When you first open a coffee roasting company, pricing your products feels like a mystery. Even with the best formulas, strategies, and intentions, you might wonder, “Are my prices too high? Too low?”
Sure, your prices are a determination of profitability and a tool to communicate value to customers. But how do you identify the price point that convinces customers to buy and properly represents your brand image?
Spoiler Alert: There’s no magical formula or strategy that’ll give you a definitive answer.
However, there are several tips and tricks you can use to identify sales prices that both meet your profitability goals and attract the right customers. We used these same strategies to run our successful coffee roastery!
Let’s break it down.
As any business professional will explain, there are three common strategies for setting product prices:
These strategies work well on paper. But when it comes to setting prices for coffee products, a little nuance is involved.
When we were operating the coffee roastery, some great advice we received was:
Your coffee should be priced high enough that some customers complain, but still buy.
The goal of the “complain and buy” theory is to find the sweet spot between profitability and perceived customer value. When customers view your coffee as expensive and still understand the value of purchasing your coffee, you’ve hit the pricing jackpot.
If your coffee is too expensive, some customers will complain and not follow through with a purchase. Others won’t complain at all! They simply won’t buy. If you notice sales are starting to trend downward, ask your target audience why they aren’t purchasing the coffee. On the other hand, if your coffee is too cheap, you’ll drive sales but struggle to cover costs!
⭐️Pro Tip: If some of your customers haven’t complained about the price of coffee, you’re undercharging!
Since every audience is different, you’ll need to experiment with various price points and strategies until you find that sweet spot.
Revenue - Expenses = Profit
It’s a simple equation, right?
But, do you know the most important part of this calculation? Expenses.
Setting prices for your products begins with knowing how much money it costs to roast and sell your coffee. Common operational costs for a roastery include:
Once you understand how much you’re paying to operate overall, break it down into “per pound” or “per bag” amounts.
Example 👉If you paid $500 in overhead costs for the month and you sold 2,000 pounds of coffee, your cost per pound would be $0.25 per pound.
Knowing how much you’re spending to roast a bag of coffee gives you the information you need to accurately price your coffee products. Otherwise, you run the risk of pricing your coffees too high or too low.
Without knowledge of your total costs, any sales price you set will simply be a shot in the dark.
Your blends should not be the same price as your single origin coffees. Each product you sell has a unique set of costs, and therefore, requires an individual price.
All too often, roasters make the mistake of setting a blanket price for blends and single origin coffees. This leads to unoptimized profit margins and money left on the table!
Pricing coffee products such as blends requires one part math, one part intuition, and one part creativity.
Coffee blends offer roasters a world of pricing (and growth!) possibilities. Best of all, you can create a blend specifically to meet your pricing and profitability goals without sacrificing flavor.
Blends also provide roasters with the ultimate control. By combining a few green coffees, you can devise a blend that meets your ideal cost threshold.
Example 👉 Let’s say you want to keep your total costs below $5 per pound of coffee. You’ve already calculated overhead and other extraneous expenses for a total of $1.50 per pound, with $3.75 left (per pound) for green coffee costs.
You want to use a coffee from Brazil ($3.00/lb), Ethiopia ($4.00/lb), and Guatemala ($3.75/lb). One blend recipe you could use to meet the $3.75 threshold is:
Total Green Coffee Cost: $3.43 per pound
Of course, this is only one possibility!
Blends allow roasters to control costs while remaining creative. Customers can’t buy this blend anywhere else— it’s exclusive to your roastery! When setting a price, be sure to consider this factor as well. To drive repeat purchases and customer loyalty, you may choose to set a more affordable price range for your blends with the intent of relying on recurring purchases.
Plus, when executed well, blends can drive the bulk of your roastery’s revenue through wholesale partnerships, ecommerce sales, and in-store purchases.
From here, you can choose to use one of the previously mentioned pricing strategies to set a price that both meets your profitability goals and satisfies the “complain and buy” theory.
By combining the right coffees to reach a desired cost and pairing it with the right sales price, you’ve unlocked the secret to roastery success!
Due to the nature of single origin lots, pricing these products can be a bit more straightforward.
You can use the cost-plus or target gross profit margin strategies to calculate an exact sales price or experiment with a value-based approach to communicate exclusivity.
However, single origin coffees offer the opportunity to tell a story, captivate customers with unique flavors, and provide variety. Since single origin products tend to be more expensive than blends, you’ll have to experiment with how much you can increase the sales price before you pop the “complain and buy” bubble.
Another pricing element to consider is the availability of a single origin coffee. For instance, you may discover that a competitor has also purchased the same lot from an importer. Even though the intricacies of each brand’s roast will differ, the average consumer may not know. This is where competing on price can work in your favor—but be sure not to underprice yourself too much!
Your pricing strategy must also take respective sales channels into account. The costs of operating each sales channel will differ—meaning your profit margins will fluctuate too.
Imagine you sell a blend that costs $5.50 per pound to produce—before channel-specific expenses. You plan to sell this coffee in-store at your café, through online store orders, and to your wholesale customers for $15.00. Let’s take a look at how your margins will fluctuate with each sales channel.
Selling bags of coffee at your café allows you to control the costs. Your cafés will provide you with the best margins by far. With a $5.50 per pound cost, you can sell this blend at $15.00 in your store for a $9.50 profit and a 63% profit margin.
This higher margin also gives roasters the flexibility to experiment with different sales promotions in the café.
Let’s imagine your ecommerce costs (website maintenance, shipping, and packaging fees) add up to an additional $2 per pound, making the total cost $7.50. With the $15.00 price tag, your profit margin drops to $7.50, leaving you with a 50% profit margin.
A word of advice: Set your wholesale prices first.
Wholesale clients expect a rate lower than MSRP that allows them to collect a profit as well. By first setting your wholesale rates to obtain the margin you want, you can then set cafe, ecommerce, and other channel sales prices to generate a higher return.
For this example, let’s say the extra wholesale expenses—delivery, shipping (if necessary), and credit card processing fees—add up to $1.50. Your total cost per pound is now $7.00.
For 1-pound retail bags, you can price these products anywhere from $10-$12 per bag for a $3-$5 profit and a 30-40% profit margin. Yes, it’s lower than the MSRP cafe and ecommerce store prices per bag, but remember— wholesale clients are purchasing in bulk.
If a client purchases 24 retail bags of coffee, the equation becomes:
(24 bags x $12 sale price per bag) — ($7 costs per bag x 24 bags) = $120 profit and ~41% profit margin.
With 5 lb bags, the pricing equation is simply multiplied by five. The price becomes around $50-$60 per bag.
Keep in mind that these examples are exactly that—examples! A multitude of variables will factor into your retail café, ecommerce, and wholesale product pricing. It’s up to you to find the sweet spot where some customers complain and still proceed to buy your coffee.
No!
Do you need to understand what your competitors are charging so you don’t outprice yourself or undercut margins? Absolutely.
Knowing competitor pricing is a key factor in determining product prices, but it shouldn’t be the sole piece of information.
Only use competitor pricing as a barometer of how much your local customers are willing to pay for coffee. Basing your prices off of your competitors’ only ends in a race to the bottom.
The price of products we use throughout our daily lives changes in response to the market—fuel, eggs, shipping. The price of your coffee should adapt too.
As the cost to produce a bag of coffee fluctuates due to the C-market, importer fees, and rising overhead costs, you need to adjust the price of your coffee accordingly.
Review and update your coffee prices every six months. During these bi-annual reviews, take a moment to see where your current costs stand and how much prices may need to fluctuate in response.
Since products such as blends allow you to control costs, prices for these coffees may not deviate drastically. Others, such as single origin lots, may require larger increases to ensure a profit.
The key is to communicate these pricing changes to customers every six months or year as you continue to find the “sweet spot” of pricing. After a while, customers will come to expect this regular price increase from your business.
Keep a record every time you update costs and sales pricing. With a record on hand, you can visualize your roastery’s pricing and cost trends. This documentation will also serve as a way to monitor costs and keep them under control!
Be sure to also track how pricing increases benefit sales and your bottom line.
Did a price increase lead to lower sales volume but better profitability overall?
Did introducing that new “affordable” blend lead to an increase in sales?
Are customers giving feedback about the price changes?
These are the questions you can answer when you track pricing history.
Beyond looking at the trends, sales and pricing documentation serves as a visual representation of your company’s trajectory. You’ll be able to look back at every price increase and product launch and reflect on how much your company has accomplished.
Setting prices for your products can be overwhelming. But, with our tips and tricks handy, you’re well-equipped to determine the right prices for your coffee products.
No matter if you opt for the straightforward cost-plus approach or dabble with value-based pricing, it all boils down to having a firm understanding of your costs and finding the price point that drives customers to “complain and buy.”
Once you’ve got your pricing under control, it’s time to drive sales. And to do this, you’ll need to have your wholesale, ecommerce, and in-store processes under control.
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