Small business owners across industries are currently grappling with the significant impact of record-high inflation, especially as it relates to their material prices. The relentless rise in expenses is making it increasingly challenging for entrepreneurs to maintain profitability while providing quality products and services. In such times, it’s important for business owners to review their pricing strategy.
Recently, we had the privilege of working with with a local coffee shop that was feeling the impact of soaring material costs. To stay profitable and continue delivering exceptional experiences to their customers, they realized the importance of updating their menu prices.
In the past, our client had calculated their product costs and discovered they were inadvertently paying customers $0.25 per sandwich for a customer to take it out the door. Determined to avoid a similar situation, this coffee shop wanted to know the current costs to make each of their products to make sure this wasn’t still happening.
Getting Started
Inflation has become a concern for businesses of all sizes, with small enterprises particularly vulnerable to its effects. For our client, a local coffee shop that prides itself on serving some of the best coffees, teas, baked goods, sandwiches, and wraps, the steady rise in material costs was beginning to erode their profit margins.
Our client approached us with a clear understanding that the 2023 economic climate (characterized by lingering inflation) called for immediate action. To comprehend the gravity of their situation, our initial discussions centered around several key factors:
Soaring Cost of Goods Sold (COGS): The heart of the issue lay in the cost of goods sold (COGS), which refers to the expenses directly associated with producing the items sold by the coffee shop. Vendor invoices for coffee beans, tea leaves, bakery ingredients, sandwich fillings, and other essential items had witnessed a sharp increase. These mounting expenses were squeezing the shop's profit margins and threatening their ability to remain competitive.
Pressure to Price Products Competitively: The coffee shop operates in a tourism-oriented vacation town with several nearby competitors. To maintain their foothold in the market and continue attracting customers, it was crucial to offer pricing that remained attractive while accommodating the rising costs of production. Competitor price analysis revealed that their menu prices needed adjustment to align with market trends.
Employee Quality of Life: Our client was not only committed to sustaining their business but also had a strong desire to improve the livelihoods of their staff members. However, escalating expenses presented a significant challenge to achieving this goal. To provide better compensation, the coffee shop needed to find ways to enhance profitability without compromising on quality or customer satisfaction.
Crafting a Comprehensive Pricing Strategy
With the challenges laid out and a clear understanding of the pressing issues facing our client's coffee shop, we started developing a pricing strategy that would not only offset inflationary pressures but also set the stage for sustainable growth. Here's how we did that:
Detailed Cost Analysis: We recognized that any effective pricing strategy must start with a meticulous examination of costs. In this phase, we worked closely with the coffee shop's management team to gather invoices, receipts, and records of all expenses related to product procurement.
Standardized Recipes: To achieve accuracy in our cost calculations, the coffee shop introduced standardized recipes for every item on their menu. Standardization not only ensures consistency in the quality of products but also enables accurate pricing. With these recipes in place, we could attribute exact ingredient costs to each item, down to each sprinkle of cinnamon.
Competitive Pricing Benchmark: Understanding the local market dynamics was crucial. We guided the client through conducting research at competing coffee shops, specifically analyzing their menu offerings, pricing structures, and customer satisfaction. This benchmarking exercise allowed us to identify opportunities for our client to better position themselves within the market.
Dynamic Pricing Model: Armed with a comprehensive cost breakdown and insights into market pricing, we helped our client develop a dynamic pricing model (i.e., a very fancy Excel spreadsheet!). This model allows the coffee shop to account for changes in material costs and adjust menu prices accordingly, ensuring that the coffee shop can remain profitable in the face of continued inflation.
By combining these elements into a cohesive pricing strategy, we were able to provide our client with an interactive Excel spreadsheet to help navigate the pricing challenges posed by inflation. This strategy addressed immediate concerns while laying the groundwork for a financially secure and prosperous future.
Implementing the Pricing Strategies
Executing the customized pricing strategy required meticulous planning, team training, and an ongoing commitment. We worked with the coffee shop staff for three months to refine and implement the new pricing model. The coffee shop plans to update this model regularly and is excited that they will be able to use updated Point-of-Sale product cost data to determine their daily profitability going forward.
Expected Outcomes
After the successful implementation of their new pricing strategy, our client's coffee shop expects to see a healthier bottom line and happier employees.
Improved Profit Margins: The most evident outcome will be a noticeable improvement in profit margins. By accurately pricing menu items based on costs and local competition, the coffee shop was able to maintain profitability even in the face of rising expenses.
Revenue Growth: The small, incremental price increases aren't expected to deter customers. As a result, the coffee shop expects not only to retain its customer base but also continue to attract new patrons who appreciated the quality products.
Enhanced Cost Control: With a solid pricing strategy in place, the coffee shop is beginning to have a more granular view of its expenses. This enhanced knowledge and subsequent cost control is expected to further contribute to increased profitability.
Employee Satisfaction: One of the most rewarding outcomes of this endeavor will be the ability to provide wage increases to the coffee shop's employees. As profits grow, our client is planning to increase wages, recognizing their crucial role in their employees' quality of life.
Employee Retention: Higher wages and a more prosperous coffee shop will hopefully lead to improved employee retention. The coffee shop hopes its team will feel valued, motivated, and invested in the business's future.
Conclusion
For small businesses, every penny counts. The story of our client's coffee shop serves as a testament to the importance of strategic pricing in achieving financial freedom and fostering employee well-being.
The combined efforts of transparent pricing, enhanced cost control, and employee wage increases are expected to help our client's coffee shop enhance profitability without compromising on quality or customer satisfaction. This case study illustrates how proactive pricing strategies can be a game-changer for small businesses hoping to do the same.
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Miranda Kishel
Founder
Development Theory
Disclaimer
While this case study showcases the positive outcomes achieved by our client, it's important to note that every business is unique. The strategies and results presented here are intended for informational purposes only. We recommend consulting with financial professionals and experts to tailor solutions that suit your specific circumstances.
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