Coffee Shop Economics – The Secret to Profitability

We recently watched Andrew Tolley’s talk on ‘coffee shop economics’ that took place at Barista Camp a little over a month ago. What he had to say was eye opening, to say the least. The overarching theme of the talk was the importance of profitability and its significance in successful coffee shop ventures. As the formula states: (Revenue – Costs = Operating Profit). So it seems easy, right? The key to a profitable business only requires that your revenues outweigh your costs. The Trezoro team understands that this is easier said than done, so we’re here to expand on Tolley’s formula to give you tips towards maximizing your revenue.

So what is revenue exactly? In its simplest terms, revenue is the income that a business has from its normal business activities. Tolley breaks it down into three main components: (Market Size x Regularity x Basket Size = Revenue). Lets break it down a bit further.

Market Size: Market size is basically just how many customers your shop has. Factors that affect this include location, competition and demographics.

  1. Location: Picking a location is crucial to coffee shop profitability. Some things to think about include: the amount of foot traffic surrounding your shop, distance from public transportation or a residential area v. an area packed with offices.
  2. Competition: How many other shops are within your proximity?
  3. Demographics: Knowing your local market is crucial. Market research can be expensive, but it’s an investment that will yield returns. Results will give insights to shop owners regarding product offerings, pricing and promotional efforts.

Regularity: Regularity is simply how often your customers are coming in. Coffee shop owners can increase regularity in the following ways:

  1. Convenience: Of course this is easier said then done, but as we said before, location is key. A customer is more likely to regularly buy from a shop that is on their way to work than from one that sends them on a detour. People value their time, especially in a buzzing city like London.
  2. Loyalty Schemes: They give customers a tangible reason to return to your shop. Working towards that 5th free cup of coffee will incentivise customers to visit your shop more often. To get further ahead of the competition, go digital and try a mobile loyalty app.
  3. Customer Service: Everyone likes a friendly barista and their cup of coffee in a timely fashion. Pinpoint what’s important to your customers and focus on creating the best possible experience for them. One bad experience can cost you a customer to the shop next door.

Basket Size: This is the transaction value of your customers on average. How much are they spending each time they visit your shop and how can you increase this number?

  1. Menu Variety: It may be easier for shops to simply focus on coffee; however, people are often looking for something to eat as well. Adding food items to your menu can help increase the average transaction value of your customers.
  2. Barista efficiency: An efficient barista will be able to maximize the number of drinks produced. The faster you can make drinks, the faster you can sell them, which ultimately leads to increase revenue. Key elements of attaining full effectiveness include: comprehensive barista training, investing in worthy equipment and proper equipment maintenance.
  3. Upselling: There’s always something more you can offer your customers and a knowledgeable barista can help make this possible. If someone orders a cappuccino everyday, it may be worthwhile to respectfully offer him or her your latest filter coffee, or ask them if they’d like to add on a sandwich or pastry.

To view the full talk visit: https://youtu.be/fCJdI8-kxA0

Picture: Andrew Tolley, co founder of Taylor St Baristas & Harris + Hoole.

Picture from: Barista Guild of Europe

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