Bar Prime Cost: How to Calculate, Benchmark, and Manage It
TL;DR: Key Takeaways
- Prime cost = Cost of Goods Sold + Labor Cost, but what you include (credit card fees, paper goods) varies by establishment
- The two most common mistakes: using purchases instead of actual COGS, and mishandling owner compensation in labor calculations
- Generic benchmarks (55-65%) are a starting point, but you should benchmark against your own structural target, not the bar down the street
- Track prime cost weekly, not monthly — by the time your bookkeeper turns around a monthly P&L, the data can be three weeks stale
- A 2% or greater week-over-week spike in either labor or COGS is your signal to dig in immediately
We’ve spent the last several weeks on this show talking about non-financial topics — mindset, leadership, team dynamics, guest relationships. All of that matters. But this week we’re turning back to the numbers, and I want to start with the metric that sits at the center of every bar’s financial health: prime cost.
Most bar owners are tracking prime cost. But I don’t think most bar owners are managing it. And there’s a significant difference between knowing your prime cost number and actually using it as a weekly operational tool that drives decisions.
Bar prime cost is one of those metrics where the gap between “I check it” and “I act on it” is the difference between a bar that’s profitable and a bar that’s bleeding money without knowing why.
What Prime Cost Actually Is (And Why There’s No Single Right Answer)
At its core, prime cost is simple: Cost of Goods Sold plus Labor Cost. Those are your two largest expense categories, and together they typically represent the majority of your operating costs.
But here’s where it gets complicated: there is no single correct way to calculate bar prime cost. Different establishments legitimately include or exclude different line items.
Some bars include credit card processing fees. I do when I work with clients. That doesn’t mean excluding them is wrong — it’s a choice. Some establishments include paper goods. Should they? If you’re a college bar serving beverages in plastic cups every weekend to avoid breaking glassware, then yes, those cups are a real cost of serving drinks and they belong in the calculation. If you only use disposable cups for occasional special events or to-go orders, probably not.
The key is consistency. Whatever you include, include it every time you calculate. The value of prime cost isn’t in hitting a magic number — it’s in tracking the trend over time and catching movement before it becomes a crisis.
The Two Mistakes I See Most Often
After working with hundreds of bar owners, two prime cost calculation errors come up over and over again.
Mistake 1: Getting Owner Compensation Wrong
This shows up two ways. Either the owner includes draws (which are distributions, not salary) in the labor calculation, or the owner excludes themselves entirely even though they’re on payroll.
The rule is straightforward: if you are on payroll and taking a salary, you count toward labor cost and therefore toward prime cost. If you’re taking owner distributions, those are not labor — they come out of profit, not operations.
Mistake 2: Using Purchases Instead of Cost of Goods Sold
This is the more damaging error because it makes your prime cost number unreliable from week to week. Cost of Goods Sold is not what you bought. It’s what you used.
The formula: Beginning Inventory + Purchases − Ending Inventory = Cost of Goods Sold.
If you ordered a large liquor shipment this week but most of it is sitting in storage, your purchases are high but your actual cost of goods sold may be normal. If you’re using purchases as your COGS proxy, you’ll see phantom spikes and dips that don’t reflect operational reality.
This means you need a solid inventory system. If your inventory is sloppy, your cost of goods sold will never be correct, and your prime cost becomes meaningless noise rather than actionable signal.
| Common Mistake | What It Does to Your Numbers | The Fix |
|---|---|---|
| Including owner draws in labor | Inflates labor cost, makes prime cost appear worse than reality | Only include actual salary if on payroll; distributions are not labor |
| Excluding owner salary from labor | Understates labor cost, creates false sense of efficiency | If you’re on payroll, you count toward prime cost |
| Using purchases instead of COGS | Creates phantom spikes and dips unrelated to actual consumption | Use Beginning Inventory + Purchases − Ending Inventory |
| Inconsistent inclusions (credit card fees, paper goods) | Makes week-over-week and month-over-month comparisons unreliable | Pick your inclusions and keep them consistent every period |
Why Generic Benchmarks Can Mislead You
Most conversations about prime cost land somewhere in the 55-65% range. And that’s a reasonable starting point. If you’re including items like credit card fees, I typically say stay under 65%. Without those extras, 50-60% is a common target.
But here’s what those benchmarks miss: whether that number is right for your establishment.
I’ve seen bars where labor runs at 18% — not 30%, eighteen percent. Does that happen often? No. But it’s possible when the business is structurally set up for it. And if you’re structurally built to run a 52% prime cost but you’re actually running 58%, you might look at industry benchmarks and think you’re doing great. You’re under 60%. But you’re actually 6 points above where your own business should be operating — and those 6 points are pure profit leaking out the door.
The reverse is true too. A bar focused on high-end spirits — $50 bourbons with 40-50% pour cost — might run a structurally higher COGS than a well-drink-heavy college bar. But the contribution dollars on that $50 pour might be $25, versus $4 on a well drink with 18% pour cost. The percentage looks worse. The dollars look much better.
| Scenario | Pour Cost % | Drink Price | Gross Margin $ |
|---|---|---|---|
| Well drink (high-volume, low-cost) | 18% | $5.00 | $4.10 |
| Premium bourbon (low-volume, high-cost) | 50% | $50.00 | $25.00 |
This is why contribution margin versus contribution dollars matters when evaluating prime cost. A “bad” pour cost percentage on a high-ticket item can generate dramatically more gross profit than a “good” percentage on a cheap well drink.
The right benchmark isn’t the industry average. It’s your own structural target — where your numbers should land given your concept, your pricing, your service model, and your volume.
The Weekly Prime Cost Habit That Changes Everything
Here’s where most bar owners leave money on the table: they look at prime cost monthly. Often, they’re waiting for their bookkeeper to turn around the P&L — which means they might be looking at data that’s three weeks stale. That’s not actionable. That’s an autopsy.
Prime cost should be a weekly review. Here’s the rhythm I recommend:
Every Monday morning (or the day after you complete your weekly inventory), pull three numbers: total sales from your POS, total labor cost from your payroll system, and your cost of goods sold calculated from your weekly inventory count.
If you’re doing a complete inventory every Sunday night — which you should be — Monday morning becomes a 15-minute exercise that gives you a real-time view of your bar’s financial health.
If your inventory happens on a different day, adjust accordingly. The point isn’t the specific day of the week. The point is looking at a complete seven-day window with fresh data so you can actually respond to what you see.
The 2% Rule: When to Dig In
Two signals should trigger immediate investigation:
If labor cost spikes more than 2% week over week, dig in. Was there unexpected overtime? Were you overstaffed for a slow weekend? Did a weather event or road closure tank your revenue while labor stayed fixed?
If cost of goods sold spikes more than 2% week over week, dig in. That could be waste, overpouring, a vendor pricing change you didn’t catch, or a training gap with new staff.
A 2% swing in either direction on a weekly basis is your early warning system. Catch it this week and you can fix it before it becomes a pattern. Miss it because you’re only looking monthly, and it compounds into a real financial problem.
| Spike | Threshold | Possible Causes | Action |
|---|---|---|---|
| Labor cost spike | 2%+ week over week | Overtime, overstaffing, revenue shortfall against fixed labor | Review schedules, compare projected vs. actual covers, check overtime log |
| COGS spike | 2%+ week over week | Waste, overpouring, vendor price increase, training gap | Audit pour counts, check invoices for price changes, review waste log |
Your Action Step This Week
Here’s what I want you to do right now. Pull your last four weeks of sales, labor, and COGS. Calculate prime cost for each week individually — not as a monthly aggregate, but four separate weekly numbers.
Find your worst week. That week is telling you something.
Dig into it. Was it weather? An event that didn’t perform? Overstaffing? A large order that inflated your purchases because you were using purchases instead of actual COGS?
Figure out why it was your worst week. Because once you know why, you can build a system to prevent it from happening again. And that’s the difference between tracking prime cost and managing it.
Common Questions About Bar Prime Cost
What is a good prime cost for a bar?
Most industry guidance puts the target between 55% and 65%, depending on what’s included in the calculation. If you’re including credit card fees, staying under 65% is a reasonable goal. Without those extras, 55-60% is more typical. But the most useful benchmark is your own structural target — where your numbers should land given your specific concept, pricing, and service model. A bar that structurally should run 52% but is running 58% has a bigger problem than a bar that structurally should run 62% and is hitting 63%.
How often should I calculate prime cost?
Weekly. Monthly prime cost reviews, especially when you’re waiting on a bookkeeper’s P&L, can mean you’re looking at data that’s weeks old. By then, the problem has already compounded. Weekly reviews tied to your inventory cycle give you data you can actually act on within days, not weeks.
Should I include credit card fees in prime cost?
It’s a legitimate choice either way. Including credit card fees gives you a more comprehensive view of your true cost to generate revenue, but it will push your prime cost percentage higher. The important thing is to be consistent — pick your method and stick with it so your week-over-week comparisons are meaningful.
Why is my prime cost different every week even when business feels consistent?
Usually it’s because you’re using purchases instead of actual cost of goods sold. A large liquor delivery one week inflates that week’s number even though most of it sits in storage. Using the COGS formula — Beginning Inventory + Purchases − Ending Inventory — smooths this out by measuring only what you actually used, not what you bought.
How do I benchmark prime cost if my bar focuses on premium spirits?
Focus on contribution dollars rather than cost percentages. A $50 bourbon at 50% pour cost generates $25 in gross margin — far more than a $5 well drink at 18% pour cost generating $4.10. Your prime cost percentage may look higher than a high-volume well-drink bar, but your actual profit per transaction can be significantly stronger. Benchmark against your own historical performance and your own structural target.
Want help figuring out what your bar’s prime cost should actually be — not a generic industry benchmark, but the number that reflects your specific concept and structure? Book a strategy session at www.barbusinesscoach.com/strategy-session and we’ll build your custom prime cost target together.
