Are you charging the right price for coffee beverages?
If not, then How do you charge the right price for coffee?
If you’re operating a coffee shop, restaurant, or café, then you already know that coffee revenue is key to generating the profits needed to grow your business.
So, how do you know the right price to charge for your coffee beverages? The problem is that all too often, your coffee pricing strategy gets overlooked or pushed to the side due to the overwhelming daily needs of your business. As a business owner, we know that you want to tackle this challenge to maximize your profits, so you’re not leaving revenue on the table.
We understand this challenge:
Finding the time to review your pricing strategies isn’t always a priority when you have a ton of responsibilities to manage daily. This is why we have put together a simple guide of the top five pricing strategies for coffee that will ensure your business has a profitable strategy in place. You can then focus on creating those enjoyable customer experiences every time a customer walks in the door. All while putting those dollars in your pocket. It’s time to ask yourself, are you charging the right price for coffee in your business?
There are so many pricing strategies to choose from:
Cost-Plus Pricing
Penetration Pricing
Skim Pricing
Value-Based Pricing
Loss Leader Pricing
When deciding which is right for your business, we recommend you answer these few questions.
What priority is coffee on your menu?
Do you know your costs?
Do you understand what your customers want?
What position do you want to hold in your marketplace?
How competitive is your market?
Do you know your competitors?
How much profit do you want?
Before you select a strategy, identify your hard costs.
How much does a cup of freshly brewed coffee cost?
Cost of coffee
A pound of coffee = approximately 48 – 8oz cups of brewed coffee
The average cost of a pound of specialty coffee costs $10 – $16 per pound.
$13.00 per pound / 48 cups = $0.27 per 8oz cup
Cost of Supplies
Cup – 8 oz. double walled kraft paper coffee cup purchased in a 500-count box for $79.38
$13.00 per pound / 48 cups = $0.27 per 8oz cup
Lid- 8 oz. eco-friendly black plastic cup lid purchased in a 500-count box for $47.26
$47.26 per box / 500 lid = $0.09 per lid
Base Cost = $0.27 + $0.16 + $0.09 = $0.52 per 8oz cup of fresh brewed coffee
Five most popular pricing strategies defined:
Cost-Plus Pricing
Our top recommendation and the most common and straightforward pricing strategy is a cost-plus pricing strategy. Pricing doesn’t have to be complicated, and we recommend keeping it simple unless you are in a highly competitive market area. An essential part of this strategy is to ensure you cover your costs.
Cost of coffee + Cost of supplies + Cost of other ingredients + Profit margin
Calculating your profit margin
The average gross profit margin should be a little over three times your cost or approximately a 70% margin.
Cost / (1 – Profit margin) = Sales Price
70% profit margin = $0.52 / (1 – .70) = Minimum Sales Price of $1.73 per cup
That’s $1.21 gross profit per cup!
In this example, we calculated our cup using specialty-grade coffee and quality eco-friendly paper products. Also, keep in mind that the average cup of coffee today sells for approximately $2.70 per cup.
Now, that’s $2.18 gross profit per cup! Almost double!
When determining your profit margin, don’t forget to consider the following factors:
Quality of your coffee (low grade commercial to specialty grade coffee)
Types of coffee beverages (fresh brewed to signature drinks)
Type of service you offer (counter, table service, to-go, and drive thru)
Style of your coffee shop and target market (casual local hangout to high-end neighborhood)
Competition (are you the only option, or is your location in a highly competitive area)
Each of these factors can actively play a significant part in your profit margin, either increasing or lowering it.
- Don’t forget about opportunities to up-sell and improve profits by offering to add additional shots, syrups, or additives to your coffee beverages. They’ll improve your margin.
Penetration Pricing
When you are in a highly competitive market area, charging a price to undercut the competition can help you gain market share and awareness. This strategy is good for attracting customers to a new product or service by penetrating the market and pulling customers from your competitors. Grabbing a higher market share of the existing customers can stimulate and grow your sales. In the short term, it may degrade an individual item’s sale profit, but it can ultimately lead to an increase in net profit from greater overall sales.
For example, a coffee shop might offer a popular specialty coffee beverage, like a “latte”, at a lower price point to bring in customers. Then, they offer bundles with breakfast items or upsells like syrups or additives to boost the overall sale. The price pulls customers in, allowing the business to earn their loyalty by enhancing their customer’s experience and providing value.
If you’re using this pricing structure, we would recommend making sure your “latte” is of premium quality. At Salt River Coffee, we offer over 25 specialty coffee roasts to serve various tastes and needs. We even have a line of specialty espresso roasts. Crafted specially to produce amazing espresso shots, these roasts provide consistent, flavorful tastes to keep your customers coming back for more.
Skim Pricing
The opposite of penetration pricing, skim pricing is used most often to introduce new products to an emerging market. Basically, you are setting a high introductory price. As more competitors enter your market, your prices will fall and eventually level out. The idea here is to capture the highest amount of revenue before your market is flooded by the competition. This is often a challenging pricing strategy for smaller businesses as constant attention must be paid to your competition.
The best use for this strategy might be to launch a new beverage or product, such as seasonal or specialty drinks, to attract new customers. It can also be used when opening a new location for your coffee shop, restaurant, or café. Or if you are in a non-competitive area.
If you’re crafting a new seasonal or specialty coffee beverage, take the time to make it special and unique with a micro-lot roast. Salt River Coffee carries a variety of micro-lots, and limited-season coffees like our Burundi Turihamwe roasts produced entirely by women farmers. This amazing coffee yields only about 1,200 bags a season.
Value-Based Pricing
There is a lot written about value-based pricing and how to quantify it. In simplest terms, value-based pricing is what customers are willing to pay based on their perceived value of your product.
The best use for this strategy might be to launch a new beverage or product, such as seasonal or specialty drinks, to attract new customers. It can also be used when opening a new location for your coffee shop, restaurant, or café. Or if you are in a non-competitive area.
The best use for this strategy might be to launch a new beverage or product, such as seasonal or specialty drinks, to attract new customers. It can also be used when opening a new location for your coffee shop, restaurant, or café. Or if you are in a non-competitive area.
If you’re crafting a new seasonal or specialty coffee beverage, take the time to make it special and unique with a micro-lot roast. Salt River Coffee carries a variety of micro-lots, and limited-season coffees like our Burundi Turihamwe roasts produced entirely by women farmers. This amazing coffee yields only about 1,200 bags a season.
Loss Leader Pricing
This strategy sounds counterintuitive. Who wants to lose money or just break even on their products? How about your local grocery store? Your local store probably practices loss leader pricing daily by offering extra low prices for staple items like eggs, milk, or bread. Then, once they’ve drawn you in, they have plenty of other products to sell you at a greater profit margin to make up for any losses. The advantage is that the more customers that walk in your door, the better your chance to increase your overall sales.
Some restaurants practice this strategy by offering their brewed coffee at an extremely lower price but then making up for it on the individual plate prices of their meals. The issue run into is that they don’t follow through with the strategy correctly. They still try to profit from coffee sold at a lower price. To do this, they use cheap, commercial coffee that tastes bad and leaves a bitter taste in their customer’s mouth. Not only will it backfire, but most likely, they’ll end up losing customers. If your customers are willing to pay a higher price for their meal, then they’ll expect a quality beverage to go with it. Without it, the overall enjoyment of their experience will be mediocre at best.
We only recommend this strategy when your customer is going to order higher profit items with their coffee. At Salt River Coffee, we carefully consult with our partners on their specific menu needs. We’d recommend our Brazilian or Guatemalan roasts for a loss leader strategy. These specialty crafted roasts are available consistently and at more affordable prices while still giving your customers the benefit of a smooth, great-tasting coffee.
Consequences of charging the wrong price for your coffee
Let’s just look at coffee shops. Currently, there are over 63,000+ coffee shops in the United States, so your customers have lots of choices for their morning java ritual. That’s not counting the number of restaurants, cafés, fast food joints, and even gas stations that sell coffee.
What If…
If your pricing strategies are weak or nonexistent…
If you made up prices purely by what the competition is charging…
If you have no idea what your base cost per cup is…
Then, you are losing revenue and leaving profits on the table daily (literally). Or, worse, you are losing money and not realizing it.
On the other hand, if you charge the optimal price for each cup while earning a place as part of your customer’s morning ritual, you could be generating a substantial amount of recurring revenue and profit.
Select Your Strategy for Success:
Remember, there are many different options depending on your choice of coffee bean, packaging and serving supplies, and other ingredients. The key is to make a conscious choice when deciding how to charge the right price for coffee in your business. Don’t forget to factor in the quality of your coffee and the customer experience you are trying to create.
Stop letting revenue and profits slip away because you still ask how to charge the right price for coffee in your business.
Start charging the right price for your coffee beverages today!
Still, need help calculating the cost of your coffee beverages? Get access to our easy-to-use Coffee Cost Worksheet below by entering your email, and stop leaving profits on the table!
