Coffee is a big part of my daily routine. I’m barely conscious when these transactions take place, fortunately the barrister knows my order by heart, but what I am conscious of is the price.
It could be because I always have exact change in my hand or it could be because there are so many coffee shops all along the street and even right next to ‘my’ coffee shop, but regardless I am very sensitive to price changes.
However, I will never forego a coffee altogether. I absolutely must get one from somewhere, anywhere. Caffeine is addictive you know.
And this is the challenge that a coffee shop owner faces or at least as I see it; in economic terms there is relatively inelastic demand for coffee but elastic demand for the coffee of any particular coffee shop (Iacobucci 2013,p.109).
And it’s not just me. Coffee prices are a sensitive topic for everyone. A WA newspaper even thought it would be an excellent target for an April fools joke (Sheehan 2016). So what can a coffee shop do to increase its customer’s willingness to pay more for their coffee?
Some coffee shop owners seem to be talking up future price rises due to coffee shortages sighting increasing global demand, droughts in Brazil and El Nino in Indonesia (Brown 2016). But if you think about it the coffee beans themselves are just one cost involved in getting a coffee into my hands, the estimate is that each shot of coffee costs about 17 to 21 cents per shot (http://www.coffee-prices.com/cpi-faqs.html).
Fortunately our coffee culture is so mature in Australia as to support a Cappuccino Price Index (CPI) and a ‘Coffee Economist’. Our coffee economist explains that the pricing pressure on coffee shops is mostly because other costs have risen including shop rental, staff wages, furniture and equipment (http://www.coffee-prices.com/cpi-faqs.html).
It really highlights the cost based pricing structure that besets the industry and how the prices in any single coffee shop are largely set with reference to competitor prices (http://www.coffee-prices.com/cpi-faqs.html). Clearly coffee shops that persist with a rhetoric around world coffee prices will only reinforce a competitor orientated pricing model. Changes in world coffee prices can never justify a pricing premium in one coffee shop over another.
Some coffee shops in Wellington, New Zealand have tried to cut coffee prices in conjunction with a unique loyalty model as a point of differentiation but most try to push the focus away from price altogether.
I drove past Gas Espresso yesterday and had to laugh at the sign ‘Gourmet Boutique Specialty Coffee Experience’, quite a few adjectives there, but it does highlight the focus of many coffee shops.
The idea is for a coffee shop to go beyond making coffee and to tap into a specialty coffee culture and find consumers willing to pay more for the ‘experience’. The experience often includes the narration of the story of the beans and the processes involved. For many people coffee can become more then a drink, it can become almost a form of self expression, a key part of their social identity (Dekel, Prince & Beaver 2007,p.252).
But most importantly for coffee shop owners, people are willing to pay a premium price for this. After all the most expensive coffee in the world quite literally comes out of the backside of a civet, now that’s quite a story to tell! (http://www.most-expensive.coffee)
However we must remember that the peak period for coffee consumption is between 8am and 10am on a working day and as I stand in a queue with all the other commuters barely grunting their orders at the barrister I’m not sure they are too interested in the ‘story of the beans’. But as they arrive at work with a few sips under their belt I’m quite sure the expensive specialty coffee cup carries some social equity.
Brown, SL 2016, ‘Coffee shortage could cause price rises and cafe closures, Melbourne operators say’, ABC News, 22 January, retrieved 29 April 2016, http://www.abc.net.au/news/2016-01-22/global-coffee-shortage-could-cause-melbourne-cafe-closures/7107110
‘Coffee consumption in Australia – which, where, when and how much?’ 2015, Inside Small Business, 21 December, retrieved 29 April 2016, https://insidesmallbusiness.com.au/latest-news/coffee-a-national-obsession-which-where-when-and-how-much
Dekel, O, Prince, C, Beaver, G 2007, ‘The changing orientation of marketing:an emerging post-modern perspective’, Strategic Change, vol.16, issue.6, pp.245-255, retrieved 23 April 2016, Deakin University Library Search, EBSCOhost.
Edwards, J 2016,’Raglan Roast cuts coffee prices in the capital with loyalty model’, Stuff.co.nz, 5 April, retrieved 29 April 2016, http://www.stuff.co.nz/life-style/food-wine/78518987/Raglan-Roast-cuts-coffee-prices-in-the-capital-with-loyalty-model
Iacobucci, D 2013, MM4, South-Western, Cengage Learning, Mason, USA.
Most Expensive Coffee 2016, retrieved 29 April 2016, <http://www.most-expensive.coffee>
Sheehan, L 2016, ‘Perth coffee prices set to skyrocket over ‘diabolical changes’ to import laws’, WA today, 1 April, retrieved 29 April 2016, http://www.watoday.com.au/wa-news/perth-coffee-prices-set-to-skyrocket-over-diabolical-changes-to-import-laws-20160331-gnv1ue.html
The Coffee Economist – Cappuccino Price Index 2016, retrieved 29 April 2016, <http://www.coffee-prices.com/cpi-faqs.html)>.
Posted by Daniel Joy (dmjoy) 215138594