Alright, coffee shop owners, let’s talk numbers.
Yup, another brass tacks newsletter (because it's not always about delivering an amazing experience).
Running a coffee shop isn’t just about serving the perfect latte – it’s about making sure every cup you serve contributes to your bottom line.
Understanding and calculating the profit margins on every item you sell is crucial. Not just for keeping the lights on, but for thriving in this fiercely competitive market.
Don't get me wrong here – optimizing profit margin is crucial, but it must be WELL-BALANCED with treating customers with incredible service and quality goods.
Why Margins Matter
First, let’s cut through the fluff.
Knowing your profit margins isn’t optional – it’s fundamental.
Profit margins tell you how much money you’re making after covering the cost of goods sold (COGS). They’re the difference between running a beloved neighborhood café and shuttering your doors before you hit your first anniversary.
Without a clear understanding of your margins, you’re flying blind.
You might be selling a ton of coffee, but if the cost of those high-end beans and artisanal pastries eats up all your revenue, you’re in trouble. And TBH, this is where I see way too many cafe owners operating.
They don't know their margins. Don't set their own prices. They simply go with what "feels right" or use pricing from the coffee chain down the street
But hey, you're reading Coffee Shop Keys so I know you're smarter than that.
Calculating margins helps you set prices strategically, manage expenses, and ultimately, ensure that your business is sustainable.
Calculating Coffee Shop Profit Margins
Let’s break it down.
To calculate the profit margin for each item, you need two key numbers: the cost of producing that item and the selling price.
Here’s a step-by-step guide:
Calculate COGS: This includes everything that goes into making the product—ingredients, packaging, and even labor if it’s a significant factor (for drinks with steamed milk – yes, for a cup of drip coffee – no).
Determine Selling Price: This is the price your customers pay for the item (maybe this is already set, but if not, you can reverse engineer your price by choosing your target margins and using your COGS).
Subtract COGS from Selling Price: This gives you the gross profit per item.
Divide Gross Profit by Selling Price: Multiply by 100 to get the profit margin percentage.
For example, if a latte costs you $1.50 to make and you sell it for $5.00:
Gross Profit = $5.00 - $1.50 = $3.50
Profit Margin = ($3.50 / $5.00) * 100 = 70%
Ideal Profit Margins for a Coffee Shop
So, what should your target margins be?
For a healthy, sustainable coffee shop, aim for:
Coffee and Beverages: 70-80%. These items often have the highest margins, so leverage this to boost profitability.
Pastries and Snacks: 50-60%. These can vary depending on whether you make them in-house or source them.
Merchandise: 30-50%. Items like branded mugs and beans can add to your revenue but typically have lower margins.
If you've been reading for a while, you'll know that I love cold brew – not just as a consumer, but a merchant, too. That's because the profit margins on cold brew are incredible.
Typically $.50-.75 for the coffee, and a few cents for the packaging. No milk, no steaming, non pulling shots, etc. It's fast and efficient. And can sell for $4+.
Calculating and understanding your profit margins isn’t just about crunching numbers—it’s about making informed decisions that drive your business forward.
It allows you to price your products effectively, manage costs, and ensure each item contributes to your overall profitability.
Don't forget to check out the Coffee Shop Keys ROI Calculator and Break Even Point spreadsheet to help with your financial planning!
