Australia has seen an incredible growth in its coffee culture in the past 20-30 years. According to ASIC’s Moneymart site, Australians spend over $1.1 billion a year on coffee an tea. If you walk by many cafes in the morning, you will see people sipping a cup of coffee with their breakfast. Or you will see many people on their way to work holding a disposable takeaway cup that they bought from the cafe near where they live or the cafe next to the train station to drink on the way to work.
What does it cost to make a cup of coffee, from the cafes point of view?
Each coffee consists of one espresso shot, which is 6-8g. The average Australian wholesale coffee supplier charges $25 per/kg of coffee. If its 8g of coffee per shot, then its 125 cups of espresso. $25/125 = 0.2. So 20 cents per espresso shot. Milk can cost around 20 cents, add the takeaway cup and lid (10-20 cents) and labour (20-30 cents). Add it up and:
|Coffee cost||$0.20 – $0.30|
|Takeaway cup and lid||$0.10 – $0.20|
|Labour||$0.20 – $0.30|
|Total||$0.70 – $1.00|
|Average cost of a cup of coffee||$3.50 – $4.50|
What is the difference between a $1.00 7/11 machine made brew and a $5.00 barista made coffee? The ingredients are the same. So what exactly are we paying for when we spend so much on a cup of coffee?
A cup of coffee is often ones of the largest revenue makers, and when done correctly has the biggest and best word of mouth benefit than any other part of the business. A well-trained barista can turn an unknown cafe into one that people will travel long distances for.
Another impact is the perceived correlation between price and quality. So if a cafe is selling a coffee for $2, consumers may wonder why their coffee is so cheap and rather go to another cafe.
Coffee costs so much because it has more attributes of a service than as a product, because drinking coffee is about the experience. If a person goes out and has a great time – they were with their friends, the coffee tasted good and they paid $5 for the couple of hours, they probably think they had a good coffee. There are some cafes in Sydney that charge up to 35% less for a takeaway coffee than a sit-down coffee.
The experience we have when drinking coffee is key to the pricing of it. When purchasing a regular product, consumers generally look at cost per unit, and will pay according to how they value it. So the consumer, who just wants a caffeine hit, is more likely to go get a $1 or $2 machine or pod coffee. Consumers that are purchasing a service however, look at pricing differently.
From this you see that you can charge more for services than for a product and customers won’t care about the price as much, because they feel like they are receiving much more than just a cup of coffee.