3 Ways To Increase Your Cafe Business Profit Margins
A profitable cafe business is important not just for your own income but for your very survival in business.
In this article, I share with you three strategies you can use straight away to increase your cafe business profit margins.
Strategy 1: Increasing Your Prices will Increase Your Cafe Business Profits & Make More Cash flow
Now I know this might sound simplistic, strange, or both, but if you want your cafe business profits to increase, the easiest way to achieve this is to increase your prices.
It’s that simple.
But the funny thing is that most cafe owners are too terrified to do this. They seem to believe it will drive them out of business.
The exact opposite is often true!
You’ll find that most of your customers won’t even notice.
Let me explain…
There are 4 types of customers: A, B, C, And D.
- Starting with ‘D’ type customers, these people will come in and often complain about how slow the service is, how cold the coffee was, or will always have an excuse to complain about everything they can.
- ‘C’ type customers will come in one off, just to buy a drink to get change to fill up their car park meters.
- The ‘B’ type customers are your regulars that come into your cafe on a regular basis during the week.
- On the other hand, ‘A’ grade customers are the ideal customers for your business. Not only they are friendly, approachable, and purchase many of your products, they also refer your cafe to their friends and spread all the good words about your business.
Those that object are probably your ‘C’ and ‘D’ Grade customers anyway.
The ‘A’ and ‘B’ grades customers are the ones that even if they do notice your price increase, chances are they just won’t care.
You need to understand that raising your price is the fastest and best way to bump up your profitability.
My experience is that the cafe owner is the one who usually have more of a problem with this strategy than their customers.
So, just do it.
But if you’re too scared to increase your prices across the board, try doing it to just 80% of your product range. Slightly increase their prices, and you’ll find your customers will hardly notice.
Did you know…
If you increase your price by 6%, you could sustain a 19% reduction in your sales before your gross profit is reduced…
If you discount your price by 6%, your sales must INCREASE by 32% to keep the same gross profit…
Special Note: Every cafe I’ve coached have increased their prices without any negative effects. They all benefited immediately and marvelled at the effect it had on their bottom line.
Strategy 2: Discounting Costs You Money
Another brilliant strategy that will have an immediate effect on your bottom line is to stop discounting.
Why give money away?
It doesn’t even make sense!
How can you expect to increase your cafe business profit margins if you discount?
If you discount constantly, why bother having a regular retail price?
Discounting not only costs you money, but it gives the impression that your normal prices are a rip off, and your product has no value (discounts devalue your product!).
Think about those rug retailers that are always advertising massive discount sales on TV. How often do they say up to 80% discount on all floor stock – final clearance sale – new stocks have just arrived, so old stock has to go.
The trouble is people become oblivious to all these sales after a while. They cease having an impact. They become no longer believable.
It’s better not to discount at all but to simply offer more add-on value instead.
Consider something like “buy a coffee, get a slice for free”, “Spend over $10 and get a free coffee”.
The idea is to add perceived value.
The surprising truth is – “Selling is not about price. It’s all about value”
Strategy 3: Concentrate on ‘A’ Grade Customers Only – Sack ‘C’ and ‘D’ Grade Customers
Now I know many of you will find this a strange thing to do but get rid of your ‘C’ and ‘D’ Grade customers, as explained in Tip 1 previously. You don’t need them.
What are ‘C’ and ‘D’ Grade customers? They are the ones that basically waste your time. They are constantly on the lookout for bargains, discounts and freebies. They are what the motor trade call “tyre kickers” or time wasters.
These are the types of customers who eat away at your cafe business profit margins.
So, let them know you don’t want to deal with them. But don’t be rude or offensive about it.
Drop subtle hints. Spell out what you expect of them, what the standards of your business are and what your business and customer policies are.
Take the case of this coffee shop in a Melbourne inner suburb. It was a great successful cafe with many regulars from local businesses and residents.
However, as the area became more popular with tourists, it also became more popular with backpackers, bikers and the younger customers.
Now there might be nothing wrong with this new type of customer, but the owner and the regulars didn’t like it. So for the sake of cafe regulars and business reputation, the cafe owner decided to ‘sack’ these new customers.
How did he do this?
He changed the type of music played in the cafe. No more pop or modern music. It was strictly classical music only. The younger element disappeared almost overnight.
Of course, you do need to think carefully about this strategy, because it may be that ‘C’ and ‘D’ grade customers are your bread and butter. It might be that if you were to sack them, you’d have no business to speak of.
Bear in mind the 80-20 rule that applies to most cafe businesses. 80% of your profit comes from 20% of your customers.
These are your ‘A’ grade customers.
So, why then should you put up with so much wasted time and effort pleasing 80% of customers, who are your ‘C’ and ‘D’ grade customers if they don’t contribute much to your bottom line (20%)?
You cafe business profit margins depend on you making these types of tough decisions.
The Top 3 Practical Tips To Increase your Cafe Business Profit
- Focus on your ‘A’ and ‘B’ grade customers,
- Increase your prices, and
- Do away with discounts.
This is the way all businesses grow.