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