Now that you are on the path to opening your coffee shop, you should consider the profit margin that you will need to succeed in the business. Profit margin is the percentage amount that shows how much profit exceeds your overall expenses in your business. But what is the optimal profit margin for a coffee shop?
According to the Perfect Daily Grind, the optimal profit margin for beverages from a coffee shop should be about 70% after taking into account all of the material costs involved in making said beverages. Calculate your coffee shop’s profit margin by dividing your shop’s net revenue by the net sales.
Besides learning how to calculate net profit margin, we will also discuss how you can increase your coffee shop sales and reduce your overall expenses to increase your shop’s profit margin. Grab a cup of coffee and let’s get to work!
How do I calculate my coffee shop’s profit margin?
To find your coffee shop’s net profit margin, some mathematics equations are involved. Before implementing these math equations, you must complete these 2 key steps and keep in mind some tips for each step.
- Project your net revenue for your first year of business.
- Plan for more revenue from coffee shop beverages than retail items.
- Think about how much traffic may come to your coffee shop each day to account for daily sales.
- Keep in mind how holidays and weather will increase your sales during certain months throughout the year.
- Estimate your coffee shop expenses for the first year.
- Include rent, utilities, labor, and materials costs.
- Do a mock wholesale transaction that you will need for one month for all your menu items and calculate the cost in 12 months.
Once you have completed these steps, you will use this equation to figure out your net profit.
Net Revenue – Net Expenses= Net Profit
For example, if you project your net revenue to be $60,000 and your net expenses to be $22,000, you will calculate the net profit as:
$60,000 (Net Revenue) – $22,000 (Net Expenses)= $38,000 (Net Profit)
Once you have figured out your net profit, you can move on to finding out your coffee shop’s profit margin. You will divide the net profit figure you just got by the net revenue. Once you get this number, you will multiply it by 100 to get the net profit margin.
(Net Profit / Net Revenue) x 100
Hence, if your net profit is $38,000 and your net revenue is $60,000, you will calculate the profit margin as:
($38,000/$60,000) x 100
0.6333 x 100= 63.33%
Round to nearest full number percentage= 63%
In this example, with a profit margin of 63%, you are well on your way to the optimal profit margin of 70%.
If you would like to see a more visual explanation of this equation, check out this YouTube video from Sam Tube.
What should I do to increase my net profit margin?
There are 2 key ways that you can increase your net profit margin.
- Reduce your coffee shop’s expenses.
- Increase your shop’s overall revenue.
While it may seem simple to enact these key steps, there are multiple components for each one that should be heeded to make them possible. When you have enacted the tips suggested for each key step, you will see results over time that will impact your net profit margin positively.
How can I reduce my coffee shop’s expenses?
You can reduce your coffee shop’s expenses, so they will not eat into your net profit. A higher net profit means a higher net profit margin.
- Look around for a brick and mortar coffee shop that costs the least rent in your local area.
- Only purchase materials the nonperishable materials you need for an entire month.
- Only purchase the perishable materials that you will need every 2 weeks.
- If you run out of materials during these periods, order only what you need to get you through the rest of the month.
- For materials purchases, anticipate what you will need within the suggested period mentioned above.
- Be sure all lights are turned off at the end of the day before closing.
- Shop around with utility companies and suppliers in your area to receive the cheapest service for electric, phone, and gas.
How can I increase my coffee shop’s overall revenue?
Shoot to always increase your revenue each year for optimal profit for your business. Increase your coffee shop’s overall revenue by:
- When selling retail items, you should set the price to receive double what you paid for each unit.
- Do a 3% to 5% increase in prices each year for a gradual profit increase.
- Increase your marketing efforts.
- Include social media, radio, and newspaper advertisements.
- Focus your time mainly on social media since it is free to use and reaches out to a wider audience than other marketing avenues.
- Increase positive public relations.
- Partner with other local businesses willing to advertise and vouch for your coffee shops such as bakeries and restaurants.
- Join community days and host a table that gives out free samples, coffee shop coupons, and free coffee shop swag (pens, notepads, cups). Sell T-shirts and higher value items.
- Host a coffee shop loyalty program.
- For every 10 beverages purchased, a loyalty member can receive a free drink on the 11th purchase.
- Have one coupon you send to loyalty members’ emails once a month to drive repeat sales.
- Free dessert with the purchase.
- BOGO free on select beverages.
- $2 off a breakfast or lunch meal.
What if my profit margin is under 70%?
If your profit margin is under 70%, it does not mean that your business is destined to fail. Think on the bright side and start to increase your coffee shop’s sales and reduce its expenses.
When you open your coffee shop and see that your profit margin maybe 60% to 69%, this means you are well on your way to an optimal profit margin for your business. Keep doing what you are doing already and implement as many of the tips above as you can to steadily increase your profit margin to 70% or higher.
Should you see your margin dips to 50% to 60%, consider checking your product prices. Our retail items at least priced double the unit cost price you paid? Are you charging fair yet profitable prices for all your beverages?
If the profit margin is 49% and below, consider doing an entire overhaul on how you do business. Watch what you are spending on materials and only purchase what you need for 2-4 weeks based on if they are perishable or nonperishable items. Increase your marketing and public relations efforts. Be sure that the flavor profile of your beverages and other menu offerings are to the customers’ tastes.
Learn more about how to make a profit HERE.
While profit margin is easy mathematically to calculate, it can be challenging to achieve that 70% profit margin goal. Take into account all the tips and tricks to increase your shop’s income and reduce its expenses to hike up your profit margin slowly but surely.
Remember that social media is your best friend to increase marketing. Get creative when looking for ways to reduce your expenses. Encourage your customers to remain loyal to your coffee shop via loyalty programs, great value coupons, and awesome customer service.
Find your niche and expand upon it to keep your customers interested and attract new ones to coming to your coffee shop.
Frequently Asked Questions
When you increase your prices from 3% to 5% annually, customers may not notice the small price change and remain loyal to your coffee shop.
For example, if your 12 oz cup of coffee is $2.50 and you increase prices by 5%, the new price for that product will only be $2.62. That is only a price increase of 12 cents.
The gradual increase of your prices will do good for increasing your net revenue.
You can market your coffee shop on social media by:
Notifying your customers of all the promotions and sales happening currently in your business.
Reminding customers about: Signing up for your shop’s loyalty program.
Reduced coffee price for those who use a reusable cup.
Senior, first responder, and college student discounts.
Engaging customers with polls. Favorite coffee brew.
For new menu items, ask customers what they want to try the most out of the options listed.
Consider hiring at least 2 Full-Time Baristas and 1-2 Part-Time Baristas depending on customer demand. Hire a Full-Time Store Manager and Full-Time Assistant Manager. One of the more responsible Baristas can be appointed as a Shift Lead to act in the Store Manager or Assistant Manager’s place when it is their time off.
To save on labor, you can appoint yourself as the Owner and Store Manager. This will mean that you are more involved in the working portion of your business, but it will be more rewarding at the end of the day.
To learn more on how to start your own coffee shop checkout my startup documents here
Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.
Hi! I’m Shawn Chun
My adventure in coffee began when I first launched my first coffee shop back in the early 2000s. I had to figure out so many things on my own and to make it worse within 2 years of opening two large corporate coffee chains moved in just blocks away from me!
As I saw smaller and even some larger coffee shops in the neighborhood slowly lose customers to these giant coffee chains and slowly close up shop, I knew that I had to start getting creative…or go out of business.
I (like you may be) knew the coffee industry well. I could make the best latte art around and the foam on my caps was the fluffiest you have ever seen. I even had the best state-of-the-art 2 group digital Nuova Simonelli machine money could buy. But I knew that these things alone would not be enough to lure customers away from the name brand established coffee shops.
Eventually, through lots of trial and error as well as perseverance and creativity I did find a way to not only survive but also thrive in the coffee/espresso industry even while those corporate coffee chains stayed put. During those years I learned to adapt and always faced new challenges. It was not always easy, however, in the end, I was the sole survivor independent coffee shop within a 10-mile radius of my location. Just two corporate coffee chains and I were left after that year. All told the corporate coffee chains took down over 15 small independent coffee shops and kiosks and I was the last one standing and thriving.
Along the years I meet others with the same passion for coffee and I quickly learned that it is not only “how good a barista is” that makes a coffee shop successful, but the business side of coffee as well.
Hence why I started this website you are on now. To provide the tools and resources for up and coming coffee shop owners to gain that vital insight and knowledge on how to start a coffee shop successfully.
Stick around, browse through my helpful blog and resources and enjoy your stay! With lots of LATTE LOVE!