Coffee, from lattes, espressos and mochas come in various forms. It is more than just a morning ritual or a midday boost, rather it represents a vital aspect of urban life, in particular students and working professionals. However, coffee shops serve more than just a quick stop for a caffeine fix. These familiar places provide a rich ground for examining underlying economics that influence everyday decisions.
（the annual per capita consumption of coffee in developed and developing countries is 350+ cups）
In today's society, per capita coffee consumption in most cities is close to 400 cups a year. So how much do we spend on coffee daily? What is the impact of these expenses? What economic phenomena drives this thriving market? This blog navigates through the economic landscape of coffee shops. Revealing the relationships between supply and demand, and the dynamics of the market that shape this environment.The secret behind coffee shops: How do they use strategic decisions and equilibrium to spark up success
Typically, a person might view a coffee shop simply as another store - enjoy a cup of coffee, and leave without a second thought. However, the reality of coffee pricing strategies can be puzzling. Lets piece together this puzzle and uncover the strategies that drive these decisions.
For instance, why is it that a macchiato is priced at £3.60 at Cafe Nero but jumps to £6 at Moonbucks? Despite the price gap, both attract a steady stream of customers. This is all thanks to well-analysed decisions aligned with each coffee shop’s environment and customer base. This economic strategy ensures that both Cafe Nero and Moonbucks thrive by maximising their profitability while also satisfying customers.
(Contrasting ambiances: From a modern plant-filled cafe to a soft pastels coffee shop, each tailoring to meet the expectations of their target demographics)
Beyond the simple liquid in a cup, consumers pay for the experience. Each coffee shop attracts loyal customers through a combination of pricing, quality and ambiance. The coffee shop industry offers a great insight into consumer behavior, all different aspects are meticulously chosen to suit their preferences. Consumers are nudged into choosing the best experience for them. Interestingly, the largest profit margins stem not only from the quality and price of the product, but rather from the overall atmosphere. Essentially, you're investing in a £10 experience! This “£10 experience” isn't just about coffee; it is about the emotions it evokes. Coffee shops create spaces that foster a sense of community, which is a critical component of their business. This strikes a balance between supply and demand to enhance customer loyalty and satisfaction.
Navigating through the impact of information and the hurdles within the industry
Information, varying from nutritional values and customer reviews on social media platforms like google, plays a pivotal role in shaping consumer preferences and the decisions each individual makes. This is accentuated by the strategic marketing efforts that highlight each company's unique selling propositions…
Market failures include poor coordination that causes a concentration of coffee shops in one location, which can be extremely competitive and detrimental to all parties. Hence why they carve out their distinct niche in this overcrowded sector by using efficient tools like niche marketing and specialisation.
Beyond this, coffee shops also face the challenges posed by environmental externalities. The use of plastic straws and single use cups has become the focal point of concern for environmentalists, which has led to a transition towards eco friendlier practices. This is illustrated through the diagram below.
Beyond the simple liquid in a cup, consumers pay for the experience. Each coffee shop attracts loyal customers through a combination of pricing, quality and ambiance. The coffee shop industry offers a great insight into consumer behavior, all different aspects are meticulously chosen to suit their preferences. Consumers are nudged into choosing the best experience for them. Interestingly, the largest profit margins stem not only from the quality and price of the product, but rather from the overall atmosphere. Essentially, you're investing in a £10 experience! This “£10 experience” isn't just about coffee; it is about the emotions it evokes. Coffee shops create spaces that foster a sense of community, which is a critical component of their business. This strikes a balance between supply and demand to enhance customer loyalty and satisfaction.
Navigating through the impact of information and the hurdles within the industry
Information, varying from nutritional values and customer reviews on social media platforms like google, plays a pivotal role in shaping consumer preferences and the decisions each individual makes. This is accentuated by the strategic marketing efforts that highlight each company's unique selling propositions…
Market failures include poor coordination that causes a concentration of coffee shops in one location, which can be extremely competitive and detrimental to all parties. Hence why they carve out their distinct niche in this overcrowded sector by using efficient tools like niche marketing and specialisation.
Beyond this, coffee shops also face the challenges posed by environmental externalities. The use of plastic straws and single use cups has become the focal point of concern for environmentalists, which has led to a transition towards eco friendlier practices. This is illustrated through the diagram below.
The environmental concerns surrounding this industry serve as a prime example of negative externalities, as illustrated in the diagram. The social marginal cost (SMC) of coffee production, includes the broader environmental impacts such as deforestation, is higher than the private marginal cost (PMC), which only reflects the direct costs incurred by producers. The shaded area in the diagram represents the deadweight welfare loss, indicating the inefficiency in the market caused by the externality.
If coffee shops fail to account for the SMC, the market will overproduce (Q2) relative to the socially optimal level (Q1), resulting in a price (P2) that does not capture the true cost of production on society and the environment (P1). Addressing these externalities through sustainable practices, like sourcing from Fairtrade, can help align the PMC with the SMC, reducing the welfare loss and moving towards a socially optimal outcome.
Providing public goods, such as free Wi-Fi and restrooms, adds complexity. While these enhance the customer experience, they introduce additional financial burdens for maintenance.
Take My Money: Nudging Through Your Purchase
Have you noticed how these coffee shops not only focus on product quality but also promote ethical principles, like using Fairtrade coffee beans? Majority of coffee shops will claim they use Fairtrade beans. This is a signal - particularly a market signaling - showing their commitment to ethical sourcing and sustainability. This promotes a sense of responsibility to their customers, to further increase the reputation of the coffee shop. And not to mention, a $2 discount for every purchase with the use of their own tumbler. Sustainability? Check. Loyalty? Check. Profit? Check.
In addition to the framing effect, we also have the salience effect. Just like during the medieval times when a bulge from the wall is built to have the enemy focus on it, so as in business today. “Drink of the Day” is one example. Customers see different options in the menu, but “Drink of the Day '' saves them from headaches, while probably not their pockets. The ambience factor also contributes to the salience effect. All in all, the salience effect is just for the show.
To conclude, the economics of coffee businesses go beyond a simple cup of coffee. A complex interaction between market strategies, consumer psychology, and economic theory is involved. The combination of all these components unite to shape the ultimate coffee experience. Revealing how economics is woven into every aspect of our daily lives.
References :
https://medium.com/pushtostart/coffee-economics-7c0e0c834979
Flender, S. (2019) ‘Coffee Economics’, Medium, 19 January. Available at: https://medium.com/pushtostart/coffee-economics-7c0e0c834979 (Accessed: 20 March 2024).
https://www.iol.co.za/sunday-tribune/lifestyle/5-ways-to-attract-more-customers-to-your-coffee-shop-according-to-an-expert-a77db175-4d3b-4e33-9544-6efd453ca471
Pasiya, L. (2023) ‘5 ways to attract more customers to your coffee shop, according to an expert’, IOL, 5 October. Available at: https://www.iol.co.za/sunday-tribune/lifestyle/5-ways-to-attract-more-customers-to-your-coffee-shop-according-to-an-expert-a77db175-4d3b-4e33-9544-6efd453ca471 (Accessed: 25 March 2024).
https://www.searchenginejournal.com/google-star-ratings-guide/416951/
Nolasco da Silva, C. (2024) ‘A Guide To Star Ratings On Google And How They Work’, Search Engine Journal, 14 March. Available at: https://www.searchenginejournal.com/google-star-ratings-guide/416951/ (Accessed: 25 March 2024).
https://www.bbc.co.uk/food/articles/fair_trade
BBC Food ‘What is fair trade and how does it affect your food shop?’, BBC. Available at: https://www.bbc.co.uk/food/articles/fair_trade (Accessed: 25 March 2024).
https://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/
Pettinger, T. (2019) Negative externalities, Economics Help. Available at: https://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/ (Accessed: 25 March 2024).
https://stories.starbucks.com/press/2024/starbucks-becomes-first-national-coffee-retailer-to-accept-reusable-cups-for-drive-thru-and-mobile-orders/
Starbucks becomes first national coffee retailer to accept ... (2024) Starbucks. Available at: https://stories.starbucks.com/press/2024/starbucks-becomes-first-national-coffee-retailer-to-accept-reusable-cups-for-drive-thru-and-mobile-orders (Accessed: 25 March 2024).
If coffee shops fail to account for the SMC, the market will overproduce (Q2) relative to the socially optimal level (Q1), resulting in a price (P2) that does not capture the true cost of production on society and the environment (P1). Addressing these externalities through sustainable practices, like sourcing from Fairtrade, can help align the PMC with the SMC, reducing the welfare loss and moving towards a socially optimal outcome.
Providing public goods, such as free Wi-Fi and restrooms, adds complexity. While these enhance the customer experience, they introduce additional financial burdens for maintenance.
Take My Money: Nudging Through Your Purchase
Have you noticed how these coffee shops not only focus on product quality but also promote ethical principles, like using Fairtrade coffee beans? Majority of coffee shops will claim they use Fairtrade beans. This is a signal - particularly a market signaling - showing their commitment to ethical sourcing and sustainability. This promotes a sense of responsibility to their customers, to further increase the reputation of the coffee shop. And not to mention, a $2 discount for every purchase with the use of their own tumbler. Sustainability? Check. Loyalty? Check. Profit? Check.
In addition to the framing effect, we also have the salience effect. Just like during the medieval times when a bulge from the wall is built to have the enemy focus on it, so as in business today. “Drink of the Day” is one example. Customers see different options in the menu, but “Drink of the Day '' saves them from headaches, while probably not their pockets. The ambience factor also contributes to the salience effect. All in all, the salience effect is just for the show.
To conclude, the economics of coffee businesses go beyond a simple cup of coffee. A complex interaction between market strategies, consumer psychology, and economic theory is involved. The combination of all these components unite to shape the ultimate coffee experience. Revealing how economics is woven into every aspect of our daily lives.
References :
https://medium.com/pushtostart/coffee-economics-7c0e0c834979
Flender, S. (2019) ‘Coffee Economics’, Medium, 19 January. Available at: https://medium.com/pushtostart/coffee-economics-7c0e0c834979 (Accessed: 20 March 2024).
https://www.iol.co.za/sunday-tribune/lifestyle/5-ways-to-attract-more-customers-to-your-coffee-shop-according-to-an-expert-a77db175-4d3b-4e33-9544-6efd453ca471
Pasiya, L. (2023) ‘5 ways to attract more customers to your coffee shop, according to an expert’, IOL, 5 October. Available at: https://www.iol.co.za/sunday-tribune/lifestyle/5-ways-to-attract-more-customers-to-your-coffee-shop-according-to-an-expert-a77db175-4d3b-4e33-9544-6efd453ca471 (Accessed: 25 March 2024).
https://www.searchenginejournal.com/google-star-ratings-guide/416951/
Nolasco da Silva, C. (2024) ‘A Guide To Star Ratings On Google And How They Work’, Search Engine Journal, 14 March. Available at: https://www.searchenginejournal.com/google-star-ratings-guide/416951/ (Accessed: 25 March 2024).
https://www.bbc.co.uk/food/articles/fair_trade
BBC Food ‘What is fair trade and how does it affect your food shop?’, BBC. Available at: https://www.bbc.co.uk/food/articles/fair_trade (Accessed: 25 March 2024).
https://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/
Pettinger, T. (2019) Negative externalities, Economics Help. Available at: https://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/ (Accessed: 25 March 2024).
https://stories.starbucks.com/press/2024/starbucks-becomes-first-national-coffee-retailer-to-accept-reusable-cups-for-drive-thru-and-mobile-orders/
Starbucks becomes first national coffee retailer to accept ... (2024) Starbucks. Available at: https://stories.starbucks.com/press/2024/starbucks-becomes-first-national-coffee-retailer-to-accept-reusable-cups-for-drive-thru-and-mobile-orders (Accessed: 25 March 2024).
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