It’s amazing how new and even experienced entrepreneurs can often get tangled up in trying to define the business model for a club or bar when it can actually be very simple if you don’t over complicate it.
In essence, the majority of bars and nightclub businesses make money by selling drinks. In addition, some also generate revenue by charging patrons to enter the establishment through ticket sales that may or may not include a first drink.
As such, there are a couple of revenue streams, each with a differing profit margin. In the case of drinks, the profitability will depend on the pricing and purchase cost of each product type. For front door charges that do not include a drink, the gross profit margin is technically a 100% unless there are any direct commissions given to sales agents. If the entry charge includes a first drink, then the margin will depend on the type of drink that is provided with the entry fee.
There may also be special occasions when the club hires a famous DJ or performer to play for the night, paying thousands of dollars in fees to the celebrity and any other agents, as well as incurring additional marketing and advertising costs to promote the event. As a result, the tickets for these events will be significantly more than the usual entry fee, as it needs to make up for the artist’s professional fees and all the other costs involved. However, sponsors will often cover some of the expenses and the heftily priced tickets may generate a huge profit for the club owners.
The bulk of a club’s income is derived from selling drinks, where there is usually an average margin of about 50% to 80%, depending on the pricing, type of bar and purchasing power. Having said that, it is worth noting that the margin for some items could be well over 100% a lot of the time. For example, a beer that is sold for $10 may cost $6 to buy. In this case, the profit is $4 and the profit margin is $4 divided by $6, which comes to 66.66%. This should not to be confused with the Cost of Goods Sold (COGS) or Cost of Sale, which is $6 divided by $10 or 60%.
The revenue model for a club or bar is made up of the income streams that we’ve just looked at, and together, they produce the gross sales for the business. When we deduct the direct costs related to generating these sales, such as the purchase price of the beverage items, we are left with the Gross Profit.
Next, comes the fixed expenses or operating overheads that need to be incurred even if there are no sales at all. These include the property’s rental, staff costs, utility bills and other expenditures required to run the club.
Profit Before Tax
This Operating Expense (or OPEX) needs to be deducted from the Gross Profit to arrive at the Net Profit (before taxation). To calculate the real profits that are made each month, you have to further deduct the tax that is payable on the profits to work out how much is left.
In a nutshell, this is the basic financial model for almost every bar and club all around the world.