How Profitable Are Coffee Shops? (Menu and Pricing Strategies)

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.

How to Add More Profitable Drink 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.

• Flavored syrups (especially as add-ins)
• Hot teas and hot chocolate
• Fruit juices and smoothies
• Cold brew
• Lemonade
• Wine, beer, and cocktails
• Cakes, pastries, and bakery items
• Grab-and-go and healthy meal options
• Coffee beans
• Gift shop items like books, local art, and branded merchandise
• Small coffee appliances, bean grinders, coffee pots, and pour-over coffee drippers

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.