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