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Everyone has their go-to coffee order from their favorite cafe. Whether it’s a double shot of espresso, a flat white, or the ongoing competition between cold brew versus iced coffee, a successful cafe offers a variety of coffee drinks to cater to their customers’ diverse tastes. When it comes to profitability, not all types of coffee drinks are created equal.
As a cafe owner, it’s important to understand the cost of coffee drinks to set appropriate pricing and increase your profits. Here’s what to consider when deciding how to fill up your cafe beverage menu.
Pricing considerations for different types of coffee
Understanding your target market and your customers’ preferences is the foundation of a successful pricing strategy for your cafe. While some coffee drinks may cost more to make, they may also have significantly more demand than other drinks you may be looking to add to your menu. It’s important to perform market research to understand what the customers in your community are looking to order when they walk in your door.
For example, let’s take a case of cold brew versus iced coffee. While cold brew may be more expensive to produce than iced coffee, you may find that the customers in your area lean towards cold brew. Therefore, you could sell more drinks if cold brew is offered.
It’s also important to understand your cost of goods sold. The cost of goods sold is the direct cost of producing a single coffee drink, including the beans, milk, syrups, physical cup, and any additional ingredients used. Labor costs should be considered as well when factoring in what it takes to prepare each drink.
By accurately calculating your cost of goods sold, you’ll be able to set more competitive prices while still ensuring a profit from the drinks you choose to offer. Aiming for an 80% profit margin is common for the coffee shop industry, but the profit percentage should be based on your business model and local competitors’ pricing structures in your area.
Calculating prices for coffee drinks
So how much is a coffee at your cafe? Determine what profit margins you want to have for each of the various coffee drinks so you can begin to set proper prices for the different types of coffee. Let’s illustrate the pricing process with a few examples of popular coffee drinks as a starting point.
Cold Brew
While there’s a debate between cold brew versus iced coffee on which is better, it’s true that cold brew typically costs more to produce than traditional iced coffee. The cold brew process involves steeping high-quality grounds for an extended period of time, leading to a concentrated smooth brew. This process increases the amount of coffee beans used, which contributes to a higher cost of goods sold for this drink.
Alternatively, iced coffee is just coffee that is brewed hot then chilled, requiring fewer coffee beans and a shorter preparation time. While iced coffee can be produced cheaper and faster, it may not be the best option for your cafe, depending on the preferences of your customers. Understanding the cost difference of cold brew versus iced coffee, along with market research based on your customers’ preferences, can help you decide how to better price these drinks on your menu.
Cappuccino
A classic coffee shop drink, cappuccino is made up of equal parts espresso, steamed milk, and a layer of frothed milk. To determine the price of your cappuccino, consider the cost of coffee beans, the type of milk used, and any labor involved in creating the drink. Once those costs are determined, you’ll want to add your desired profit margin to find an ideal price for this classic coffee.
Latte
A go-to for most coffee drinkers is the latte, made by combining espresso with a greater amount of steamed milk and a small layer of foamed milk. Since more milk is used, lattes tend to be a higher price than a cold brew or a cappuccino. And as customers begin to explore different milk alternatives, you’ll want to carefully assess the cost of these ingredients and labor to set the best price for these lattes or any upcharges you’ll want to add for different milk alternatives if necessary.
How to approach your pricing strategy
Now that you’ve determined what costs you’ll want to consider when making coffee drinks, firming up your pricing strategy will be your next step. How you approach your pricing strategy can significantly impact your cafe’s success, so let’s review a few options for you to consider.
Keystone pricing
The keystone pricing strategy involves applying a simple markup of double the wholesale, or cost of goods, price to determine what you’ll sell it for to your customers. For example, if the cost of goods for a latte is $2, the customer’s cost would be $4. However, this strategy may lead to selling yourself short when the drink’s perceived value is actually more than double the wholesale cost.
Competitive pricing
Competitive pricing involves analyzing your competitors’ pricing for similar drinks you are offering and pricing them at comparable rates. The strategy can be beneficial in helping your cafe remain competitive within your local market.
Value-based pricing
The value-based pricing strategy takes into account the aforementioned perceived value. The quality of your coffee drinks and the customers’ overall experience can help determine your drink pricing. If your cafe is high-end, unique, or offers a richer experience, customers could be willing to pay a bit more for your offerings.
Premium pricing
Instead of a perceived value, if your cafe is offering rare or limited-edition coffee beans, higher prices can often be justified. Because of the exclusivity, you may be able to go with a premium pricing strategy by charging higher prices for these specialty drinks.
Penetration pricing
If you have a newer cafe, the penetration pricing strategy allows you to initially set lower prices that will attract new customers and gain market share in your area. While this allows new customers to try your drinks at an affordable price, remember that this may not be a sustainable strategy for the long term.
Once you have your pricing determined for your drink menu and any additions to the drinks, such as flavoring or milk alternatives, you’ll want to find an efficient way to list these drink options in your point-of-sale system.
Square Point of Sale software offers a seamless and convenient option that makes ringing up orders and taking payments smooth and convenient for both your staff and your customers. If you offer a loyalty program to your customers, options such as Square Loyalty can be configured within your Square Point of Sale, making it easy to offer rewards to returning customers during purchases. Be sure to factor the loyalty prizes into your pricing strategy to offset potential discounts or free coffees that may be given to repeat customers through the program.
Square Point of Sale also integrates with Square Online to take the customer experience beyond your physical store, making your cafe accessible to a wider audience and giving your customers an option for ordering online prior to picking up their favorite coffee drink, ensuring the best customer experience from drip to sip.
