News and Upcoming Events
Price: A Discovery in Value
March 11, 2015 | Caravan Coffee
News and Upcoming Events
March 11, 2015 | Caravan Coffee
When it comes to sales, the question that leaves most people’s mouth before any other pertains to price. These questions usually sound like: “What is your price per pound?” And, “Will you match prices?” And, “Why are your prices higher/lower than our current coffee prices?” I am sure every salesperson has heard these questions many times.
These are not invalid points. In fact, they are extremely important questions to be asking when a business owner is looking to make his or her company profitable and sustainable. There is nothing inherently wrong with these questions either, when paired with the whole equation of business profitability.
Coffee prices are only part of the equation to keep a coffee company profitable. I want to break down the basic price of a coffee pound to the gram level to show how coffee makes up only a fraction of the overall prices. Let’s base all of these prices on $10 a pound to provide evenness, but I will also mention prices for $8 and $12 a pound to show how these prices make little difference in the price per cup of the coffee.
There are a roughly 453 grams in a pound of coffee. To the find the price per gram of coffee, we take the pound price and divide it by 453. This would be $10 divided by 453, which ends up being $0.022 or 2.2 cents. To summarize:
Price of Coffee Per Gram = Price of Coffee per Pound / How many grams in a pound.
$10.00 / 453g= $0.022 or 2.2 cents a gram
Price for $8 and $12 a pound:
$8.00 / 453g= $.017 or 1.7 cents a gram
$12.00 / 453g= $.026 or 2.6 cents a gram
The average recipe for brewing into 2.5 liter airpots is 110 grams to 2.5 liters (the average airpot size). 2.5 liters is roughly 84 ounces of liquid. To find how many grams it takes to brew 1 ounce of drip coffee, we take 110 grams and divide it by 84oz. Therefore, it takes 1.31 grams to get 1 ounces of drip coffee (110g of coffee divided by 84 oz. of liquid). For a 12 ounce cup of coffee, we multiply 1.31 by 12 and get 15.72 grams per cup. Then, we multiply 15.72 by the price per gram found above ($0.022) and get $0.34 or 34 cents per 12-oz. cup of coffee. To summarize:
110g to 84oz. (2.5 Liters)
Grams per oz. of drip coffee= 110g / 84oz.
1.31= 110g / 84oz.
Grams per 12-oz. coffee= 1.31 X 12
15.72g=1.31 X 12
Price per 12-oz. = 15.72 X price per gram of coffee
$0.34= 15.72 X $0.022
If we were to raise the price to twelve dollars a pound we find that the price per cup would only increase to 40.8 cents a cup, and at eight dollars a pound, we only lower the price to 27.8 cents. This is a difference of roughly 6 cents either way! I am sure you can see where I am going with this.
For espresso beverages, a 12-oz. drink uses two shots of espresso. A double shot (2-oz.) takes an average of 19 grams (between 18-20). To find the price of the espresso for a 12-oz. espresso beverage, we take the price per gram of coffee and multiply that by 19. This is $0.41 or 41 cents for a coffee selling for ten dollars a pound, $0.32 or 32 cents for coffee at eight dollars a pound, and $0.49 or 49 cents for coffee at twelve dollars a pound. You can see that this difference is roughly 9 cents per beverage! To summarize:
19g for 2-oz. espresso (double shot)
Cost per 2-oz. espresso for 12-oz. espresso beverage = 19g X price per gram of Coffee
$0.32= 19 x $0.017
$0.41= 19 x $0.022
$0.49= 19 x $0.026
Now that we have tackled the cost side of the equation, lets tackle the other side of the business: value. If the value of the business is to sell the cheapest cup of coffee this side of the Mississippi, it makes sense to save 6 cents a 12-oz. cup. If you are trying to sell 1,000 cups of coffee a month, that’s $60.00 a month in savings. (Now whether or not your customers will come back for that cheap coffee is another story!)
However, if your mission is provide responsibly sourced coffee that will offer a memorable experience to the customer, then you would charge more for the coffee. Because you have positioned yourself as selling a quality cup of coffee, versus a cheap cup of coffee, you can afford that $60.00 extra a month knowing that in the end you are making much more profit than by taking the cheap route. The same can be true of espresso.
This describes value value. Value is something’s inherent worth. Value is what we offer the consumer, often greater than monetary value. Price is important, certainly, but it only makes up part of the equation for value. A value proposition is what a business offers to the customer: it solves their problems, it gives them something unique, and it offers a competitive advantage. However, to offer a value proposition you have to find what you truly want to offer in the marketplace.
Some questions to begin asking yourself are: do you value being the lowest price in town? Do you value offering the best customer service? The best quality? The best experience? Etc.
Your business cannot make all of these your core values. If you try to be the cheapest with the best quality you will go bankrupt. When you find your values, you can begin to understand how the price of coffee is only a small part of the equation. If you value customer service and quality, you are willing to pay extra for a better product.
Lastly, you also have to factor in the cost of labor, milk, cups, lids, retirement, and more into the price of coffee. However, we’ll tackle that at a later session.
So, the next time you are shopping around for coffee roaster, think twice about the price per pound. While it is important, it is only a small part of the equation. You have to determine what is important to you and what you want to offer to your patrons. Paying a little more per cup may be in your favor!