By: Jack Groots
Confession of a coffee shop owner
Jack is my name, price increase my game.
Let me aks you a question; If I still charged the same price for a latte today as I did when I opened JP’s would I still be in business? What if the price of coffee was the same today as it was 18 years ago? What if I owned my own building and the price of coffee hadn’t gone up in 18 years? Regularly raising your prices is critical to your success as a business. Let me show you why.
Product cost increases are not the only reason to raise prices
There are many expense categories in running a small business, product cost being only one of them. I recognize the fact when green coffee prices go up it may force us to raise our prices, but let’s face it it doesn’t hurt to raise the price of my coffee beverages at the same time the newspaper, internet and stock market all reflect the “Coffee prices nearly double, with no relief in sight” headline.
If you incrementally raise your prices every year you can click the ‘next post’ link and go on to another topic. If you haven’t raised your prices in the last two years, you better read on for encouragement. If you haven’t raised your prices in three years, print off this post, tape it to your bathroom mirror and read it every morning till you do.
You MUST increase your menu prices regularly
Following are 10 reasons you MUST raise your prices regularly:
- COGS – Ingredient prices have gone up – whole bean coffee, cups, lids, syrups, milk, whip cream and almost every single item you can list is more expensive today than it was two years ago.
- Lease rate – If your lease has not escalated in the last two years, it will in the next two. You must account for that increase over time.
- Utilities – I don’t know the last time you filled your gas tank or paid the electric bill, but did you notice something? Utilities are all up. You have to drive to work, deliver goods, heat or air condition your building, keep all the lights on, use a bunch of electric-consuming equipment to make drinks and toast bagels and even pay your vendors a surcharge for their increased fuel costs to deliver to you.
- Wages – I don’t know about you, but our wages continue to be pushed up. Whether through federal or state mandated increases, seniority or performance wage increases, or competitive pressures to hire and retain good help we will always pay more for the staff we retain.
- Taxes – Whether you’re a democrat or republican…or neither, our government has a nasty habit of spending more than it makes. And who do you think is gonna end up paying the bill?
- Insurance – Another category that notoriously goes up. Whether it is liability, work comp or health, all insurances seem only to go up and never down.
- General inflation and CPI increase – The overall prices of groceries, going out to dinner and wage increases shows the continual upward movement of our economy. I know I’d yell at my kid for using this reasoning, but if everyone else is doing it…
- Miscellaneous – everything from postage to internet service for your business to snow plowing goes up. And while it may not be a lot or often, it has to be accounted for at some point.
- People expect it – I know it sounds weird, but if you never raise your prices people will notice. Not that they’ll complain, but they know if you don’t raise them over the course of the years you won’t be able to stay in business or maintain your quality. I’ve actually had people comment on their expectations when I raised my prices (“I was wondering when you were gonna raise prices“).
- Smaller increase often – The last thing you want is to be forced to raise your prices 50% because, “you can’t hold out any more”. When that happens you will lose your business. Customers will freak out and no matter how much they like you or your business, people can’t process that kind of increase.
- Bonus #1 – If you raise your prices you should make more profit. This will allow you to pay down any remaining debt quicker, replace tired equipment or remodel the store and invest back into your business.
- Bonus #2 – Keeping your prices on the upward swing will allow you to make more money with less customers and you’ll lose the “bottom-feeder” customer that only hangs around cause your cheaper. As a matter of fact, if you are too low on your pricing I suggest being more aggressive with price increases until you start to lose a few customers. That will show the tipping point for your business, where you keep the desired customer and lose the unprofitable ones.
- Bonus #3 – By making the correct margins in your business you also build long term value. If you hope someday to sell your business or retire, but you don’t regularly raise your prices there will be nothing of value left to sell. At some point you’ll have squeezed all of the life out of your investment and there will be nothing of value left.
I’ve had new coffee business owners tell me they got into business to “donate the profits to charity” or “just to support their downtown”, but most times that’s just a stupid excuse for not running a business professionally. Making a correct margin on the products we sell will actually give us the ability to do noble things such as help our downtown, give to the local mission or even spend some of our time serving a worthy organization.
If you don’t raise your prices, the pressure of a shrinking margin will make paying your bills difficult at first, impossible in the end. Right before you close your doors that is. And if you reach the point of not making enough to cover costs (no net profit that is) no potential buyer would even look at your business as more valuable than simply buying used equipment on eBay. Nothing says “buy me” like a healthy net profit!