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Knowing how to price coffee isn't exactly intuitive.
Have you ever wondered why your daily cappuccino costs $3.50 at one coffee shop and $4.50 at the one across the street? Before you open your cafe, it’s essential to know what you will charge, and more importantly, why.
Pricing coffee might seem simple. From a consumer’s perspective, the price is the price, right? Not quite.
You see examples in every neighbourhood coffee shop. The differences in how much you pay for a cup vary even more dramatically by city or state. But just because coffee in Melbourne might be more expensive, it doesn’t mean that every place there uses better beans.
Many different factors add up to create price variations, making something that seems simple a lot more complicated than you might expect.
Understanding coffee pricing is essential for running your cafe successfully. Continue reading for our comprehensive guide to pricing all your espresso drinks. We’ll cover everything, including:
When it comes to pricing, having a general strategy in mind is a good idea. While it might be tempting to copy what your favourite cafe does, you should tailor your prices specific to your cafe.
Considering three key points will help you figure out exactly what that rate should be. We’re calling these the “Three C’s” of coffee pricing, to help you remember these factors throughout the process.
Rather than thinking about what you will charge your customers, flip the script and ask yourself what your customers will pay you. If you have a clear vision in mind already, you should be able to guess what their expectations will be.
If your cafe’s primary audience is students on their way to uni, chances are they’ll pay a lot less than a retired couple who wants to sit in for hours.
In addition to considering who your customer is, ask yourself what your cafe will be to them. For the uni student, it will be a quick stop on their way to class. For the couple, however, your cafe might be a place for socialisation where they are happy to spend their free time each day.
When you take these factors into account, it makes sense that the couple would be willing to pay more than the student.
While knowing your customers is a great place to start, it’s not the whole story when it comes to coffee pricing.
In addition to knowing what your customers would pay at your cafe, you also need to ask what they are paying at competitors cafes. Setting your prices wildly outside of the margins of your competitors is a bad idea. Below, we’ll discuss different pricing strategies that you can use to outdo the competition, but don’t think that charging $2 less will automatically equate to more customers.
While a slightly cheaper coffee might appeal to a customer like a uni student, for example, drop the prices too low, and it will turn people away. If your prices are consistently far below the norm, visitors will start to question not only the quality of your coffee but also of your cafe as well.
On the other side of the spectrum, prices that are too high will also deter customers. The elderly couple might be willing to spend a dollar more than the average person on a great cup of coffee in the beautiful environment you’ve created. Still, if you push the boundaries too far, they will feel ripped off and start going elsewhere.
Making sure you’re on-par with the competition, will help you run a fair establishment and ensure that customers perceive that as well.
Finally, you can’t set a price for your coffee if you don’t know how much it costs to make. If you’re using some of the most premium coffee beans to make your espresso, this will drive up the cost of the goods you’re selling.
In addition to considering all the coffee materials (beans, milk, water), you also need to factor in the materials that facilitate the coffee and the labour required to make the coffee. These are just a few expenses created from making a simple cup of coffee:
The list is long, but the gist of it is: selling a cup of coffee costs a lot. You’ve poured a lot of money in up-front to make it all possible. While one latte might not make or break your business, you do have to keep in mind that each sale will affect how much profit you turn over.
As you can see in the list of items that contribute to the cost of a coffee, there are a lot of external factors in play that will influence how much you charge for a product.
However popular, takeaway coffee's not completely immune to economic influences. Those with a lower disposable income may view takeaway as a luxury and opt for instant, making takeaway coffee vulnerable to economic downfalls.
These factors change regularly, but they should nevertheless be considered in your pricing. If people have less to spend, you might need to charge less. But if the demand for coffee rapidly increased, you could likely charge more for it.
Now that you know the basics, you can start to consider different pricing strategies. Keeping in mind that you want to stay within a reasonable range, two common strategies work well in the scenario of pricing coffee.
Penetration Pricing: Penetration pricing is when you set your prices lower than the average, to interrupt the market and win customers over. By lowering your prices, you might find that you win-over customers who might otherwise support your competition.
Price Skimming: Price Skimming is the opposite of penetration pricing and works by setting prices higher than expected to make a higher margin. While it might sound counterintuitive, this can create the illusion that your coffee is better than the competition, and lure customers to your cafe instead.
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