Coffee drinks are the heart and soul of every coffee shop. As coffee shop founders one of the very first tasks we did when evaluating the potential for our business was to analyze the gross profit margin of a cup of coffee.
When we did so the numbers sounded amazing. However, there was a lot more behind this seemingly fantastic number that we did not know at the time and later on, found out the hard way.
The gross profit margin for a cup of coffee is around 70 to 80%. This is a great profit margin. However, the price for a cup of coffee is usually not high which makes it necessary to sell a large a volume of cups in order to have a profitable business overall.
Read along this post to discover the behind the scenes for the gross profit margin of a cup of coffee, what factors to consider and how to calculate the margin; but also, the challenges that we coffee shop owners face.
What is the gross profit margin
The gross profit margin for a cup of coffee is when you subtract the price of the cup of coffee minus the costs. The most usual costs are ingredients, packaging and services. Examples of services are electricity and water.
After you calculate the gross margin you will then have to subtract the fixed costs, divided by unit sold, to obtain the net margin. Examples of fixed costs include rent and employee salaries. In this article we will be focusing on the gross margin profit.
Coffee cup margin for our coffee shop
The following table describes the profit gross margin for a 12-ounce cup of coffee
| Price | $3.2 | 100% |
| Ingredients and packaging | $0.6 | 19% |
| Electricity | $0.1 | 2% |
| Gross margin | 78% |
According to Colin Harmon (from the book What I Know About Running Coffee Shops) the profit margin on a cup of coffee should probably sit close to the 70 to 80% mark.
For our coffee shop this was actually the profit margin varying between products. For example, americano coffee would be closer to the 80% being greater as the cup sized increased, and would be towards 70% for cappuccinos and lattes, and especially for other milk-derived drinks like coffee with almond milk.
The following were the ingredients and packaging in a cup of coffee
- Coffee: 28 grams / 1 ounce
- Water: 354 ml / 12 ounces
- Packaging: cup, lid and holder
- Other ingredients: added sugar
All this ingredients would add up to $0.6. When adding an estimated amount of electricity from the equipment you would then be left with a 78% margin.
Aspects to consider when calculating profit margin
Water to coffee ratio
The more water you add to your coffee the higher the margin will be. For tasting or cupping the usual ratio is 1:15. This means that for every gram or ounce of coffee you use fithteen times as much water. When we first started we used this water coffee ratio. However, we quickly found out that our customers wanted a stronger coffee, as so did we. So the coffee ratio was moved to 1:12. This took a small toll to the margin but increased customer satisfaction which we were extremely eager to do so.
Coffee source and type of coffee
As you can see in the ingredient list there aren’t many things that go into your cup of coffee. Therefore the cost of the coffee is important. These costs will vary depending on the quality of your coffee, whether it is considered specialty coffee or not. But also, it will vary if you buy it ground or whole, and roasted or green. The further up the chain of the process you buy your coffee the more expensive it will be. However, usually the earlier in the chain you buy your coffee the greater the amount you will have to buy.
In our case, we started buying whole roasted coffee but later on moved to green coffee. This added an extra process for us, for now, we had to take the coffee to a roaster, but we saved up to 15% in cost.
Packaging material
When we choose our packaging material we wanted it to be as environmentally friendly as possible. All of our cups were made from either paper or PLA plastic, which is a plastic derived from starch that degrades much faster than regular plastic. This in turn was more expensive, but for us it was worth it. It’s been a long time since we have tried to avoid plastic in every way possible and our coffee shop was not going to be the exception.
Milk and other ingredients
When choosing other materials there can be a difference in cost because of the size of the package, the temperature needed for storage, the type of supplier and the amount that you buy. When choosing milk for example we prefer to use the gallon package instead of the 1-liter package because it was about 40% cheaper.
You may want to read: Choosing skimmed milk versus whole milk
Pricing
Another important aspect to consider is the price point for your cup of coffee. Usually coffee shop owners are afraid of charging a seemingly expensive price for the coffee. Try to think what you would pay as a customer for the quality you are serving.
Coffee shops are places where people tend to feel a strong emotional connection toward the business. Its not just about the coffee, it has to do with the ambiance, the people, the service, and the quality of the drinks and food. People are generally willing to pay for a good experience, and you as a coffee shop owner need to be able to make a profit to have a sustainable business.
So keep this in mind when calculating your price point. But also, know that the higher you charge for your coffee the greater the expectations and demands you will have from your customers. Also, try to understand what the price is for other coffee shops in your area.
For us, we felt proud of the quality of the coffee we sourced and the machine we used to prepare our coffee drinks. But, on the other hand, we also wanted to be a reasonably affordable place for people to enjoy their coffee. So we decided to price our coffee closer to the upper threshold but not above it.
Use this omni calculator to estimate your gross profit margin
Coffee shop owner challenges: the volume/quality paradigm
So you have a great gross profit margin for each cup, between 70 to 80%. Wow, that sounds amazing. But imagine for a minute that you are only selling 20 cups of coffee each day. You are able to make each cup with the perfect quality, attend every customer with great service. But it is just not enough to keep up with the bills. In order to do so you need more sales volume.
A cup of coffee has a great gross profit margin, but you need to sell a high volume in order to make a profit.
So if the price point was about $3.2, with an 78% gross margin would mean a profit of $2.56. To make $100 in gross profit you will need to sell 39 coffees. This means 39 customers to satisfy, 39 times you need to use your espresso machine, more electricity consumption, and the list could go on.
As you increase your sales volumen, you need more staff, you need to make the drink quicker, you need to be able to satisfy your customers needs faster and more efficiently. Suddenly this can start to take a hit on your quality. The paradox: keep quality up and at the same time volume up.
The coffee shop is a business of volume, and volume requires staff and lots of work. And after that, you still need to subtract all the other expenses like rent and employee salaries.
So when calculating your profit gross margin, keep in mind, that another very important equation for determining the viability of your business is volume of sales. Next to volume of sales, comes all the other expenses. Tough equation right? Hope this articles has helped, best of luck.