Pricing tips

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I get asked the following question an awful lot of times by those new to the licensed trade – how do I set my Gross Profit Margin?

This is an awkward one to answer the general rule is the higher your cost price the lower your gross profit margin.  For example a large chain could and does attract a hefty discount from the brewers, where as a stand alone pub will not attract such a hefty discount and a tied house will receive no or very little discount.  So lets look at what would happen if we applied rigid pricing's rules to these scenarios.

The big chain pays £50  for an 11 the stand alone pays £70 and the tied pays £80

That means the costs per pint are as follows

Big chain 0.57
Stand alone 0.80
Tied house  0.91

Now if we applied a rigid gross profit % and then VAT at 17.5% we would see these resulting selling prices.

Lets apply 70 % as our gross profit margin

Big chain........... £2.24 a pint - profit £1.33
Stand Alone ......£3.14 a pint - Profit £1.87
Tied house ........£3.57 a pint - profit £2.12

As you can see the selling prices are a world apart as are the resulting profits per pint so clearly the "apply one margin to all" method is not an option.  However the more astute will have learnt something and that is how to roughly work out what a big chain is paying and thus making on their beer.

Take a big chain and apply 70% as a gross profit margin on draft products and you wont be too far away so if your local big chain operator is charging £2.24 a pint then you know he is paying about £50 an 11.  How do we apply this to prices we do not know the starting price of?

Well that's simple; say they are selling a product at £2.60 a pint, the first thing to do is to take the VAT off, to do this simply divide by 1.175 giving a VAT free selling price of £2.21.

Now we know that is their 100% selling price and that price includes 30% cost and 70% gross profit so to find the cost price divide the £2.21 by 100 and times it by 30 = 0.66

and then to find the profit divide £2.21 by 100 and times it by  70 = 1.55.

Now to find the barrel cost, or brewers barrel of 36 gallons we have to times the cost price per pint by 288 = 0.66 X 288 = 190.08 which gives a brewers barrel  cost of £190.08.

Next,  to obtain a per gallon cost; divide £190.08 by 36 = 5.28 and from that you can work out their cost by what ever size they buy the product in.  Say the by 11’s that 11X 5.28 = £58.08 or a 22 is double £116.16 and so on.

How does this help you, well you now know how much the opposition has in the tank should you want to start a price war, and believe me, many new to the trade do and they're often the first victims of the war. 

 Most big chains will send their managers out from time to time to check the surrounding pubs bar prices and they will come up or go down accordingly with their prices.  So if you cut your prices and you can expect them to do the same,  likewise raise your prices and in time they will do the same, though they will always sit just a little under you.  Their aim is the same as your charge what you think the market can bare - you go up so will they, maximum profit is the name of the game.

Now if you buy the same product from the same supplier but you are tied and enjoy no discount from the full list price of £240.00 a barrel  your cost per gallon is £6.67 some £1.39 a gallon more or 17p a pint more.  You charge £2.70 a pint, the big chain is under your price by 10p,  your selling ex VAT is 2.30 a pint your cost is 0.83 a pint so your profit is 1.47 not a world away from the chains but you may need to make more if only to cover the rent.

You might be tempted to cut your prices and go for volume sales, it will work  for a short while but in the long run  the big players will catch on and drop their prices accordingly you will soon loose the extra volume generated by the price cut and will find it harder to put your prices back up (once you have cut them to the bone)  though make no mistake you will have to  put them up and you regulars will perceive you as being greedy by doing so and cashing in on the extra trade.

Now you could actually increase your prices and increase profit from the same sales; timing here is vital.

You may well be aware of when  the chains bar manager is doing his price checking rounds, if not see if you can find out when they do it – you may even consider giving him your prices after all he will be able to obtain them easily enough.  Once you know when they perform this task then this is the time to raise your prices by say 5 - 10p a pint, they should follow pretty shortly after about a week before they do their rounds is the best time.

Now suppose you are a stand alone pub free of tie and not part of a big chain, you may own your pub – full free house or you may be a lessee who can buy from who ever you like, free of tie –  sort of free house.  This status gives you a couple more strings to your bow and you have one big leaver – your ability to change breweries.

Apart from the method mentioned for the tied house you can also compete on product as well as price for instance your main rival the big chain sells fosters the same as you do, only theirs is cheaper but your suppliers are the same.  Now you are never going to be able to fully compete on price but you could compete on product.  Call in your brewery rep and tell then that you realise that you will never enjoy the discount they offer to your rival but unless they lower your cost price then you will have no option but to change breweries.

This will hopefully give you a many pronged attack on your rival, the brewery may drop you cost price thus increasing your profits at no cost to the customer – by the way only a fool would pass all the discount on to their customers, for they would soon be back to the status quo of being under cut by the chain.  You might still have to change breweries but now you can compete on product if not on price, if they are a fosters house you could get in say Carling in the hope that you pick up those customers who actually prefer carling, make sure you change the supplier totally if you do change products, that way your high list prices will not be supplementing the discounts given to the big chain and if all the pubs in the area did the same the rep would soon be in big trouble.

I have never seen the virtues of supporting any supplier that has a tiered pricing system unless you enjoy the best prices or are tied to them.  These are the sort of schemes employed by wine & spirit suppliers.  Buying in to that sort of scheme if you do not have to and do not enjoy the full benefits is just cutting your own throat.  Your high price band is supplementing the discounts offered to the big players.  Best go to the cash and carry and enjoy the shelf price their.

The same applies when it comes to beer suppliers get the best deal or don't deal with them at all, do not be tempted to use them if they load offers and discounts on to just one product,  get a discount across the whole range and make sure it is a good one.

You may like to buy one of my costing programs that allows you set all your prices to the correct gross profit margins and will even tell you the gross profit 5 you are making now.  I also sell a deluxe version that will not only allow you to set and change your prices with ease it will also generate a legal bar price list for you.  It comes with a section on the legal requirements of a bar price list as well.

Ordinary bar pricer is £2.49 and can be downloaded from this site please use the button below.

The deluxe version that also generates a legal bar price list for you each and every time you change your prices. It  is priced at just £3.99 and will save you hours of work, please use the button below to buy this version and you could be using it within minutes.

Firstly work out the cost of one measure of the product without VAT.   Take a bottle of gin costs you £12.49 with VAT, for 700mls.  Divide £12.49 by 1.175 to take the VAT off = £10.63 next find out how many measures the bottle will yield by dividing 700 by you measure size say 25ml = 28 measures.

Next divide 10.63 by 28 to obtain the cost of one measure = 0.38p .

Now you need to apply your gross profit % to that price say you aim to achieve  65%.

To achieve 65% profit you cost per measure must represent 35% of the total selling price (VAT excluded) 35 + 65 = 100% with just the VAT to add
 
Therefore in this case the  38p cost price is 35% of your selling price (VAT EXCLUDED) so we divide o.38 by 35 to obtain 1 % of you ex-VAT  selling price = 1.09p Pence not pounds, we then multiply this by 100 to achieve you full selling price ex-VAT = 1.09 X 100 = £1.09 then we add the VAT by multiplying that by 1.175 which would give the full retail selling price of £1.28 a 70% gross profit margin would produce a selling price of £1.49 on the figures above.

At 65% gross profit you would achieve a profit per measure of £0.71.

There are two main ways of achieving a higher return on your money the first being the obvious by increasing you gross profit % on the cost price as it stands thus increasing your bars prices.

The other much harder but achievable none the less way is to keep the selling price the same but reduce the cost price.  This can be done in a variety of ways, change supplier to a cheaper one.  Take advantage of special offers, buy 6 get one free that sort of thing (note here to club stewards and bar managers if you buy stock that has free stock offered as an incentive to buy then that free stock does not belong to you but belongs to your employers unless they say otherwise help yourself to it and you could be accused of theft).  Change the product altogether is your last option.

If you do get tempted to buy a tied house then please look very carefully in to what exactly you are buying in to being tied really does tie your hands in so many respects not just supplier costs and product range.  Please look more a your rivals than at you intended pub, if you cant compete then you are throwing your money away.  Look in to how many landlords  the pub has had in the last ten years if it is a lot then chances are each and everyone of them have sponsored their drinkers by ploughing their own money in to what was a failed business.  They only gave up the dream when their money ran out and the next sponsor was ready to take over and again loose their money.  If you choose to buy a pub or bar that has this history then you will almost certainly loose the pub in the long run – the length of time this takes to happen is dependant on how much working capital you have to start with.

Try and buy a tied house that has little or no competition, though these are can be as hard as hens teeth to find, if a pub is doing really well then the chances are it is brewery managed or about to be.  It often crosses my mind that pub companies will let you the tenant do the hard work of building up trade and then put the rent up beyond your reach with the thought of putting one of their managers in, I may be wrong but seems to happen an awful lot in the trade.  But that's going a bit off topic.