Why Beer Costs What It Does

Belly up to any bar in America, and chances are good there's beer for sale. Whether it's in a can, a bottle, or a glass filled from a tap, that serving of beer comes at a price. But prices for the same kind of beer can vary a lot from bar to bar, and the same bar or restaurant may even offer the same beer at different prices, depending on the vessel it's served in.

So what gives? What's going through the minds of proprietors when they set these figures? Quite a lot, it turns out. Curious about what goes into the price of beer, I recently spoke to several beer-bar and restaurant owners, as well as a brewer. Here's what they had to say.

Michael Naessens is the owner of Eulogy Belgian Tavern and Bierstube, two long-established beer-centric bars in Philadelphia. Prior to his full-time work in the service industry, Naessens was a CPA at PricewaterhouseCoopers and Campbell's Soup. Naessens spent some time living in Belgium as part of his Campbell's work, and he took the opportunity to hone his Belgian beer expertise. As you'd imagine, he brings an accountant's eye to running his businesses, and thinks a lot about prices and how they are perceived by customers.

Naessens says that the 'three times' principle is a widely followed basic pricing model in the bar and restaurant industry. "Typically, in a restaurant, you want to keep your food costs and so forth at 33 percent," Naessens says. "So, a lot people simply multiply [the product cost] by 3." This approach works fine for, say, a bottle of Budweiser, which may cost a bar or restaurant in the range of 75 cents to stock. When you see bars pricing Buds for $3 apiece, this is likely the model they're using.

What's special about 33 percent? The rationale is that an establishment's operating costs such as labor, rent, and utilities—the costs other than the expense outlaid to buy, say, beer, or ingredients for a dish—will eat up some chunk of the money earned from the sale of that Budweiser. But if the product cost is kept to a third of the price, generally speaking, owners can safely trust that they'll be able to pay their bills and still take home a profit.

Some of the costs bars and restaurants incur may not be all that obvious to us customers, but in the end, they're passed on to us in the menu's prices. For instance, when Naessens calculates markups, he keeps in mind not only the purchase price he pays his distributors for beer, but also the local 8 percent sales tax tacked on; the wages he pays a daytime barback to put beer deliveries away; the storage costs (which include refrigeration); and the carrying costs. That last one takes into account what it may cost an establishment to sit on an unsold volume of beer, which may have been purchased on credit, and is therefore not only tying up funds but also costing the owner interest.

Because his bars specialize in European beers, Naessens say he must also be mindful of the dollar-Euro exchange rate; he might place an order for a supply of European craft beer, expecting to pay one price, but by the time of the sale, when the shipment arrives, shifts in the exchange rate may have moved the numbers significantly.

Setting aside these sometimes overlooked costs, the 'three times' approach has its flaws. Naessens is quick to point out that it works poorly when pricing higher-end beers. You don't want to "alienate your guest with too high a price point," he explains. A Lindemans Framboise might cost a bar upward of $6 a bottle to acquire, but customers would balk at purchasing it for $18. So what does the proprietor do then? This is where a command of the mathematics of one's business must be coupled with some understanding of your customers and the local market for beer.

Christian Albertson is the co-owner and cellarmaster of The Monk's Kettle and The Abbot's Cellar, two craft beer destinations in San Francisco known for fine and rare brews, both local and imported. He considers the price of each beer on his menus at first independently and then in relation to the broader selection. "With every beer in here, we have target cost percentages that we try to hit, but then there is an adjustment based on what that price turns out to be," Albertson says. Once a menu price is calculated (with operating costs factored in), they decide whether the number feels right, or feels off. "There is an intuition to it," he adds. Ultimately, they want a given beer to seem worthwhile at its price, or else it won't sell.

While it may seem counterintuitive at first, the highest-priced beers at Monk's Kettle and the Abbot's Cellar generally net the bars less profit compared with the lowest-priced ones. "It's a sliding scale," Albertson says. "And we no doubt want to promote those higher-priced items—and show they are worth it—so the adjustment on our final price[s] brings [them] down." The most extreme example of this strategy is how Albertson chooses to price rare and vintage beers, which are dutifully cellared on the premises. "The vintage stuff is not a money maker. We usually price it out more in line with non-vintage items. It's more of a keep-ahead-of-the-pack kind of thing."

Since suds rule at Albertson's establishments, beer prices also generally come bearing the highest markups in comparison to other beverages, he says. "As a rule, any business is going to [apply the highest markups to] the items that they sell the most," Albertson goes on. "Your biggest-selling item—either specific item or general category of item—should be marked up most in order to make a profit. We obviously sell a lot of beer—it's a very large part of our sales makeup—and therefore we need to mark it up in a way that makes us profitable." In other words, establishments specializing in one category of beverage won't—or at least shouldn't expect to—survive in business by raking in high margins on high-priced fringe products while the bread-and-butter offerings are sold for aggressively low prices.

"The best deal in our house is the wine, because it makes up so little of our sales percentage," Albertson notes. By that same logic, the draft beers at Monk's Kettle, where the taps outsell bottles roughly two to one (it's more firmly a bar, whereas Abbot's is more food- and pairings-focused), are typically going to carry bigger markups.

A beer's size and presentation vessel can also factor into price determinations. These days, servings of beer come in way more volumes than just the humble pint. The menus at Monk's Kettle and Abbot's Cellar feature everything from 8- to 16-ounce pours. On the one hand, Albertson says, "We always want to show the beer in its best light, and glassware definitely plays a part." On the other hand, the wholesale cost of a beer may also inform size determinations. In many instances, he adds, "We will do a smaller pour for a beer if it's too expensive for a larger glass." A third factor is context. "At Abbot's, with the whole program being about pairing with food, we intentionally have smaller pours because we want guests to be able to try a different beer with each course."

There's another reason besides high product cost that might compel a beer bar to scale down the serving size of a beer: alcohol content. While a lager may contain around 5 percent ABV, a double IPA or barleywine could be twice that strength.

At SmallBar Division Street in Chicago, owner Phil McFarland is constantly balancing the variables of size, strength, and price when setting the draft list. For example, on a recently published menu, he offered Allagash Black (7.5 percent ABV) in a 13-ounce glass for $5 and Allagash White (5 percent ABV) in a 16-ounce glass for $6. By volume, the Black is 50 percent stronger than the White, and the serving size he chose is close to 20 percent smaller.

Deciding what's a reasonable pour at a worthwhile price is part of being a responsible owner, McFarland says. His menus clearly state serving size and alcohol levels, so customers have the context they need to make informed choices.

McFarland selects beers to carry in part based on how they fit into the larger menu in terms of size and strength. He says, "I don't want to be a place where every beer is $10 and comes in a tiny glass because it's super high alcohol and super obscure."

Both Naessens and McFarland cite the Beer Menus website as an important point of reference for pricing their products competitively. The site features a searchable database of beer offerings; visitors can use it to find which bars are serving beers they want to try in their market. Establishments are responsible for updating their menus, which include pricing. Owners like Naessens and McFarland use the tool to see how their prices compare with their peers'.

In some cases, intuition and personal taste figure more heavily in setting prices than do sheer numbers or the influence of the local market. Jeff Motch, a co-owner of the Blind Lady Ale House and Tiger!Tiger! Tavern, two draft-only bars located in San Diego, says that, "All of our pricing on beer and food is based on what we would be willing to pay." In determining a beer's price, approachability wins over all else. What's more, Motch prefers to serve glasses of beer at only a few different price points, with a benchmark of $6 for a half liter serving as the standard, typical pour. To maintain parity, Motch says, "Pricier kegs are served in a smaller glass for basically the same price."

In general, Motch says he's sensitive to what feels like a fair price. On the occasions when his bars come into something precious and rare, he says "we try to never overcharge... We price them based on what the brewery or distributor charge us. That's fair. We don't deserve to make a killing because a brewery decided to release something special to us. We want to share the good."

Speaking of breweries, what role do they play in the whole pricing game? If the distributor adds a given markup, and the bar owner does the same, then the brewery's original price in large part determines what customers pay. (Think of the example of the $3 Budweiser.) How does that original price get set?

Jesse Friedman, one of the founders of San Francisco-based Almanac Beer Co., explains that, even at the brewery level, beer pricing can be a dance between math and intuition. There are operating costs to consider, such as staffing, storage, ingredients, equipment costs, utilities, and packaging. Time is also a major factor; Friedman says that the brewing process for one style of beer may take a fraction of the time needed to produce another style, and tying up brewery equipment making one beer over another has its opportunity costs. Friedman and other brewers ultimately pass along their costs to the consumer, so astutely managing them results in a more competitively priced product.

Friedman also pays close attention to the market in order to formulate a successful pricing strategy. He's noticed, for instance, "Consumers equate higher alcohol with higher price points and, certainly, low alcohol with lower price points," he says. "But, that does not necessarily mean there is a direct connection [in terms of costs] between those things." For Friedman, this market expectation means lighter-alcohol beers with high production costs might have trouble fetching the price his business model would suggest he charge.

Though it matters less in the context of bars and restaurants, Friedman has also observed that consumers are much more sensitive to six-pack retail pricing than, say, that of 22-ounce bombers, which hold a little less beer than two 12-ounce bottles. According to Friedman, a $15 or $16 six-pack is "DOA on the shelf," but a bomber priced at the same dollars-per-ounce ratio might sell.

Let's belly up to the bar for one more...lesson. When you pay what feels like a high price for beer, a major factor could be the expertise of the person serving that ale or lager. Albertson acknowledges that his restaurants operate on a very costly business model, based heavily on staff education and returning what he considers a low profit margin despite what some consider to be elevated prices for beer. "We spend a lot of time training the staff, and test them before they are allowed to serve," he says. "We provide the staff with tasting notes on every beer that we serve"—upwards of 200 varieties—"and test their knowledge. We open a ton of bottles to be sure that everyone knows what he or she is selling."

He adds that, "It's one thing to have a 200-beer list that is always changing. It's another to have a staff that can ask 'what do you want your beer to taste like?' and then guide [guests] through that 200-beer list to find the one that is exactly right for them...and then know where [to] take them next based on their palate and what we have on the list." The lesson to be learned here: we drinkers should always be seeking the advice of servers and bartenders in serious craft-beer bars and the like: in many cases, the expertise they have to share is a component of the prices we pay, so we may as well get our money's worth.