Pricing a product in a competitive market is hard work. The most valuable team members at companies such as UPS, OfficeMax and Southwest Airlines are their product pricers. Why? Because their work must appeal to millions of people in a highly competitive market. Now, let’s talk about pricing beer — how do we typically price our product? Does the distributor set it and we conform because we don’t want to undercut the neighborhood bar? Do we guess? All these pricing methods are happening and, in my opinion, must change as the craft beer industry becomes more competitive.
For starters, answer this question: Who is your customer? Let’s examine the two customer types most craft breweries encounter: Distributors and Patrons.Pricing with a purpose will ensure you have enough profit to run the brewery successfully.
Distributors are necessary for geographic growth. Good distributors will learn about your product so they may better sell it. Distributors typically add 30 percent to the top of their cost, and that is what they sell to retailers. To ensure they get their 30 percent and leave a little for the retailer, distributors do what I call “price coaching.” This is where they tell breweries the most they will pay for their beer.
Patrons (on-premise consumption) are the folks that belly up to the taproom bar or purchase packaged sales. Patrons are less price sensitive because they are showing up for a fresh beer and an experience. They typically respect the craft beer efforts and don’t mind paying a little extra for it.
Now that we know our two customer types, how do we price for them?
Distributors begin with the retail price. They determine what product price point the end user (bar, restaurant, liquor store, etc.) will set. From there, it’s a formula to get back to the price they will pay for your beer; plain and simple. Breweries are free to charge what they want for their beer, but at the end of the day, the beer must 1) sell and 2) ensure all parties profit. Flagship beer prices will remain steady and realize minimal increase in profits as efficiencies occur. Specialty or seasonal beers that make it into distribution are an opportunity for breweries to charge a premium for the exclusivity.
I typically like to look at the product mix and determine what is a “flagship” beer and what is a “specialty” beer. Flagship pricing, once set, usually will not change. The profit margins on these beers will increase as the brewery scales up in size and efficiencies happen. Since your taproom should offer a better experience than the local bar, charge for it.
Charging as little as $0.25-$0.50 more per pint than the local competitor, cumulatively, will add serious profit to the business over time. Specialty or one-off batches are a different story altogether. Think about it: these are highly sought after specialty brews that do not last very long. Also, given the small production run, they cost more to make. Patrons do not mind paying a little extra for bragging rights. I suggest charging 20 to 25 percent more than the highest priced flagship for speciality batches.
The profits generated from each customer type will vary. Profits from taproom sales will certainly be higher than sales from the distributors. However, the distributor will be purchasing far more quantity than the patron. This doesn’t guarantee more profit, but it is a larger inflow of cash when compared to the daily sales. A successful taproom can generate enough profit to pay the bills of a production brewery, and if this is accomplished, the profit generated from distribution sales will remain available for expansion, investor distributions or salary increases. It’s hard, if not impossible, to give profit examples on certain types of beer. There are so many factors that go into determining the cost per barrel, it would be misleading to attempt this.
Your brewery success is not an assured conclusion. Pricing becomes trickier as more competition enters the market. This is an aspect of the business that needs close attention as your brewery grows. Successful breweries will focus on pricing over cost controls. Pricing with a purpose will ensure you have enough profit to run the brewery successfully.
Chris Farmand is the founder of Small Batch Standard, a CPA firm helping craft breweries across North America. Chris has more than 10 years of tax and accounting experience, with the last 3 years dedicated to the craft brewing industry. Small Batch Standard believes brewery owners should have reliable financials while focusing on what they do best, making beer. He can be reached at firstname.lastname@example.org.