Standing before a menu board. Perusing the selections. Weighing your desires against the dollar signs. The decision is a no-brainer. You barely think about it, right?

Now put yourself on the other side of the board--as the one who makes up the menu and prices the items--because as the operator of a coffeehouse that's exactly where you are.

Looking at those coffee drinks and muffins a little differently now, huh?

Pricing and selecting your menu can be one of the trickier parts of operating a coffeehouse. Price too low and there goes potentially thousands of dollars in lost revenue. Price too high and not only wave bye-bye to lost revenue, but perhaps customers, as well.

Some operators devise intricate formulas based on cost, some copy the competition and still others use common sense, asking themselves, "What would I pay for this blueberry muffin?"

In reality, pricing is a delicate balancing act that may involve using a formula that perhaps doubles the cost, in addition to surveying the prices of the competition and, yes, even applying good, old-fashioned common sense.

Figuring out the product mix can also involve a lot of hanging out at the guy next door to see what the competition is offering. Of course, the selection of items may be guided by personal choice, perhaps offering homemade soups or cookies made from family recipes. Whatever the choice, it must be weighed against both the cost of labor and materials to provide those food items.

Also keep an open mind to customer suggestions and feedback when selecting a menu. Customers, after all, are the ones who ultimately decide your product mix and prices.

COFFEE, TEA ... PANINI?

Michael Roderiques, co-owner of Big Valley Coffee Co. in Danville, Ky., believes that menu selection should be step one. What you choose to serve will determine the amount of space, type of equipment and your budget for the enterprise, he says.

"Plan your menu first," Roderiques strongly advises. "Your menu will dictate everything you will need."

However, one of the first questions newcomers ask is, "If I'm a coffeehouse, why do I have to sell cinnamon rolls and sandwiches?" says Bellissimo Coffee Info Group consultant Ed Arvidson of Bend, Ore.

IN ONE WORD--OVERHEAD.

Coffeehouses these days tend to be about 1,200 to 1,500 square feet. That's a lot of rent, heat, lighting, paint, etc., to cover and just selling coffee beverages, no matter how special, is not going to do it, Arvidson says.

"You typically need food sales to push your gross volume high enough to make you profitable," Arvidson says.

In some cases, this may include offering a variety of baked goods--muffins, scones, cookies--for hungry morning commuters who want something to go with their morning coffee. Locations that attract a lunch crowd may call for a menu of soups, salads and sandwiches.

Even though menu expansion is important to drive sales, Arvidson cautions operators to keep the foodservice part simple. It's important to remember that your first line of business is still coffee. "We think of a coffee bar as being basically a gourmet beverage bar," he says.

MENU MIXING

No matter the location, specialty coffeehouses tend to have similar coffee beverage selections. "These are items that people expect to see and are items that sell well," Arvidson says. Standards include drip coffee and espresso favorites--cappuccinos, lattes and mochas. A cold/iced blended version of each drink is also customary.

Arvidson also advises clients to concoct a signature drink that can only be found at their locations. Usually these are espresso-based drinks made with different combinations of chocolate, caramel and syrup and then given a creative name to attract customers. Such beverages can be high-profit items, Arvidson says.

Food selection may be based on location--Will you have morning customers who want breakfast-type items? Competition--Are there already too many sandwich shops nearby? Or, simply personal preferences.

"It's basically what people are looking for," says Rich Sheehan, co-owner of Kokopelli Coffee & Tea Inc. in Shaker Heights, Ohio.

Kokopelli offers a variety of baked goods such as muffins, scones, doughnuts and coffeecakes. Customers have suggested some of the items, such as tea biscuits that come from a local bakery.

One customer wanted more of a kick to his mocha--which at Kokopelli is made with cold brewed coffee. So, Sheehan added a shot of espresso and called it a Mocha Kick. Another customer wanted half mocha, half coffee. "So now we have our Mocha Mix," Sheehan says. "Customers have a lot of input into what we have."

Other operators get their menu ideas the old fashioned way--from the competition. Jake Tortorice, owner of two Rao's Bakery and Coffee locations in Beaumont, Texas, has about 130 menus from U.S. and European coffeehouses and pastry shops.

"I'm not real hesitant about asking for a menu," he says.

Tortorice takes particular note of the product mix, pricing and even how the product is described. Sometimes he even takes photographs of particularly pleasing-looking pastries and then brings the pictures to his baker back home. The baker then tries to duplicate the products. Tortorice admits that the results are not always successful, but he's always willing to give it a try.

"I'm a firm believer in throw that sucker against the wall. If it sticks, run with it. If it doesn't, throw something else," Tortorice says.

Much of what Tortorice has tried has stuck. Tortorice's newest store is 4,000 square feet and includes two 8-foot cases with nothing but cakes, whole and slices, plus éclairs, cream puffs, crème brulee and other delectables. The store also has another 12-foot case filled with cookies, sweet rolls, cinnamon rolls and other baked goods.

Although it takes a back seat to the desserts, the beverage menu offers a full range of specialty coffee drinks and smoothies. But at Rao's, it's the pastries that draw customers. "A lady comes in and gets her sheet cake for someone's birthday and she might get a latte. She walks out the door. It's an add-on sale," Tortorice figures.

Consultant Arvidson believes that product mix should be based on convenience and efficiency so menu items should be easy and inexpensive to prepare.

Arvidson suggests standard breakfast fare, such as bagels, muffins and scones, that can be simply purchased from a supplier and then resold to customers. Another option is proof-and-bake or scoop-and-bake products. These food items come in mixes and can be scooped into the desired amounts and then baked. Products that need to rise are placed in a proofer first.

For lunch, Arvidson says paninis (Italian-style sandwiches) are a good option because they can be prepared ahead of time and can generally bring in good margins. Soups can also be purchased in a mix, dumped into a pot and then heated up. Because salads contain produce, which is perishable, Arvidson says they're not a good menu choice.

Although many operators like the appeal of "homemade," Arvidson tries to steer his clients away from baking from scratch, which is usually labor-intensive and therefore costly. Sales volume can make up for high labor costs, he says, but it's also important to keep in mind that the main business is coffee, not food, which is only there to help pay the rent.

HOW MUCH?

Asking someone how he prices his products is a little like asking someone for a secret family recipe. It's personal. Yet all business owners have to price and although each has their own twist, there are more similarities than differences in the methods. It seems for most operators, pricing is a matter of cost, competition and, again, common sense.

"It's nothing scientific," quips Rick Sheehan of Kokopelli. "I've got a consultant that I've been married to for almost 25 years."

Along with bouncing price suggestions off his co-owner and wife, Sheehan says it's also a matter of simply asking, "What do you think someone would pay for this slice of coffee cake?" he says.

Sheehan also tries to send his employees out once a year to compare his prices against the competition. "We see where we're at--the ballpark. Are we priced too low, are we priced up too high?" Sheehan says. "Sometimes I can double my price, sometimes I can triple it. I would at least want to double it."

Competitors' prices are also a major factor in how Sheehan prices his whole bean coffee. He used to price the packaged coffee at what he thought it was worth, but found he couldn't get that price. "A lot of it has to do with the competition. What is the competition charging? Do I want to be under, over, right in the middle?" says Sheehan, noting that his whole bean pricing is similar to a Caribou Coffee or Starbucks.

Before surveying the competition, Arvidson recommends figuring the cost of each coffee item first. For example, if you use 8 grams per shot of espresso, you will get about 56 shots per pound of espresso, he says. Divide 56 by the cost of the espresso per pound and that's how much espresso, in dollar figures, goes into your, say, cappuccino. To get the ounce price for milk, take the price per gallon, divide by 128. Figure out how many ounces of milk you use--that's your milk cost. Add in the cost of the paper products and you have your total. Because the goal is to maintain about a 25 percent cost on beverages, quadruple the cost to get the price of the product, Arvidson says.

After that, Arvidson says, is when it's time to survey the competition.

While in theory this pricing strategy sounds straightforward, in reality, pricing is not so simple, Arvidson notes.

"What you realize is that what you deal with when you're putting together a menu mix is that you can't actually take every item and just multiply it by four," he says. "It's not going to work from a market standpoint."

Some higher-cost drinks may bring in lower profit margins because the customer will not pay quadruple the cost for that drink. On the other hand, some lower-cost drinks may run a higher margin, simply because that's what the market will bear. Deciding on the right mix of low-margin and high-margin products can be tricky. "The truth of the matter is you kind of need a combination of both," to balance out costs across the menu, he explains.

According to Arvidson, because costs run higher when using prepared products, food items will probably run at 50 percent cost. Baking from scratch will save on food costs, but increase labor costs. Again, he cautions, this is a coffee business supported with food--not the other way around.

Perceived value and competitive pricing is the combination that works for Jake Tortorice of Rao's. He tends to get better margins on specialty items that are only offered at Rao's. If customers can see higher quality, the higher profit margins are easier to get, he says. But Tortorice also takes note of what the other guy is charging.

"I try to survey my competition and see if I can live with their price," he says, "rather than just saying, hey, my markup's three times, or four times or five times [the cost]. That's not what we do."

Lisa Verrochi of Red Barn tends to tailor her prices to the amount of labor that goes into making the product. The seven locations offer a variety of baked goods--some homemade, some proof-and-bake. One location is a full café that serves a lunch menu. "The formula is basically double to triple [the cost]," she says. Espresso drinks are basically tripled while she prices her cold specialty coffee beverages at suggested retail prices offered by suppliers.

Again, however, scoping out the competition is part of it. "We do analyze," she says. "I'm always going out to different shops to see what they're getting."

About five years ago, Verrochi and her co-owner/husband, Mark, also began a roasting operation, which is where they are now focusing the business. Mark says he's done an in-depth market analysis in pricing the whole bean products. He looks at the costs of the product, including the packaging and labels, and also picks out key competitors, in this case, Starbucks, and tries to remain within that price range. "It's very much market-driven pricing," he says.

WORKING IT OUT

Unfortunately, pricing does involve trial and error. But your goal really should be to get it right the first time, because errors can be expensive. Spending time at the competition to track prices and customer selection is an effective strategy. Of course, knowing your own costs is fundamental to determining your profit margin.

Menu selection may just be a matter of hit and miss or figuring out what everybody else is doing, adding one or two unique items of your own, and you're off. And remember, listening to your customers' suggestions on what they like can also result in some profitable menu items. *

Specialty, Not Discount

Determining the appropriate prices for your menu items can be nerve-wracking. Nobody wants to overcharge and risk losing customers.

According to Bellissimo Coffee Info Group consultant Ed Arvidson, however, that's not really the problem. A common mistake Arvidson has seen many make is in strategic thinking. Coffeehouse operators, he says, forget that they're in the specialty coffee business, so they think customers are price-driven. Newcomers, he says, tend to think that undercharging, therefore, is going to create a great market advantage and attract more customers. But that isn't the case, he says. Instead, shortchanging revenue can mean a loss of potentially thousands of dollars every month.

Specialty retailers can charge a little more because the products are supposed to be of a better quality than the average coffee shop. So there's really no need to hunt around town to find the coffeehouse with the lowest prices and then price according to that business.

"Don't get caught up in being price-driven," Arvidson says. 'You've got to be proud of what you're serving and have confidence that you're serving a great product and you charge the appropriate amount of money for it."

Copyright © 1999-2003 Adams Business Media, Inc. All Rights Reserved.  Reproduction Prohibited. Would You Like A Reprint of this Article? CLICK HERE!