Just what are your customers paying for, and what does it cost you?
When specialty coffee hit London in the noughties a couple of mistakes were made. Ben Townsend, one time founder of The Espresso Room, has previously pointed out that we launched too cheaply by setting prices at only a small premium to high street coffee shops to encourage accessibility. I don’t disagree, but my sense has always been that the more egregious shortcoming was made by shops who told customers that the cup price of specialty coffee was set because espresso machines and green coffee are expensive. Many customers have come to believe that this is the situation – and now shop accordingly.
But, it’s just not true.
Because this belief is now deeply entrenched, let’s take a couple of minutes to destroy the argument.
Espresso machine costs
We started breaking down the myth of the expensive espresso machines several years ago with a post explaining the actual cost of an espresso machine. It’s still up on our blog and is frequently read as it’s a basic guide for setting a selling price of used equipment. But to prevent you from having to read it to make sense of this, and so I can use a more extreme example, if a business buys a £10,000 machine (many coffee shops don’t buy espresso machines this expensive), uses it for five years, sells it for £3,500 (just for the sake of this example) and spends £500 per year on parts and maintenance, then the actual cost around a fiver per day – yip, less than two cups of coffee. To put this in perspective, the utilities bills for most shops are of greater cost.
It’s true that the cost of roasted coffee has a greater impact on cup price, but it’s still not that significant, because most shops achieve margins in the nineties. For example, making some assumptions about dose and wastage, a shop selling 300 cups per day could save that fiver a day by knocking £1.50 per Kg off their roasted coffee price (or, the other way around, with smart buying you can move up a tier of quality for a fiver a day).
To be clear, we are not advocating some kind of financial imprudence; rather these examples illustrate that both these costs are small compared to many of the other costs in a retail coffee business – and consequently are not key drivers of the price of a cup of coffee.
The human cost
A key cost is staff. Even with a barista paid just £8 per hour (50p above the current minimum wage), assuming they’re not on a zero hours contract, they only need to work for a bit over 30 minutes per day to add the same cost to the business as a £10,000 espresso machine.
Now in an ideal world we’d all buy better machines, pay more for coffee and see barista wages significantly increase. And for that to happen we need to stop pegging the price of a cup of coffee to the machinery and its ingredient costs in the minds of consumers.
It actually shouldn’t be that hard, many other hospitality businesses do it perfectly well. In terms of cost basis, our customers are actually paying for a mixture of: service (people), convenience (a coffee made for you, by people) and the use of space (their share of rent, rates, utilities etc). The mix of these factors in a shop’s cost structure varies by location and proposition, but they’re all broadly the same.
The need to add value
Under the flawed logic of positioning a cup’s value on the cost of the coffee and the price of the machine, we leave ourselves little room to add value. In fact the logic dictates that prices can only justifiably increase when ingredient costs rise – and this is precisely the claptrap that gets rolled out whenever there is a retail price rise, whether it’s true or not.
If you don’t add value, you’re just selling a commodity
If cup prices are to rise – and we’re of the opinion that they should – then shops are going to need to add greater value to a cup of coffee in the mind of the consumer. And if they want to add significant value they’ll have to hone their proposition around selling intangibles. In fact, this is what hospitality is about.
No consumer, or critic, primarily judges a hospitality establishment on its oven or ingredient costs. For me, visits to my favourite establishments leave me feeling energised, excited and empowered as well as having served me delicious food and drink – and I’m happy to pay for that experience and feeling. Other people will, of course, be attracted to other qualities, which is why there are many different forms of hospitality businesses.
I’m well aware that some people in specialty coffee will feel uneasy about the idea of selling the intangible ‘nothing’ for something. But there’s a word for products that are bought and sold on the basis of their purchase price without much value added – and that word is ‘commodity’.
Premiumisation and pricing
I’m being deliberately provocative with my language to elicit action, as the track record over the past decade is that the UK specialty coffee community has successfully de-premiumised the world’s best coffees (for example, higher grade speciality green coffees are easily three times more expensive than the cheaper speciality coffees, but currently command only a few pennies more per cup at retail) – and then commenced complaining that customers won’t pay more for a cup of coffee. It’s a self-inflicted wound. Presumably since we broke it, we can fix it.
How? Well that’s a topic for another post, but there many places to look for inspiration and there are as many potential answers as there are coffee shops. The key thing right now is to make sure your business is intelligently asking these questions and finding answers that put you on the journey to adding the right value for your customers so you can charge them correspondingly. For most businesses this means moving past mimicking components of somebody else’s coffee shop and actually working out what customers you actually want and how you might serve them well.
We’ll explore some options in the autumn…