Coffee is one of humanity’s favorite drinks, helping us keep our energy up and giving us a good way to start the day. As such, selling coffee is also a very reliable source of income. The question remains, however, what are the profit margins for a coffee shop per drink?
On average, a coffee shop will see a profit margin of about 12% on every coffee product that they sell. Essentially, this means that for every cup of coffee you sell, about 12% of that money will remain after all expenses.
Profit margin: what is it?
Profit margin is a measure of how much money a company or business will make after all expenses are covered.
Having healthy profit margins are incredibly important to any business, as it ensures that the company will be making enough money to continue its operations and hopefully expand, rather than simply allowing the business to survive.
A fairly common mistake made by new business owners is that they tend to focus solely on revenue instead while ignoring the company’s total costs.
For example, a company may have made $1.2 million in sales in a year, which is fantastic.
But that same company also happened to have $1.4 million in costs, which means that they have a negative profit margin.
Thus, focusing solely on revenue can create a misunderstanding as to how a business is doing and whether or not it is going to be able to continue operating.
How do you calculate profit margins?
To calculate the profit margins for any business, all you have to do is follow a few simple steps.
Step 1: Find your revenue for the period
Step 2: Deduct your costs from your revenue
Step 3: Take that number from step 2 and divide it by the number from step one
Step 4: Take the number from step 3 and multiply it by 100
If you follow these steps correctly, then you should end up with your profit margin for the period you are calculating it for.
If the number you end up with happens to be negative, then you ended up spending more than you made in that period.
How does a coffee shop increase profit margins?
There are two basic ways for a coffee shop to increase its profit margins.
- Decrease overall costs
- Increase revenue
A combination of both of these tactics is generally the best and most effective way for a coffee shop to increase its profit margins.
Ways to decrease costs
There are a few ways for a coffee shop to decrease its upfront costs to increase its overall profit.
- Shopping around
Shopping around is a great way to help decrease costs, especially for a coffee shop that has a large number of potential suppliers.
By shopping around, you can ensure that you will receive the lowest possible prices for all of the products that you are purchasing.
- Buying in bulk
As anyone who has shopped at Costco can tell you, buying in bulk can save you money.
Buying in bulk will allow you to receive a lower unit price on all of your coffee products.
While you will be paying a higher upfront cost, you will be saving money in the long term.
The second important aspect of keeping profit margins high is increasing revenue. To do so, you can follow one of a few tactics.
- Raising prices
While this may not be very popular with the consumer, it is a very effective way to increase the revenue for your coffee shop.
Although it may not seem significant, increasing prices by only a few cents can be a noticeable difference in revenue over time.
- Increasing advertising
Increasing advertising is a good way to help your business receive more traffic and hopefully more revenue.
The only issue with this tactic is that advertising can increase your costs.
Unless, however, you utilize a form of advertising, such as social media advertising, which is completely free!
- Utilize a customer loyalty program
Customer retention is an incredibly important aspect of any coffee shop.
A study by RjMetrics shows that returning customers spend 300% more than new customers.
As such, employing a customer loyalty program, which emphasizes customer retention, can greatly increase the amount of revenue you pull in every month.
How profitable is a coffee shop as a whole?
As a whole, a coffee shop will enjoy a profit margin of 25%, or on average between $55,000 and $100,000 in profit.
Now you may be asking “if coffee products only see a profit margin of about 12%, then how come the total profit margin of the whole coffee shop is upwards of 25%?”
The reality is, a coffee shop can greatly increase its profit by offering more than just coffee products.
What products should a coffee shop offer?
Certain products can bring more value to a coffee shop than many others.
These types of products include things such as:
- Baked goods
Many coffee shops that offer baked goods report that the baked goods they often account for at least 40% of their revenue!
The thing about baked goods is that they aren’t necessarily something that brings a customer in, rather something that a customer purchases because they are there.
As such, having baked goods out and visible to a customer when they walk in can greatly increase your sales numbers and eventually increase your profit margins!
- Seasonal drinks
Seasonal drinks, such as those that are Halloween and Christmas themed, give customers a reason to come into your shop during those times.
They offer something new and festive to help customers celebrate the time around them and enjoy the season.
Being seasonal, you can also charge a bit more for these drinks than your normal drinks.
- Intricate drinks
Offering intricate drinks, such as the kinds that you’ll find at Starbucks, will appear to the Millennial and Generation Z demographic, who spend more than any other generation on these types of products.
These types of drinks include things such as lattes, cappuccinos, and frappuccinos, all of which can be made fairly quickly.
Is a coffee shop a worthy business investment?
Overall, yes, opening a coffee shop is a very solid business investment.
Although coffee shops do have a high startup cost, ranging from $200,000 to $375,000, coffee shops do provide a very solid possibility for return.
For being in the foodservice industry, coffee shops have a fairly high success rate, averaging around 40% to 45%.
Coffee shops also provide a very solid return rate, as discussed earlier, coffee shops generally average a profit of around $55,000 to $100,000 a year.
How long does it take for a coffee shop to make money?
As with any new business, it takes time before a new coffee shop will be able to make a profit.
On average, it will take about three years before a coffee shop will see any profits at all.
As such, as the owner, you may need to be able to survive for three years without making any money.
It’s a tough situation, but it’s the reality of starting a new business.
To learn about how long it takes to start a coffee shop, click here.
Are coffee kiosks/carts a good investment?
Absolutely, as while they do not have the same profit returns as coffee shops do, they also have a much lower start-up and operating costs.
The average startup cost for a coffee kiosk is generally only about $10,000 to $25,000, compared to a coffee shop that will cost over 10 times more.
Coffee carts also have a lower operating cost, as they do not require you to pay for a building and also have a very low cost for utilities.
Along with its low costs, a coffee cart also offers very good returns, often reaching profits of $45,000 or more.
Coffee carts are also very flexible, allowing you to operate whenever you would like.
The main drawback of a coffee cart is that it often comes with significant competition.
With a cart, you cannot give yourself some space with a physical building, which also means you can’t advertise yourself on the outside of said building.
However, the drawbacks are fairly menial compared to the benefits that a coffee cart provides.
What are the options to help meet the necessary start-up costs?
Meeting the necessary startup costs for a coffee shop is one of the biggest decisions that you will have to make.
As such, you have to weigh the great number of choices that you have in front of you and essentially decide which is best for you.
These options include:
- Bank loans
- Credit union loans
- Covering costs out of pocket
- Investor loans
- Loans from friends/family
Deciding between all of these is incredibly important, and as such, let’s take a quick look as to the benefits and drawbacks of each.
Bank loans will ensure that you meet all your expenses with one loan, but banks are notoriously ruthless when it comes to getting their money back.
Credit Union loans
Credit union loans are similar to bank loans, but there are a couple of differences.
For one, you may not get as much as you need from this single source.
However, the rates are usually lower than they are with a bank.
Covering costs out of pocket
While this may be the best choice because you do not have to worry about paying it back, most people don’t have enough money to go with this choice in the first place.
This option may be the best for you if you can find enough investors to cover all of your costs.
However, in most cases, investors won’t be able to cover all of your necessary start-up costs.
Loans from friends/family
These loans may be the most problematic of any of them.
Honestly, you should avoid them at all costs, because paying back friends and family can cause a lot of problems in your personal life.
However, if it is your only option to help cover the last small amount, then it is an option you can pursue.
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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.