugar for $100/packet in order to maximize profit! Foolishness! Well, so long as our 16-oz pours outsell our 10-oz pours by about 17% (not even, since our Hazy isn't ~that~ expensive)

The point being, when picking glass sizes for new beers, maximize volume! I struggle to imagine a scenario where increasing sales of “beers” by 20% loses you money. Pricing is a different discussion, so stay tuned for that equally huge side of things!

And until then, thanks for reading, and Cheers!

- Adrian

Opportunity Cost, Part 3

Hello! Happy Wednesday!

While we could go on about opportunity cost for weeks or years, and while it’s sure to come up again (literally in the next post, as it turns out), I thought we’d wrap up this topic and jump to another, since we’re just getting this here blog started

So, today we’re wrapping up opportunity cost with a way less number-y, much simpler concept: the value of your time!

And when I say your time, I assume you have subordinates - if not, ouch! You’re stuck doing the stuff. But in the case that some delegation is possible, let me ease your conscience a bit

Let’s say you’re the head of anything from a department of a few people up to an entire business - say, a brewery! - well then, you’re certain to have some medium- to large-sized projects, interesting ideas or maybe simple licensing applications that stand to improve efficiency or just sell more pints. Some (purely hypothetical, I swear) examples might be:

• Applying for a modification to your ABC license that allows you to sell wine and cider

  • Let's say this upgrade allows you to bring in an extra $40k per year - remember my “all lines are independent, there’s no fixed max on pints” hypothesis? (and granted, my old wine profit calculator says $60k+, but let's say it's not even that)

  • Thus, you stand to make ~$3k per month, so doing the paperwork a month sooner means $3k of otherwise untapped money in your pocket

• Working on driving down labor

  • If you’re roughly our size, then even a 3% drop could be perhaps $250-$750 per month

• Driving new style creation

  • Increasing revenue in your taproom by even 1% might be well over $1,000

• Dialing in cash flow

  • Having time to attend to the small things could mean catching a double-payment, pushing brew dates slightly into the future, avoiding late fees by paying crucial bills on time; any number of small things, which improve cash flow, mitigating the risk of taking out a big loan

  • Viscerally: if delegating small work during a busy month decreases your chance of having to take out a $100k loan by 10%, and the interest payments on that loan are $10k, then using classic Pascal logic, the value of delegation is 10%*$10,000 = $1,000 (granted this is a one-time value, not monthly, but still)

Sure, money, we get it, but what is that delegation going to cost me?

Well, in California, 10 hours per week at minimum wage ($13.25) times a 1.1 multiplier to be safe is $632/month. So yeah, if you think you can find $633 every month with an extra 10 hours per week, then delegate! While you may not be doing 10 whole hours of needless stuff, and while it'd be tough to find someone willing to do just 10 hours of stuff per week at minimum wage, clearly this story isn't one about exact dollars-and-cents but about the gist - your time is valuable, a big business has plenty of 4-figure tokens just lying around on the floor, and your job isn't really to sweep or stamp things unless you want to (it's a good political move to appear alongside the "working stiffs" with some frequency) - rather, for the most part it's to push the company forward. Heck, increasing taproom revenue almost certainly means more tips, which is a free morale boost for the bartenders - so think of delegation as selfless if you wish!

Not so bad, right? Well I’d like to thank y’all for trudging through my series on Opportunity Cost, and I’ll see ya next week for something hopefully just as interesting and practical - maybe beer pricing!

Cheers,

Adrian “Dustin Hoffman as Raymond Babbitt in Rain Man” Febre

Opportunity Cost, Part 2

And now, Opportunity Cost continued

As alluded to previously, there’s another big decision that hinges on Opportunity Cost: whether to sell, say, cans of a special beer through distribution and, if so, how much. Whereas last time the difference in profit was hiding in pushing a larger volume of another beer at the same price, this time the difference in profit comes from the obvious source: making different amounts of money for the same object through different departments

So, let’s start by quantifying this difference. While, as discussed last week, we can treat our margin in the tasting room as ~60%, and for reasons I may explain later, let’s take our distro margin as 15% (that number gets way better if you’re bigger - both by selling more, and with a lower production cost).

But! If the tasting room didn’t seem sexy enough for you, there’s another huge factor: distribution revenue is generally across the board way, way lower than tasting room revenue (even for cans, where you’d be crazy to charge PTR for a case in the tasting room).

An example would be kegs - last week we saw that revenue from a 1/2 BBL keg was ~$1,115, whereas in distro, good luck charging even a fifth of that for anything normal (even most IPAs). So your profit, being of course margin x revenue, is about (60%*$1,115)/(15%*$230) = ~20 times as high in the tasting room

That’s. That’s fucking wild. This doesn’t mean you shouldn’t distribute, but it does mean that if you sell out of a beer in the tasting room even a day early because you sold one 1/2 too many in distro, you probably lost out on some money - the longer the period, the worse the damage. And hell, even if your distro margin is a psycho, impossible 100%, the logic still holds. You’d have to have a taproom margin lower than, like, 10% in order to negate this effect.

So let’s consider two examples: running out of a popular beer, and selling cans

Sold out!

We have multiple popular beers, and we used to run out of them once in a while. Let’s say that we sell 60 pints per day of one such beer (~.200 BBL/day), and we sell a few too many to distro, resulting in a modest week-long outage. How bad is the damage?

Well, how many kegs is that in the tasting room? 7*.200*2 = 2.8 kegs. The lost revenue on this is, from last week, $1,340*1.4 = $1,876. Staggering.

And how much money was that in distro? If we our PTR was $230, with our margin of 15%, profit = $230*15%*2.8 = $97

So, you lost about $1,779 in one week. Holy shit! That’s a truckload of money. Don’t ever risk selling out of a popular beer in the taproom by selling too much to distribution accounts

Cans and the tasting room

Many taprooms sell cans both abroad and in the tasting room. Here’s a fun fact for you: our can revenue is strongly correlated to the number of options available, as can be seen here:

Pretty startling, right? In any case, the point is this: more can options = more revenue, and more rigidly than that monotonic condition, the relationship appears linear. Wild stuff

So, let’s play the same game - selling cans in distro means you drop from 4 options to 3 in the tasting room. Now, let’s say you sell a modest .05 BBL/week in the tasting room (half a case a day), so a week’s outage is a mere 3.5 cases. Let’s say a case has 6 4-packs for which you charge $15 in the tasting room, but your distro case price is a competitive $65/case.

While your distro profit is 3.5*$65*15% = $34, your tasting room profit would have been 3.5*6*$15*60% = $189, so even running out of a single can option for 7 days cost you $155. So try not to do this either. And for the record, given the super low labor of selling cans in the tasting room, the effective margin is likely higher, while distro’s labor is comparable for kegs and cans, if not identical (who buys cases and kegs?).

Final Words

I think there are three thoughts that summarize this vivid lesson:

1) Distro isn’t at all a bad idea, but it can cost you a ton of money if you prioritize it over the tasting room

2) Opportunity Cost is very, very real, and you can either build it into your business or lose thousands or more

3) Profit = Margin * Revenue

Opportunity Cost 1B: Illustrated

Hello! Happy Wednesday, and welcome to another blog post!

Today’s a two-fer, since that last post was a bit…wordy, and a friend suggested a helpful illustration. As such, here we go:

• pictured, we have a plot that tells you whether or not to dump a beer you have on for another one you have waiting in the wings, assuming all of your lines have beers

• the x axis is pints per day of your current beer (the max, 60, being roughly equal to our most popular; 20 is the average for the non-standard beers, which I lovingly call the “freaks”), and the y axis is the number of extra pints you’d sell by swapping

• if your two beers put you into the shaded zone, you’d make money by swapping, and vice versa

  • thus, if you have a popular beer, it’s not likely a swap is smart

  • and if you’re selling no beer, swap (i.e. if you have an empty line, use it! There may be limits to that related to an overload of consumer choice, but through various analyses it seems like we haven’t reached that point)

• the other line, the dotted line, describes the number of extra pints we’d sell by swapping to an average freak beer; thus, at 0 we’d sell 20, and at 20 we’d sell 0; connect the dots and you have your line

  • so, on average, if you’re to the right of the intersection of these lines (i.e. sell less than 17.4 pints per day), you should swap! How’s that for concise?

  • this number should be smaller than 20, because it costs money to dump beer, which indeed is true

So, without further ado:

Opportunity Cost, Part 1

Hello!

As a brief introduction, I’m Adrian, and I’m what I like to call a Numbers Guy (demand planner, operations manager, data analyst, etc) at a small brewery in Van Nuys.

Over the last year or so, I’ve slowly built a pile of spreadsheets, python scripts, and ad-hoc analyses that cover anything from mug club pricing, to brew date planning based on supplies and demand (not the concept), to the statistical effect on revenue of, say, adding a pizza kitchen, or changing beer prices, and I feel like what I’ve found is interesting and odd enough that I’d like to share it.

So, without further ado, let’s dive into the first part of a small series on Opportunity Cost !

Full disclosure, I got a D- in Econ 101 (I went maybe three times and didn’t do the homework, granted), but there was this very cool concept we learned about called Opportunity Cost. The gist is that, where you have multiple options for, say, making money, choosing one option results in making less than another.

While it seems obvious that you’d always just take more money, here are a few examples in the beer game that illustrate the subtlety of this choice, and often the opacity of the “value” of the options:

- managerial staff (owners, for example) helping out with menial work (labelling, brewing)

- one example would be owners doing secretarial work for themselves instead of hiring someone, because the labor is “free”

- this isn’t necessarily bad, but how much time are we talking? How much would it cost to hire someone?

- a particular favorite of mine: whether or not to cap the amount of, say, a popular can SKU you set aside for distro (the heart of the argument being that the margin in a tasting room is way higher than in distro)

- and a subset of this: pursuing new, low-margin businesses (like expanding distro) over improving existing high-margin businesses (streamlining labor and organization in a taproom)

- selling every last keg of a low-performing beer when a popular one is waiting in the wings

Obviously we’ll go over each of these, but I thought we’d start with the last one, which I think is both surprising and a wonderful example of the low cost of kegs of beer and the high value of pints, and how that simple idea can have huge practical implications

So, first of all, the assumptions:

- the number of pints sold per day (on average, i.e. over time) is not fixed, but depends to some degree on the quality of the product (from bartender to beer)

- a caveat: there is definitely a max number, but I’ll assume you’re not at that extreme

- you’re using every single line available

- an average 1/2 BBL keg of beer costs, say, $100, and you’re selling “16 oz” (13.5 after head loss) pints of beer at $8 each

- your “unpopular” beer is being sold at a rate of .060 BBL/day, and you’ve determined that your popular beer will probably sell at double that, or .120 BBL/day

- these are both pretty in line with our actual numbers

- let’s say that initially you have one pallet, or 4 BBL (8 1/2 BBL kegs) of slow beer left

- finally, let’s assume your taproom has a profit margin of 60%, and that your pouring efficiency is 95% for draft beers (i.e. you only lose 5% of a keg to foam spillage and dumped beers)

And the scenario, which is quite simple: you’ve brewed more beers than you have lines, so at least one beer is waiting to be tapped. Let’s also say you have a beer on a line that’s not selling super well, and of which you don’t have a ton on hand (let’s say less than 8 kegs). The question is, when should you dump this beer?

First, let’s look at the profit per day for each item, which is simply (BBL/day)*(Revenue/BBL)*margin. To get that, we need the Revenue per BBL, which is the following:

Rev/BBL = (Rev/Pint)*(Pint/BBL)*efficiency = $8*(3968/13.5)*95% = $2,230

And Profit/BBL = $2,200*60% = $1,340

slow beer: .060*$1,340 = $80

fast beer = 2*slow beer = $160

Thus, if we replace the slow beer with the fast beer, we’ll make an extra $80/day (again, we assume that the number of pints sold per day is not fixed - we may touch on this later, and how to numerically evaluate this claim with enough data, but for now I’ll say this: if I’m at an amazing bar, I’ll get 3+ drinks and make sure to return; if I’m at an okay bar, I’ll get one beer and never come back)

Getting closer! How many days will the current beer last?

days_left = bbl_left/demand = 4/.060 = 67

What’s the cost to dump?

cost_to_dump = $100*bbl_left*2 = $800

(the 2 is to account for our $100 per 1/2 BBL keg figure)

What’s the profit over that period if we swap to a better beer?

prof_if_dump = relative_profit*days = $79*67 = $5,300

So, what’s the profit overall from dumping the beer?

$5,300 - $800 = $4,500

Which is insane. The profit, real actual US dollars profit, you’d extract from your tasting room from dumping out (literally down the drain!) a pretty huge amount of beer and putting on a more popular one is a staggering $4,500 over a two month period. That’s the additional profit for just one line of beer!

And before that seems like a contrived scenario, we literally just did that - in our case, just taking down an outside beer which we usually have on year-round and putting up a tried-and-true popular beer, which we also had in cans (on the first day, it was our best seller). Nuts!

But you may be thinking that the whole notion of “days to outage” is extraneous - the fact that it’s a good idea to dump doesn’t seem to depend on when you dump the beer, implying ASAP is the best time to do it, so is there a more general equation that tells us whether or not to dump a beer, at any point, for a more popular one? Algebra says yes. We want the revenue per day after swapping to equal (i.e. break-even with) the cost of dumping, so:

prof_per_day = (fast demand - slow demand)*(profit per barrel)

cost_per_day = (cost per bbl)*(slow demand)

(a good sign: the units of both of these is $/day)

so: prof_per_day = cost_per_day

(fast demand - slow demand)*(profit per bbl) = (cost per bbl)*(slow demand)

(fast demand - slow demand)/(slow demand) = (cost per bbl)/(profit per bbl)

This is the break-even condition, so if the left side is greater than the right side, we should dump (i.e. the overall profit is the left side minus the right side). Interesting! So a few things about this equation:

- as slow demand goes to zero, your cost per bbl would have to be infinitely larger than your profit per barrel to justify dumping i.e. you’re selling so little that it’s a near certainty that you should dump, which is true

- things that make dumping a good idea: higher profit per barrel, slower demand for the slow beer, higher demand difference between the two beers, and lower cost per barrel, which all check out! So this is probably a correct equation

Let’s plug in our numbers:

(.120 - .060)/(.060) >? ($200)/($1,320)

1 >? .15

So indeed! We should dump. And further, and this is also nuts, if the difference in demand is a mere 15% of the demand of our slow beer, we should dump; so if, say, our popular beer were the slow one, we’d only need a beer to sell an extra .018 BBL/day to justify dumping any quantity of our current beer in order to get the new one tapped

So, a big corollary: you should “never” brew a beer that you suspect to be less popular than your current least-popular beer. While this is true in our context when all of your lines are full, I think it applies generally, with the exception of risky new styles (and even then, if you have more than like 10 beers, the slowest seller will generally set the bar low). Clearly, given the massive cost/profit ratio for brewing/selling beer, you should sharkishly sell good beers without hesitation over nursing your slow-selling darlings

And if you’re wondering how this applies to you specifically, you’re welcome to use the above and following formulas, and if dump_profit is a positive number, for example, by all means dump the current beer:

dump_profit = prof_if_dump - cost_to_dump

given:

prof_if_dump = prof_diff*days_left

prof_diff = (revenue per keg)*(taproom margin)*[(BBL/day of fast beer) - (BBL/day of slow beer)] days_left = (BBL left of slow beer)/(BBL/day of slow beer)

and: cost_to_dump = (cost to manufacture BBL of beer)*(BBL left of slow beer)

Thanks for reading, and see ya next week!

- Adrian