Business > Crafting a Beer Price

Crafting a Beer Price

By GREG MAFFETT
Published: October 30, 2011

"Beer is proof that god loves us and wants us to be happy" -Ben Franklin

Ben generated that quote a few centuries before our current craft beer revolution, but I think it holds true today. I am regularly surrounded by happy, non-denominational beer drinkers who appreciate Ben's insight.

Not only does beer make beer drinkers happy, it has a similar result for beer sellers. Selling beer is good business. Selling craft beer is very good business. As the owner of The Nook in Huntsville, AL said "A given man may not be able to afford the best house, the best car or the best wine. But every working man in America can afford a top of the line beer."

That is in fact true. I drink wines that cost $40 to $120 a bottle. That is roughly 4 glasses of wine per bottle at $10 to $30 dollars a glass. And that is pouring the wine myself at home. Buying top quality craft beer in a restaurant with a meal costs a fraction of that. And generally it pairs just as well with the food. I haven't looked at the numbers on market share, but my thinking is that the vintners around the world would argue vehemently with Ben Franklin.

So lets take a look at how beers get priced. For bottle beer, its generally simple, the sellers take the wholesale price of the beer and multiply it by 2.0 or 2.5 or 3.0, then they round up to nearest nickel. Typically the higher the wholesale price, the lower the multiplier. But it is simple. And no, its not price gouging. The seller has to cover utilities, rent, and staff salaries out of that mark up. So it is not like they are printing money. That is a reasonable approach for bottle beer.

For draught beer, it can get more complex. At The Nook, they use a two glass multi-tier pricing system with no happy hour. You get the big glass or the small glass, depending on the alcohol content. Then the price can range from 5 to 8 dollars a pour depending on the wholesale price of the keg. The Nook also serves food, but the food is minimalistic, I'd guess 5% of their weekly gross is on food, but they have 40-50 tap handles that they manage. It is a beer hall that serves food on the side and they have found a pricing approach that works in the local market. In Huntsville, the local market is NASA for the most part. If Rocket scientists are OK with this pricing scheme, I think Ben would approve also.

A much less complex scheme is in use at the dive bar near my house. Live wire sells all beers in one size container for one price. 16 ounces for $5. A buck off on happy hour. They have about 30 beers on tap. Much different clientele here. No food at all on the menu. One guy behind the bar. Compare that to The Nook that has a staff of 5-6 people on any given night and you can see that Live Wire is a low overhead operation. And the simple pricing scheme doesn't require, how shall we say, a rocket scientist behind the bar. It is a very straightforward business model. In this case the owners profit varies greatly from tap handle to tap handle. So the owner needs to do a balancing act between high cost and low cost kegs or he can run himself out of business. But so far Live Wire is doing fine with their simple model.

Last model I'll add is at Ritual here in San Diego. They have by far the most complex model. They will sell you beer in 4 different glass sizes ranging from 7 oz to 16 oz. The size somewhat tracks alcohol content, but also keg price. Here is how I think they do it. They take the keg price, hit it with the markup. Then they figure out the price for say two different portion sizes and decide which size to offer it in. Then they round that price to the nearest dollar. Using this system, most beers have a price of $5 or $6 dollars. But they once had a beer that went for $8 for 7 ounces. Complex, yes. And we still aren't done. Because they have a selected happy hour, that is, some beers are a dollar off during happy hour. I think they figure the happy hour beers like this. Say one beer comes out to $6.20 after the mark up. They round that down to $6 and don't put it on happy hour. Another beer comes out to $5.70. They round that up to $6, but don't put it on happy hour. As you can see in this pricing approach, you need some sharp people behind the counter. And nearly everyone who works as a bartender or waitress there is a college student. You need some skills to keep things straight.

Ritual has about a dozen taps and generally all of them are quite good. So patrons know that they will find a good beverage regardless of what they pick. and they are good at giving customers a taster (meaning that comes out of their mark up). They are also on a street that has many, many quality beer options, so at some level they have to be sensitive to the listed price for their beers, but I think that drives the glassware strategy. They could match the price of the two nearest bars by reducing the portion size so that at least the print prices are the same. Not sure they do that, but they might.

For me as a consumer, I'm not very price sensitive. While I can get be cheaper and in less time by walking the two blocks to Live Wire, I routinely walk the 10 blocks to Ritual and pay more the beer. Of course with the beer I get a good meal. I get a much quieter atmoshere. And I genuinely enjoy the longer walk.

So in the end, its not the price, its the value I get for the price. And in that regard, I prove out Mr. Franklin's quote. I'm happy.

Any Comments?


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