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!