How to Price Coffee in Today’s Market

You have an exciting plan for a café or a roastery, and now you need to figure out how to price coffee. Whether you’re a barista taking your passion a step further or an experienced business owner, it’s a scenario that all entrepreneurs must face. When Starbucks sold its first cup of joe in 1971 for around 35 cents, it also had to determine the correct price points to bring value to customers while driving the growth of its business. By 1996, it had become the biggest coffee chain in the world, with a vastly expanded menu and java for $2 a cup.

Correct pricing can result in more customers, a larger share of the local market, and, ultimately, increased profits. But just as no two coffee houses are alike, there’s no plug-and-play formula to follow. You may find a $7 latte in one cafe and a $5 version at a different place down the street, and both have similar profit margins. Think of pricing as a strategic tool that reflects your business’s unique identity and position in the market.

In this article, we’ll examine the key factors that influence pricing decisions. These include clear-cut factors like the cost of ingredients and labor. We’ll also tackle the tricky stuff that’s difficult to pin down, like spoilage, overhead costs, and indirect labor. Then, we’ll share step-by-step methods to calculate costs and set prices for your coffee. Read on for key strategies and insights to max out your chances of success.

Understanding the Basics of Pricing of Coffee

Simply put, pricing is the process of determining how much money you’ll charge for your coffee. It’s a crucial part of being a business owner for many reasons. 

Business Longevity

Market conditions change, and coffee shop owners must be flexible enough to adjust prices in response to economic shifts, coffee trends, and customer demand to achieve sustainability. We’ve all experienced first-hand the high cost of ingredients and supply chain issues of recent years. Unfortunately, cafes that charge pre-pandemic prices today cannot expect to thrive. 

Competitive Strategy

Finding the balance between profitability and competitiveness will be an ever-present challenge. Shop owners must look to rivals to ensure their coffee and menu items are competitive and adjust pricing accordingly while always keeping profitability in mind. This may mean cutting prices to gain market share or, on the flip side, raising prices to signify higher quality. 

Pricing Considerations

It’s more than just beans, syrups, and cinnamon that go into your favorite pumpkin spice cold brew. To determine your pricing, think about every action that contributes to creating your coffee drink. This will include ingredient costs, labor costs, and overhead expenses, such as rent, utilities, and insurance. You can’t stop there. Zoom out even further to evaluate overall market demand and what your competitors are doing right and wrong. Pricing one single espresso or macchiato requires a holistic approach with big-picture thinking.

Calculating your Costs 

Start by pondering this question: how much does it cost to produce one unit of X? Ingredients will likely jump to mind first, but you might be surprised by all the factors impacting the Cost of Goods Sold (COGS). It’s no picnic figuring out your COGS, but it’s essential to pricing, providing a baseline amount you should never go below. There are many unknowns when launching a business, but one thing is for sure: You don’t want to sell products for less money than it took to produce them. Here, we break it down. 

1. Recipe Costing

Recipe costing software takes the pain out of the process, saving time and expensive mistakes, but you can do this manually with a spreadsheet or Recipe Cost template.

Write down each ingredient in your recipe, and next to each ingredient, put the measure used (weight, volume, or number). Compute the actual food cost of each ingredient by determining the unit of measure per recipe portion size based on the total cost per purchased unit. The price of coffee beans famously fluctuates a lot, but the beans are only a small part of most coffee shop’s offerings. 

Say that a 1-pound bag of wholesale coffee beans costs $10, and you have two espresso shots in a caramel macchiato. The cost of beans for one drink will be about 33 cents. Continue to add up the individual cost of the vanilla syrup, the milk, and the caramel drizzle to get the total cost for each drink.

Be sure to account for food waste in your calculations since some spoilage, mismeasurements, and spillage are inevitable. For tips on monitoring spoilage, check out our guide to conquering food waste. 

2. Labor Cost Calculation

Labor costs include more than just hourly wages, typically making up about 30% of a business’s revenue. Anything that can be categorized as “labor-related” goes into your labor cost calculation, and there are two main buckets: Direct labor and indirect labor. Direct labor encompasses regular wages, overtime hours, insurance, and paid time off. Indirect labor includes fringe benefits like bonuses and uniforms. 

Once you’ve done the heavy lifting to determine your labor costs (direct and indirect), plug your numbers into this formula: 

Hourly labor costs x hours of labor per unit = cost of labor per baked good. 

3. Overhead Cost Calculation 

For a truly accurate pricing strategy, operational overhead expenses must be factored into every item on your menu.

Fixed costs are constant no matter what type of beverages you decide to sell. These include rent, property taxes, business loan payments, and monthly rental of barista equipment. Then come the variable costs, which fluctuate monthly depending on your output, like electricity used to power machinery, maintenance costs for your equipment, and packaging for your to-go beverages. To calculate the overhead costs per coffee drink, use this formula:

The total amount of overhead costs (fixed and variable) incurred during a period  / the total number of units produced = per unit overhead.

4. Total Cost Per Item Calculation 

Now comes the moment of truth where you discover the total cost per item, which is crucial to setting the price of your coffee. 

Recipe Cost + Labor Cost + Overhead Cost = Total Cost Per Item 

Setting Your Prices

Congratulations. Just by determining your COGS, you’ve already won half the battle. Now it’s time for the fun stuff: setting the right price so you can rake in the profits and grow your business. 

Determine Your Markup

The markup percentage varies from one coffee shop to another and is influenced by other costs such as target profit, overhead, and more. With those disclaimers out of the way, markups on coffee are 80% or more, some of the highest in the hospitality industry, 

Pricing Strategies 

• Cost Plus Pricing is the most popular strategy but it has its pros and cons. On the plus side, it’s simple and straightforward: the cafe calculates all costs (fixed and variable) for a drink and then simply applies a markup percentage to determine the selling price.
  The drawback is that when a menu item costs less money to make, you earn lower revenue and total profit. On the other hand, a bloated cost structure may force you to set higher price points to cover unnecessary expenses, and customers may not be willing to pay.
  
  

• Value-Based Pricing is a powerful strategy that sets prices based primarily on a consumer’s perceived value of a product. It is customer-focused, meaning your business will base pricing on how much your customers believe your coffee is worth. Rather than costs dictating how much you charge, this approach gives you more control over pricing and is a great fit for businesses known for sourcing specialty beans, employing cutting-edge techniques, or doing something that sets them apart from the competition.
  The trick is that it requires a deep understanding of the local market, which only comes from time and research, two things you might be short on when launching a coffee shop.
  
  

• Competition-Based Pricing. As its name suggests, competitive pricing involves setting price points relative to your competition. You have three choices: below the competition, at the competition, or above the competition. It’s a popular approach for businesses selling similar products that customers already know and love – and when a price has reached an “equilibrium.” For instance, the average price of a cup of coffee today is $3.08, according to Toast’s latest research.
  To charge more than competitors, your coffee house must deliver a premium experience. Pricing below competitors, on the other hand, risks taking a loss and hoping customers will buy other products to make up for it (known as the Loss Leader Strategy). Those who match competitors’ pricing must distinguish themselves in different ways, like through marketing or an excellent location.

Considering Price Elasticity

Buyers' responsiveness to changes in prices can be elastic, meaning a change creates a larger demand. Or it can be inelastic, with no change in demand. To give you a better idea, necessities like food and utilities are generally considered inelastic, with demand remaining the same even when prices increase. Where do bakeries stand? Typically, items that customers deem critically important to their daily routines — like a morning coffee — will be elastic, meaning demand is less sensitive to changes in price. 

Factoring in Perceived Value

This is where a great marketing strategy comes into play. Perceived value is your customer’s perception of your coffee’s desirability, especially in comparison to a competitor. If your barista is known to pull the best espresso in town, or you tout your organic fair trade beans from Peru, the theory is customers will be more willing to pay a premium.

Setting different prices for different sales channels 

Just think of all the various channels through which you can sell your coffee: retail shops, e-commerce, food festivals, food trucks, home deliveries, and the list goes on. Each distribution channel will have different profit margins, and you can customize pricing to maximize profits for each channel while appealing to different types of customers.

Adjusting and Optimizing Your Prices 

The decision to raise or lower prices is fraught with worries, but if price adjustments are implemented correctly, you can actually strengthen your connection with customers. 

Monitor and Analyze Sales Data

A spreadsheet or another data analysis tool can help you spot sales trends and buying patterns for individual drinks, providing insight on how and when to adjust your prices. For instance, many businesses raise prices slightly during the holidays when people pay less notice to prices. On the other hand, brand-new cafes might delay price hikes to gain market share if sales are slow. 

Conduct Regular Market Research

Market research may involve surveys, soliciting feedback, and customer interviews — it sounds like a lot, but getting to know your target audience and their buying habits will help grow your business in many ways. You’ll use the data to hone your drink and menu options, develop your marketing strategy — and, of course, set prices. This will also come in handy with channel pricing as you figure out which products to market to which segments. 

Adjusting Your Prices

• Changes In cost: When your costs go up due to inflation or other factors out of your control, adjusting prices requires a nuanced approach. One method is to tailor adjustments to customers who may be less sensitive to pricing. For instance, those who seek out rare beans from Indonesia or Thailand may not balk at $10 or more per cup, but a slight increase on a regular cappuccino might get pushback. Another approach is slowly implementing price changes on one or two products and then assessing the response.

• Seasonal factors: The first step of a seasonal pricing strategy is to identify your busy times of the year. It could be based on holiday demand, weather conditions, or driven by community events that spur an influx of customers. After pinpointing your key seasons, establish a base rate for your products or the lowest you’re willing to go to break even. Seasonal rates are typically higher or lower than your base rate, depending on demand in that season.

• Market demand: In this approach, you’ll charge higher prices during high-demand periods and lower prices during low-demand periods. Your market research data will help you understand your customers’ behavior so that you can predict the ebbs and flow of future demand.

• Competitor pricing: It’s easy to look at your competitors to determine pricing, whether you’re undercutting your rivals, benchmarking, or charging a bit more for higher quality. But it’s always important to do your due diligence first to ensure their prices are accurate and align with what consumers are willing to pay. Keep in mind that the pricing needs to work within your cost structure, not only covering your COGS but also ensuring a healthy profit margin.

Implementing Promotional Pricing Strategies 

Loyalty cards, seasonal discounts, and online coupons are all ways to leverage changes in product demand to your benefit. The trick is to use them wisely. For instance, a BOGO promotion on packaged beans helps clear out old inventory before they get stale but may not appeal to coffee connoisseurs.  

Communicate Price Changes to Customers

Honesty is the best policy: customers appreciate transparency around price changes. Who among us is not excited to see a “special” on your favorite morning pick-me-up? On the flip side, informing customers about increases and explaining the reason why goes a long way toward building trust. 

Pricing is more complex than it seems, but a nuanced, well-thought-out approach will keep your customers happy and lead you to profitability. There’s no “magic number” for any one drink, but following these strategies will get you pretty darn close.