How profitable are coffee shops, really? A key factor in the bottom line equation depends on what’s brewing. And how you price it.
Somewhere around 63 percent of Americans drink coffee more than any other beverage daily. But that doesn’t mean every coffee shop on the block will be a guaranteed hit with Joe Schmoe or Average Jane—or that everything on the menu will ensure your financial success.
The key? Building a menu that has all the Joes and Janes pulling up to your shop and drive-through windows and ensures that what they’re ordering is bringing in a profit for your shop.
Here’s what we’re working with: The top 50 coffee shop chains bring in 70 percent of the profit in the industry. And their gross margins can reach something crazy like 85 percent. Small coffee shops, on the other hand, usually end up with an average operating income that rests somewhere around 2.5 percent of gross sales.
While the big guys have their playbook, we think there's more to menu magic than just copying it. We've been pouring our hearts into finding what makes customers happy and profits healthy. Gather round, grab a cup, and let's chat about profitability.
Let’s Dive into Coffee Shop Pricing and Profit Margins
Your community may be important to you, but you’re not just in it for the love of the people or because you love the smell of a freshly brewed pot; you also need to turn a profit.
First things first: You need to determine your minimum profit margin for everything you sell. After all, your margin has to cover everything else: your rent, employee labor, insurance, marketing, utilities, and more. This means that everything on your menu has to be priced above your minimum profit margin—or you essentially lose money with every sale of an item priced below this threshold.
Your profit margin also helps you understand and track your performance over time—not just in revenue, but in actual profit. In other words, what you have left after you cover your expenses.
To find your profit margin:
- Subtract your expenses from your total net revenue
- Divide this figure by your net revenue, then multiply by 100%
Let's say your total net revenue for a 12oz latte is $4.50 and your expenses are $1.30. The calculation would be 4.50-1.30= 3.2 and then 3.2/4.50=0.711 and then 0.711x 100= 71.1% In this realistic example, your profit margin would be 71.1%. That means for every dollar you spend to create this latte, 71.1% of that dollar is revenue, and 28.9% of that dollar is expense.
This is the metaphorical “bottom line” everyone keeps talking about. Only in this case, it becomes way more literal.
So when it comes time to price the items on your menu, look at the cost for each component of the beverage—the ingredients, of course, but also things like takeaway cups, shipping, and labor. Then, you can use this information to determine the price for each menu item. You want to ensure that your prices are competitive but also realistic. If the coffee shop down the street charges $1 less for a latte, they might draw in some of your customers. Can you afford to reduce the cost to compete? Or are your competitors undercharging for their lattes and making a loss on each sale? If you can’t afford to reduce the cost by $1, can you make up the cost somewhere else on your menu? These are the kinds of questions you need to be asking.
How do you know what to charge for a 12oz latte? We got $4.50 by breaking down every item involved into its individual cost. Espresso, milk, cup, lid, and sleeve. This is assuming the customer orders it to-go(obviously for here orders reduce the cost even more).
The 28% is your markup, which from the other side is also your profit margin. You’re in charge of the markup percentage for each item. Generally, coffee shops need to run a 25-30% markup to make a profit. The lower the markup percentage, the more money you’re making. To find your needed profit margin, you need to have up-to-date numbers for your revenue, expenses, and COGS.
Know Which Items Are Profitable—And Highlight Those
Whether you’re building or revamping your menu, you’ve gotta know which items are your top earners
; the ones that will give you the best bang for your buck. That doesn’t just mean the items that boost your bottom line, but also the ones that bring your customers coming back again and again. And it’s not just about putting them on the menu, but making sure your customers notice them.
How to Add More Profitable Drinks Options to Your Menu
Your coffee shop needs to sell coffee (obviously), but not all drinks are equal when it comes to creating a profitable menu. Simple drinks like black coffee or an espresso round out your menu and appease coffee purists, but mixed coffee drinks are often the most profitable items on your menu. Offerings like a cafe au lait, a latte, or a macchiato may only require one extra ingredient or a handful of add-ins, but your customers are accustomed to paying a little extra for these—especially in a cozy mug or served up with some latte art on top. The experience makes it worth it.
Other Profitable Heavy Hitters
Little secret? There’s a reason coffee shops sell more than just coffee—and it has to do with profits. Some of the biggest earners on a coffee shop menu can include:
Think about it: Many of these items not only have high profit margins, but they also inspire your customers to add on to their orders or come back more frequently if they know they can pick up a healthy breakfast or lunch option, unwind after work, or find a great gift.
Additional Coffee Shop Profitability Strategies
If having a profitable coffee shop is about more than just great coffee, here are a few considerations to bear in mind as you build your menu:
Use Cost-Effective Ingredients
Just like any restaurant or cafe, your coffee shop should build its menu around cost-effective ingredients, products with long shelf lives, choosing high-caliber wholesale coffee supplies, and using ingredients in multiple offerings on the menu. Your ingredients are an investment in your shop—make the most of them!
Emphasize Quality and Presentation
The flavors you offer on the menu come down to appearance and taste—which means using fresh, high-quality ingredients and sharing this information with your customers. And if you can top it all off with great presentation like eye-catching latte art, it’s easier to justify profitable menu prices to your customers.
Create Offerings Customers Can’t Get Anywhere Else
What sets your coffee shop apart? Sure, nationwide chains offer the same drinks from one location to the next, but what you offer is something way more special. A one-of-a-kind latte recipe or a special blend from your coffee supplier is appealing to your customers who will be willing to pay more for this kind of experience.
Offer Seasonal Options
Seasonal specials are a surefire way to build excitement around your shop and boost sales. Don’t be afraid to adapt your menu to include holiday lattes and tea, and serve up different specials year-round that your customers can’t get anywhere else.
What specials can you build into your menu to upsell? Busy, coffee-loving customers love convenience, so look for opportunities to encourage pairing drinks with things like pastries or grab-and-go options.
Get Support from Your Coffee Crew
How profitable are coffee shops? They can be more profitable when you have great support. At Dilworth, we know a thing or two about building coffee shop menus. We’re more than just a reliable provider of excellent wholesale coffee supplies. We’re here to be part of your team.
From exciting seasonal recipes to mix-and-match savings that make it easier to save more on the items you need to build a robust, engaging menu, our goal is always to make what you do better, simpler, and more profitable.
But that’s not all. Connect with our pros for consulting services and support for building your menu, training your team to be latte art aficionados, and getting all kinds of ideas to balance the creativity and business of running a coffee shop. Contact us today to learn more!