The price at which you sell your coffee is one of the most important decisions you will make as a business owner.
As well as covering the costs of production, it also needs to cover overheads and marketing expenditure.
However, while the aim should be to make a profit on each unit sold, setting prices too high can make you less competitive.
Similarly, setting prices too low may increase sales, but is unlikely to be sustainable. It can also make your coffee appear inferior to more expensive brands.
Finding a “sweet spot” in which sales volumes and profitability intersect is a challenging, yet essential task for coffee businesses.
Read on to find out how to create your own effective pricing strategy.
C market and the price of green coffee
For roasters, a regular supply of green coffee is crucial to running a successful business. Without it, there would be no product to sell and customers would quickly turn to other brands to get their fix.
However, basing the price of the final product – whether a bag of roasted beans or a cup of coffee served in a café – on the price of green coffee can be tricky.
This is due to the volatile nature of the C market, a commodity exchange that acts as a global benchmark for the price of coffee.
Coffee is traded on the C market (specifically the Intercontinental Exchange in New York City) through a financial instrument known as futures contracts.
Futures contracts are legal agreements whereby two parties agree to buy and sell coffee at a predetermined price and quantity at a specified date in the future. This produces the global trading price of arabica coffee, otherwise known as the “C price”.
The C price is highly susceptible to changes in the supply and demand of coffee. This could be anything from a sudden outbreak of frost to the gradual rise of coffee consumption in developing countries.
It is not uncommon, therefore, to see coffee prices fluctuating from fifty cents per pound to two dollars per pound in a single day.
In the last year alone, extreme weather conditions in Brazil, shipping bottlenecks, and ongoing concerns over Covid-19 have caused coffee prices to skyrocket to a 10-year high, reaching almost doubling the level at the beginning of 2021.
As such, it is important for roasters and coffee shop owners to take these fluctuations into account before determining prices.
It’s much better to maintain a consistent price with which customers can become familiar, rather than suddenly hiking it up or bring it down in response to changes in the C price.
Other factors to consider
The total cost of coffee extends beyond the price of the coffee bean itself. However, the extent to which depends on several factors, from the type of packaging to the number of staff.
According to a 2019 article in the Financial Times, a £2.50 cup of coffee served in a café accounts for coffee (10p), milk (10p), stirrers/cups/ napkins, (18p), tax (38p), staff (63p), and shop/rent (88p). The remainder (23p) is profit.
Like C price, some of the factors are not always under the roaster’s control. For example, US-based Verve Coffee Roasters was recently forced to raise prices as a result of paper shortages, which inflated the cost of compostable cups and corrugated paper.
Another key expenditure that’s vital but often overlooked is the cost of equipment and its maintenance over time.
A roaster is typically the most substantial purchase a coffee business will make. However, as well as the upfront costs, it will inevitably need to be repaired during its lifespan, which can eat into profits.
Additionally, waste in roasting also has to be included in the cost analysis. Moisture content in specialty coffee beans is broadly around 8-12.5%, according to the International Coffee Organization.
Moisture is burnt off during a roast, resulting in a lower roast yield. Since coffee is sold based on weight, moisture loss indirectly influences total cost of production.
Other than cost, competitors and target customers will also impact pricing decisions. Understanding the pricing model of competitors, as well as who your consumers are, what they want, and the prices they are willing to pay for their coffee will help give an idea of a sensible price range.
Additionally, the vision of a business may also affect pricing strategy. For example, coffee roasters looking to support the coffee-farming community will have to find a balanced pricing model that allows them to pay a fair price to producers and at the same time, be sustainable for their bottom line.
Coffee pricing strategies
Prices can be determined based on many different models.
One of the simplest ways to set prices is to apply the cost plus pricing model. Under this approach, a markup percentage or the desired profit margin is added to the total cost of production, deriving the final product price.
While it is a simple and straightforward approach, there is minimal consideration of consumers’ demand or competitors’ pricing strategy. Therefore, this model usually works better in less competitive industries.
Another pricing option is competitor-based pricing model, whereby prices are determined in relation to prices of competitors. In this model, prices can be set below (penetration pricing), above (skim pricing) or at the same level as competitors.
Penetration pricing is used to draw consumers away from competitors, while skim pricing can be employed to position the brand as more superior or premium.
This pricing strategy poses lower risk for the business and requires minimal research as you can easily obtain competitors’ price range by visiting their physical location or through their online store. Especially for newer businesses lacking in market and consumer data, competitive pricing provides a good pricing benchmark.
However, this pricing model can potentially lead to missed opportunities in the long run if prices do not reflect the true value provided to consumers.
Finally, in value-based pricing, prices are dictated by consumers’ perceived value of the good. It captures the greatest amount consumers are willing to pay without driving them away. This approach maximises profit margin, but requires in-depth research, customer analysis and testing before arriving at an accurate figure.
Given the pros and cons of each model, it is not uncommon to find businesses employing a mix of pricing models to determine the optimal price.
Also, setting prices is an ongoing process since consumer preferences and market conditions are constantly evolving. In order to stay relevant, roasters and cafe owners have to be flexible and adapt to any market changes.
At MTPak Coffee, we understand the challenges that coffee roasters face in a volatile coffee market.
We offer sustainable coffee bags at affordable prices with low minimum order quantity to help keep costs down and remain flexible amidst market uncertainty. Our sustainable coffee bags are also fully customisable to reflect your brand identity, allowing you to stand out among your competitors.