The Business Model for Bars and Clubs

business modelIt’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.

Revenue Model

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.

Direct Costs

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.

Operating Costs

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.

Is it Profitable to Own & Operate a Bar

profitableCan bars make money for their shareholders? This is the question that almost all budding bar owners are trying to figure out before they take the plunge to open their own dream bar.

Unfortunately, there is no simple yes or no answer because it really depends on a number of factors that vary for different companies and ventures.

Can it vs Will it Make Profits

So if you want to know if you CAN make a profit by running a bar, the answer is yes, of course you can, since there wouldn’t be so many bars in existence if it wasn’t profitable for the people who own them.

However, if you’d like to know whether you WILL make lots of money by setting up the bar you have in mind, then the answer is that it is certainly possible, as long as you have all the knowledge, experience and a fair bit of luck on your side.

Profitable Cash based Business

The bottom line is that bars can be extremely profitable cash businesses that have very few bad debts from customers who owe them money, assuming you’re not foolish enough to give credit to your regulars.

It is one of those businesses where customers pay up front for a product even before it is consumed, and credit doesn’t have to be given, which means no collection problems. At the same time, if you play your cards right, your suppliers may give you 30 to 60 day (or more) payment terms to settle your purchases, so you’ve got the best of both worlds.

Possible to Consistently Make Money

If you have the right formula, location and team, it is possible to earn a lot of money every week, especially during the initial months when you’re the new and hip place in town. Even after this honeymoon period, if you know what you’re doing, you could be cash flow positive for a good few years or more, and end up making a huge return on the initial capital invested.

Unfortunately, while it is certainly possible to generate extraordinary amounts of profits from a bar, the majority of businesses end up loosing money. The ones that are successful tend to be owned and run by experienced operators who have normally been in the industry for many years and have learned the tricks of the trade from their past failures.

Therefore, the question that aspiring bar investors should be asking is, what does it take to own a profitable bar, or, how can new entrepreneurs set up and operate a bar that consistently makes profits.