When it comes to driving organic and sustainable growth within your coffee shop, it is imperative that you make the distinction between increasing turnover and profitability.
After all, while introducing gourmet coffee, healthier snacks and more expensive beverages may enable you to increase your turnover, it also incurs additional costs that could overwhelm your margins if such offerings do not sell in a high enough volume.
Instead, it is important that you develop insightful strategies that enable you increase your profit margins, and in this article we will look at four techniques that can be used to achieve this objective.
Invest in Gift Cards and Tailored Loyalty Schemes
While the successful use of loyalty schemes is not exclusive to coffee shops, iconic brands within the sector have created revolutionary reward programs that have raised the bar. No single coffee chain embodies this better than Starbucks, which has created a scheme that drives superior interaction from customers and improves the level of service on offer.
Starbucks’ groundbreaking loyalty scheme is built around an outstanding mobile experience, which enables customers to build stars, earn free beverages and even order and pay for drinks in advance. The brand have also taken the progressive step of creating different tiers of membership, with the so-called ‘gold level’ incentivising customers to spend more with a variety of benefits including free refills in ice or brewed coffee, free food promotions and complimentary sundries like flavoured syrup.
By creating an immersive scheme that drives interaction and enhances the consumer experience, Starbucks has actively been able to increase its revenue to a staggering $2.65 billion, with up to 22% of all sales in the U.S. now being driven through the app. The relatively low cost nature of the scheme also lends itself to higher profits, while establishing a template for other brands to follow.
Choose the Right Point-of-Sale Promotions
How many times have you visited a supermarket with a carefully controlled budget, only to make sudden and unexplained impulse purchases at the point-of-sale? If so, you should not feel bad, as most retailers create strategic promotions at sales points with a view to optimising their turnover and bottom line margins.
This plays on a key principle of human psychology, with impulse buying related to a host of emotions including sadness, anxiety and mood. These emotions are also key drivers of consumer behaviour, with an estimated 82% of mass merchant purchasing decisions apparently made in-store.
The key is to create targeted promotions at the point-of-sale, with market research playing a pivotal role if you are to understand the needs and behaviour of each individual consumer. Not only this, but point-of-sale items should also boast competitive pricing and a clearly defined value proposition, as customers must not be deterred from making impulse buyers by their better judgement.
This ensures that you can sell your point-of-sale items in volume, increasing your turnover and profitability in the process.
Maintain Pricing That Reflects the Quality of Your Brand and its Products
In general terms, coffee is viewed as a luxury product, and the larger coffee shop chains adopt a pricing strategy that reflects this. In fact, UK-based coffee chain Costa recently implemented incremental price increases across its range of beverage, as they look to capitalise on peak levels of demand and optimise their overall profitability. This represents the continuation of a strategy that has helped Costa to maintain a profitable business model over time, with the brand having increased its bottom line return to £153.3 million last year alone.
Of course, some independent chains (and relatively new entrants to the marketplace such as Greggs) have adopted the counter-strategy of reducing prices and undercutting the established coffee shop chains. This does not necessarily reflect well on the brand or the quality of the beverages that they are marketing, while it also undermines the perceived value proposition of all products sold through the chain.
This is particularly counter-productive in the coffee market, where customers are often willing to pay premium prices for high quality and expertly crafted beverages. In this respect, incrementally increasing your price points in line with demand can actively increase your profit margins on an annual basis, so long as you recognise peaks and troughs within the market as a whole.
Simplify Your Menu and Eliminate Low-margin Items
One of the key things that undermines profitability is a lack of focus, as brands look to diversify and become all things to everyone. This can cause them to lose sight of their core products and primary function, while also increasing cost bases and undermining carefully cultivated margins.
Coffee shops provide a relevant case in point, as while they have evolved to sell a host of beverages, food and supplementary menu items it is coffee that remains their key driver of revenue.
Recognising this is key, as this begins the process of streamlining your offering to customers and creating a more clearly defined philosophy and menu proposition.
Eliminating low margin items that neither support the sale of coffee or strengthen the image of your brand also helps in this respect, while it also reduces your costs without having a detrimental impact on profitability.
We have already touched on the recent growth of Starbucks and Costa, and this has been inspired in part by the elimination of low-margin menu items and the streamlining of product offerings. This sets a good template to follow, particularly if your shop’s cost base is rising at a disproportionate rate to growth.
While the demand for coffee may have peaked in the UK, the market is extremely competitive and it remains challenging for independent brands to maintain a healthy profit. It is possible to achieve this aim, however, with knowledge of the market, a decisive mind-set and a keen understanding of your consumer base all key components of a successful strategy.
Above all else, it is important to note that you can only create a more profitable coffee shop by either reducing fixed cost bases or increase turnover. Your individual strategies must therefore focus on realising at least one of these ambitions, as otherwise you run the risk of implementing measures that have no positive bearing on your bottom line margins.
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