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