How much should I charge for a cup of coffee?
A GUIDE FOR CAFE OWNERS & MANAGERS
Green coffee prices are on the rise, again!
This is largely due to weather changes, lower crop yields, demand outstripping supply, inflation, supply chain issues, and market speculation, as investors predict shortages, further driving higher prices.
The days of relying on comfortable profit margins are shifting and cafe owners are faced with a tough decision: “How much should I charge for a cup of coffee?”
As a business coach I’ve been asked this question a lot over the past few months. This is not a new issue. Only three years ago, in 2022, we helped more than 50 cafes through the last substantial rise in green coffee prices - see the images below.
Your three priorities
The rising cost of coffee is not only a concern for cafe owners, it’s also on the mind of customers who are nervous, wondering how much their daily cup of coffee will cost them and whether the quality will change. These are your three priorities.
Keeping customers happy and returning
Pricing your coffee correctly to stay profitable
Maintaining the quality of your coffee
So, how much should you charge for a cup of coffee?
It all depends on your actual costs and where you want to position yourself in the market. Regardless, you should aim for at least 50% profit, accounting for the cost of goods and labour.
For example, let’s say your cost of goods and labour for an 8oz takeaway flat white with dairy milk is $2.47. To make 50% profit you need to charge $4.91 plus $0.49 (GST), which equals $5.40 retail. If 50% sounds high, you have a lot of other costs such as machinery, equipment, power, water filtration, rent, insurance, and so on, which is why you must ensure every cup of coffee is profitable.
When dealing with pricing, it's important to understand the difference between profit margin and markup. Here's a breakdown of how to calculate both, and what they mean:
Profit Margin
This is the percentage of the selling price that is profit.
It shows how much of your revenue is actually profit.
Here's how to calculate it:
Profit = Selling Price - Cost
Profit Margin = (Profit / Selling Price) x 100
Markup
This is the percentage increase in the cost of a product to arrive at the selling price.
It shows how much you've added to the cost to make a profit.
Here's how to calculate it:
Profit = Selling Price - Cost
Markup = (Profit / Cost) x 100
Applying the calculations to your numbers:
Selling Price: $4.91
Cost: $2.47
Profit:
$4.91 - $2.47 = $2.44
Profit Margin:
($2.44 / $4.91) x 100 = approximately 49.69%
Markup:
($2.44 / $2.47) x 100 = approximately 98.79%
In summary
Your profit margin is about 49.69%. This means that roughly 49.69% of every $4.91 you earn is profit.
Your markup is about 98.79%. This means that you have increased the cost of the product by about 98.79% to get your selling price.
You can create your own calculator or save time by grabbing the one we’ve built for our clients. It’s only $39, which is cheaper than creating your own calculator from scratch.
Our calculator will help you price your cups of coffee quickly and accurately based on your actual cost per cup. It factors in expenses such as cups, lids, labour, and various types of milk. Instead of guessing, you can use this information to set your prices, knowing they will be competitive and, most importantly, profitable.
Do not guess
Most cafe owners base their prices on what competitors charge and guess or ignore their actual costs. We understand that to stay competitive, you must consider what other cafes in your area charge. But every business is different. The only way to run a successful business is to crunch your numbers to work out your costs and profit margin. It’s way too important to guess.
Your costs (or cost of goods COGS) are coffee beans, milk, sugar, and a cup and a lid for takeaway. We add in labour as many owners forget to account for it later.
You can create a calculator using a spreadsheet or save time by grabbing ours here.
Coffee Pricing Calculator
Price your cups of coffee quickly and accurately based on your actual cost per cup. Instead of guessing, you can use this calculator to set your prices, knowing they will be competitive and profitable.
Pricing communicates an important message
What do you want your prices to say about your cafe? How do you want it to be perceived in the market? Do you want to position your cafe as a specialty brand or a budget brand? Your price will tell that story!
It’s a temptation to save on costs by purchasing lower grade coffee. But if you want to be known for great coffee, this is not the best approach. So decide what your brand is about and factor that into your pricing strategy. You don’t want to lose customers because your coffee, while cheaper than others, is not as good as it used to be! Many guests are happy to pay a little bit extra for a premium coffee with fast and friendly service.
Communicate the price rise to customers
Clear communication is half the battle in keeping customers happy. Most customers won’t need much information, they will simply be happy you took the time to keep them informed. Other customers may want to know more, so having detailed information ready is a good idea.
Below are two examples of customer communications. You can use these examples as a base, then customise for in-store signage, email, and guest interactions. We also recommend equipping your staff with a cheat sheet containing answers to various customer questions to facilitate smoother interactions and better equip them for conversations with guests.
…
Dear Customers
Our prices are changing.
From < DATE > prices for some items will increase due to rising costs. We have kept our prices the same for many years, and in comparison, our coffee prices are in line with other specialty coffee venues. Surprisingly lower than some coffee chains.
We will continue to serve you high-quality coffee from the best coffee regions in the world, and we appreciate your support and understanding.
If you have any questions please ask.
You can read more about green coffee increases here > QR CODE
…
Dear Guests
From < DATE > we will implement a price change on coffee beverages and extras.
This unavoidable rise is due to the global increase in green coffee, which is caused by the following:
Green coffee prices have increased over 90% in the past year, reaching record highs
A decrease in global coffee production due to weather impacting crops
An increase in demand, which is outstripping supply
Worldwide increase in container freight and supply chain issues
Our coffee will increase by < AMOUNT > and extras by < AMOUNT >. We have chosen the lowest rise possible and it is comparable with other specialty coffee venues.
Thank you for understanding and supporting us so we can continue to serve wonderful coffee to our community.
You can read more about green coffee increases here > QR CODE
…
Link the QR Code to a page on your website that goes into more detail about the green coffee price rise, or you can link to this page, which we have already created.
Maximise profitability in other areas
A smart way to offset the increase in coffee prices is to maximise your profit across the whole business. When other aspects of your business generate good profit, you have more flexibility with coffee price increases. There are only three ways to make more profit. Raise prices, reduce costs, and sell more.
1. Raise prices
We’ve already covered increasing coffee prices, but you must also go through the same process for your food items, retail items, and anything else you sell. Assess your costs, determine profitability, and adjust pricing as needed.
Small increases across a few areas will add up and contribute to maintaining a profitable business. As we say to our clients, “raindrops become oceans.” However, be cautious about implementing widespread price increases or raising prices excessively.
Start by analysing your food menu's profitability by determining each item's cost and price point. You can grab our food costing calculator here if you need a hand.
You can also read our article on How to design your menu to increase your profit.
2. Reduce costs
Increasing profit is not all about raising prices, it also helps to reduce costs. You can reduce costs by negotiating with suppliers, buying in bulk, lowering food costs, implementing better portion control and reducing waste.
You’ll have a hard time negotiating cheaper prices for coffee from your roaster (they’re impacted by the price rise too). Still, you may be able to negotiate prices on other items such as packaging, cleaning supplies, alternative milk, syrups, teas and so on.
Another area where you can reduce costs is to increase efficiency. Streamline your systems, train staff to be more efficient, set new expectations with staff, and roster strategically. Your staff costs are probably between 30-40% of your entire revenue, it’s worth bringing that down a percent or five! Small savings add up, and over time, become valuable.
3. Sell more
Lastly, you can sell more product. Reducing costs is your defence, and selling more is how you play offence. Your plan of attack is to consistently increase revenue by selling more products. If your revenue was $30,000 in February, plan for $38,000 in March.
It is a good idea to set growth targets with staff. Let's say you want to increase revenue by $2000 per week. Break that into a target of $285 daily for a 7-day operation. At 20 customers per day, it becomes $14.25 per person. Now $104,000 extra annual revenue feels achievable!
A few areas to work on are increasing transaction size, encouraging repeat visits, getting more customer reviews, reaching new customers through marketing and developing brand partnerships.
If you’d like more help
Share Why your coffee costs a little more lately with your guests
Get the Coffee Costing Calculator
Get the Food Costing Calculator
Grow your business through coaching - send me a message
Book a complimentary 20-minute strategy call to explore how these strategies can grow your business
I can’t wait to help
Darryn
