We get it. Craft spirits are more expensive than their mass-produced counterparts. If you're using a typical percentage-based margin model to price your drinks, using locally crafted spirits can quickly blow up your prices. But that doesn't have to happen.

Bar owners and managers like percentage-based margin models because they ensure that costs outside of the raw ingredients of a drink (think employee wages, rent, utilities, etc.) are covered. They also mean that a small change in ingredient costs turns into a big change in the price of a drink. An extra dollar in ingredients becomes an extra $6.67 in the cost of a drink under a 15% margin model. 

Let's look at an example using Echo Spirits Rum as an upgrade over your traditional well rum. Let's pretend this is a daiquiri or similar.

$0.59 per 1.5oz$1.38 per 1.5oz
$0.75 for other ingredients$0.75 for other ingredients
$1.34 total COGS$2.13 total COGS
seeking 15% COGS, so divide by 0.15 = $8.93seeking 15% COGS, so divide by 0.15 = $14.20
Price cocktail at $9Price cocktail around $14
$7.66 margin$11.87 margin
A typical cocktail percentage-based margin breakdown

In our example, your costs went up by just $0.79 by using craft rum, but your customers are now paying $5.00 more - just by switching the base spirit. Simply put, that doesn't make sense.

Most bars and restaurants stop here.

Understandably, they don't feel confident their customers will adopt their new pricing. A $9 drink is one thing, but a $14 drink just for a better base spirit is something else entirely. Their current customers don't care, so why take the risk?

If you've read this far, you know we have another way to look at it.

We prefer cost-plus pricing. On the first cocktail, that $7.66 margin felt good, right? You were using it before to cover all of your non-ingredient costs and everything was running smoothly. Employees were getting paid, rent checks were clearing, and customers were happy with prices. But you wish you could use higher-quality spirits in your cocktails. You don't need to increase your prices by $5 to cover an extra $0.79 in costs. You just need to raise them by $1.

$0.59 per 1.5oz$1.38 per 1.5oz
$0.75 for other ingredients$0.75 for other ingredients
$1.34 total COGS$2.13 total COGS
Add 7.66 desired marginAdd 7.66 desired margin
$9 cocktail$10 cocktail
$7.66 margin$7.87 margin
Cost-plus or set-margin model

Not only will you make a better-tasting cocktail, but you'll only charge an extra dollar and STILL make 21 cents more. This is also a very simple cocktail example. Look at your audience. Don't get greedy, but would they pay $11 for the cocktail? Now you're making more money.

We're huge fans of cost-plus margin pricing. Figure out what your base spirit costs and what the craft equivalent costs and simply add the difference to the price of the cocktail. In almost every case, the difference is less than $1. Your customers will pay an extra dollar for higher-quality cocktails. You'll create better cocktails, make more money, earn higher tips, have happier customers, and support small, independently-owned businesses.

We're always here to help you break it down if you need us!

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