How to Set Your Coffee Prices: Fair But Not Arbitrary
Updated: Jul 12, 2022
"Go to the nearest St*rbucks and charge $.25 less." Was one cafe manager's approach that I heard recently. I don't advocate for this method, but it does beg the question:
How much should you charge for your coffee products?
It's a question that all coffee shop owners face at some point, and it's not always an easy answer. In this blog post, we'll discuss how to set pricing for your products using unit economics and other methods. We'll also explore different pricing strategies, and explain when it might be appropriate to raise or lower prices. So read on to learn more about how to price your products fairly and efficiently!
Unit economics is a pricing strategy that takes into account the cost of goods sold (COGS) and desired profit margin. To calculate COGS, add up the costs of all the ingredients used to make a product. For example, let's say to make one cup of drip coffee it costs $.50 in coffee beans and $.07 in paper goods and then labor. Suppose you pay $15/hour, and it takes two minutes for an entire transaction for drip coffee (ordering, checkout, and order fulfillment). This two minutes equates to $.50 in labor. So:
COGS + labor = $.57 + $.50 => $.57
Great. You can then add your desired profit margin (typically a percentage). Let's say we want to keep a 66% margin on our products, therefore, we divide our costs so far by our profit margin.
$.57/.66 = $.86
COGS + labor + profit = price => $1.43
Great, we have our price! But wait, we forgot about taxes and credit card processing charges! Where I am, sales tax is .0825% and let's say my CC processor charges me 3% + $.10 on all transactions. So, I'll go ahead and multiply the total e have right now by 1.1125 and add $.10 to get the price (accounting for tax and processing fees).
$1.43 * 1.1125 + $.10 = $1.69
Cool cool. So, our price is $1.69, huh? Well, you might be thinking, "That sounds pretty low." And you'd be right. Don't worry, you can use unit economics for many products in your cafe, particularly ones that are very similar, such as lattes of different sizes or with unique syrup flavor combinations. However, for this example, unit economics provides us with a lower than desired outcome. Selling coffee for this price probably won't help us achieve our break even point.
When unit economics fails us we can use value pricing.
Value pricing is a pricing strategy that looks at what the customer is willing to pay. To do this, we must first understand the perceived value of our product. In other words, what are customers getting when they purchase our product? They might be getting a delicious cup of coffee, but they're also getting convenience, a break from their day-to-day routine, and saving themselves the time (brewing) and expense (equipment) of making coffee at home.
How does one determine value pricing?
That's a bit tricky. But, a good way to start is by surveying your customers and/or potential customers. You can ask them how much they would be willing to pay for a product. Another way to generate data about pricing is through A/B testing. This is when you offer two pricing options to customers and see which option they choose more often.
You might think this is a trick question, but think of our unit economics example – I know I'd rather by a $3 cup of coffee than a $1.69 cup, because I intuitively expect the more expensive cup to be better.
Check Out What Others Do
Another method is to compare to competitors, especially those that are very busy. If they're popular, you know that consumers are willing to pay the price.
But it doesn't stop there. Consider your market positioning. Are you shooting to be a high end cafe or a local haunt? Don't simply match or slightly beat your competitors on price if you're trying to be high end. Consumers won't believe that your coffee is better if it doesn't cost more than the cafe next door.
I highly recommend value pricing for cold brew coffee. Because its requires very little effort to brew, can be made in big batches, and has a long shelf life, it could actually be fairly inexpensive. However, customers are willing to pay more for it, so simply charge more and take the surplus as profit.
Other Pricing Models
Charge the same thing for everything. You might say that's a bit silly, but consider the certain use cases, like the gift card. One popular show of appreciation is a $5 gift card to the mermaid coffee place. However, some drinks are less than and others more than $5. And it sucks either way to have a little leftover on your card or to have to dig out $1.08 because the card didn't quite cover it.
Instead, think about selling "drink cards." Price them at $5 (or whatever your most popular/average drink costs) and simply accept it to cover the entirety of whatever the customer wants. Yes, they might order a very expensive drink ($8, oh no!), but you'll have made a very happy customer that will be much more likely to return than the gift card customer. A few dollars in lost profit margin are worth it for a happy, loyal customer.
Regression to the Mean
The 'mean' is the quantitative average. Regression to the mean is a concept borrowed from statistics that states that most things will tend to be average over a large measurement. This can be applied to drink prices, using a mean of $5. Therefore, most drinks will be approximately $5. Some of the drinks that cost less to produce will be priced higher (up closer to $5) and have a bigger profit margin, while some of the more cost-intensive drinks will be priced with a lower profit margin so that they are still near $5.
NFTs to Buy Coffee
I'm slightly joking, but yes, you could sell NFTs (non-fungible tokens) and whoever has the token can show ownership to obtain free coffee. The interesting thing about this is that a customer can sell their NFT to someone else and the creator (coffee shop owner) will retain some royalties from that sale. We're still early into Web3, so I'll probably just table this idea for now.