The cup-of-coffee pricing fallacy
blog.gingerlime.com
blog.gingerlime.com
You aren't their target demographic.
People that do spend money on a cup of fast coffee would realize it's fine for their budget, and associate whatever offer with something affordable.
PS. I don't get the downvotes. Someone who says they won't spend $5 on a coffee because they are poor would be willing to pay for commenting feature on their website?! Something that they could get for free?
If SaaS is to price its service at $100/mo, then people for whom extra $5.00/day is a big deal won't be looking at this service at all, won't be contacting the owner about implementing yet another feature, etc. To get to $500/mo revenue, SaaS would need to find 5 owners.
So this isn't really against the idea, only against using coffee in the analogy.
One of the underlying principles, "Present costs as small pieces, and rewards as a large sum" is important, but there are many other relevant approaches, e.g. free trial, money-back guarantee, etc., etc. Effective marketing usually combines approaches. Analogizing to other small costs can NOT be the whole pricing strategy.
Also, what's a "coffee shop coffee"? Does that mean a place that charges more than $2 for a large?
First, the price for a plain old cup of coffee at Starbucks differs from region to region, but it usually normalizes at around $1.80 (taxes included). Refills are $0.52. While, yes, Starbucks’s coffee-based offerings (like lattes) are more expensive, coffee from Starbucks is quite cheap and VERY consistent (and cheaper than at a mom and pop coffee shop).
Second, there is more value from that cup of Starbucks coffee than the coffee itself: the space, the music, the Wi-Fi, etc. Products that make this comparison usually don’t offer the same value proposition.
That sounds really cheap, or what's a 'plain old cup of coffee' - does Starbucks sell filter coffee over there?
Starbucks accounts (free registration) get free refills.
Own-cup gets a $.10 discount.
All a bit cheaper than a local coffeeshop, where drip would be $3-3.5ish and lattes $4-4.5ish, plus typically a $1 tip.
That’s because Starbucks is not a in a coffee shop business but in a coffee based sweet deserts business. You wouldn’t compare Coca-cola to espresso or filter coffee, so why put Starbucks in coffee category?
Not only did it insult my definition of a 'nice meal', but also made me not want to give them any more money for 'nice meals'. A nice meal is 700 calories from healthy sources. An extravagant meal is the price they quote.
Similarly $5 is not the price of a coffee... It's about 30p.
But to be clear, when people refer to a "nice meal" costing $50-100, they're talking about an evening of being waited upon, not just the food. What you're paying for is service, ambiance, and restaurant location (overlooking a beach? at the top of a skyscraper?). It's not crazy for someone to decide to choose to indulge by buying nice food bundled with a relaxing experience, compared with buying nice food separate from a relaxing experience (going on vacation, going to a sporting event, having a massage).
But for the record, I agree that $50-100 is an extravagant meal. I think they chose the euphemism "nice" to make it sound like the tradeoff was for something not so extraordinary.
Now for those who actually do buy their coffee daily, it still assumes Also,it still asdumes a sort of laziness in personal budgeting. If you keep a personal budget and diligently track luxury extras like buying coffee at many x the price if making your own, and a the other little things, then you're going to be very aware and deliberate about incurring additional expenses of that sort. And so if you position your value-proposition in terms of "only a cup of coffee" instead of the value-add of the service itself, then you're automatically poorly targeting your message to the entire population of people that keep careful budgets.
However, the Lionshare of consumers are not rationalizing their purchases like people such as myself often do (I know that comes off as incredibly pretentious, I'm just using myself as an example). I've gotten worse with my money (or better) intentionally so as not to be too cheap and give off the feeling that I'm tight. Normally I'd be that way, but people dislike those kinds of people...like a lot.
Overall just think of it as people paying a tax for something to further continue. It's a tax you don't have to pay, but can freely do so if you choose.
It's worth pondering why SaaS founders are so inclined toward underpricing. I think this is because SaaS founders, especially if they are developers, tend to be really frugal in their SaaS and PaaS spending. For example, they'll use things like their DigitalOcean Droplet cost or their GitHub Pro subscription as a point of comparison. They'll think, "Those services are so valuable, and so cheap, so why would anyone buy my thing for more? I certainly wouldn't."
But what they tend to forget or ignore is that, especially in B2B, it's not your buyer's wallet or money at stake. It's your buyer's (or your buyer's department's) allocated budget. And budget allocations for businesses in mid-market and enterprise are always measured in thousands of dollars, and sometimes in millions.
All they care about is spending the money wisely -- that is, appropriately trading money for revenue, for cost reduction, for time savings, for company cultural impact, or, ideally, for all of the above. At that point, pricing too low can be counterproductive: many enterprises will, consciously or subconsciously, worry that your pricing being that low means you are a counterparty risk and thus not even worth hiring as a vendor.
In the B2C space or in the "B2B tools for individual employees" space, to understand your pricing power requires understanding your buyer demographics. If you are selling productivity software to executives, they will think in terms cost relative to their time and the time of their assistants and subordinates. If you are selling hosting software to entrepreneurs, they will want low starting pricing but be OK with pricing that scales quickly with growth. If you are selling a video streaming or premium content service to consumers, they will anchor you against Netflix, Disney+, Hulu, and cable. Selecting your price is a very important part of your strategy and how your service is perceived. Picking the lowest price you can afford at reasonable margins, which is a kind of obvious default, is often a terrible strategy.
Too much subscriptions is death by a thousand cuts.
If I'm out of town I'll grab a cup at mcdonalds or something. The regular cofee maxes out around $1.59. Or I could go fancy and get a medium caramel macchioto for $3.25 or so.
So you're telling me I can get their software for $0.50-$3.25 a month? Not bad! :D
In this formulation, I think it's a pretty reasonable comparison, since a prospective user doesn't have to sacrifice much (just a semi-luxury item, one day a month) in order to use your service. The author's criticisms don't seem to hold as much purchase (no pun intended) in this context.
I'd be curious to know if others think of cup-of-coffee pricing as $5/mo or $5/day. The only context where I can remember hearing per-day pricing is life insurance or supporting a child in a developing country.
The sign up process is a little bit of a hassle, but for anyone buying multiple cups a day, it's probably worth it.
If you sign up via an invite code, you get $5 free (and your referrer does too). For anyone who wants it, my referral code is: https://cash.app/app/HSMSVXP, or you can just sign up at http://cash.app.
note: I do not work for the company — I just find this perk to be very handy!
I like coffee, but I've not bought even a 4€ cup of coffee in a few months. Actually I don't visit coffee shops a lot, I much prefer drink my coffee at home (or at work, where it's free)...
Also if they argued that 7€ would be just 2 beers per month... maybe I'd still take 2 beers over some ridiculous SaaS. TLDR: I don't like subscriptions.
Not to be rude — just pointing out that feedback from someone who is highly unlikely to purchase a type of product is less relevant.
For the record, I also don’t like subscriptions, and I probably put too much weight on my distaste when pricing my startup's products.
I have resisted the push to make or app subscription-based, since I personally would never buy an app with a subscription. But perhaps I'm out of step with the "kids these days"? I also have zero subscriptions to Chrome extensions, and we have plenty of customers there...
- my standard cup of coffee is not 5$. It’s a free perk on the job, coffee I drink at home and buy in bulk so I don’t think in terms of cups, or a 2€ expresso I buy to sit in some warm place waiting for someone or to use the toilets.
In particular for the last instance, it’s a cost I won’t skip because I bought some service online at the same price. I’d pay the 5$ service in top of my coffee.
- coffee I really want to pay for at 5~10€/$ is extremely good and comes from a specialized place that invests a lot in making good coffee and providing a place to enjoy it. It’s of tremendous value and not something I get from random starting services. TBH I’d value it more than a third backup of my photos through dropbox for instance.
I agree though that the 0.001% ultra elitists who are destroying the world like to brag that they routinely spend this amount on one cup of plain coffee. When the revolution comes, these people will be the first against the wall and no one that is human will shed a tear at their loss.
You can make a lot of money simply by selling the right to a cup of coffee every day in advance. A cup of coffee every day is equivalent to the price of a luxury car, from the point of view of a modern capitalist, and figuring out a way to charge people accordingly is a straightforward arbitrage.
You're better pointing out how much it will cost a business in time and money to solve a problem themselves and compare that to the cost of your product. If you're selling too cheap, the problem probably isn't big enough or important enough.
Just recently a fairly large one we lost had a fantastic ROI, about a 10% ramp time to the competition, and even had the CTO's buy in. But we lost and found out it was bc the VP was neighbors to the other sales rep and he convinced the CTO not to buy from us. From what I can gather from the other folks that were championing for me was mostly untrue FUD was used by this VP, all in an effort to help his buddy. Their cost was supposedly ~30% higher and I usually stomp that product to the ground - because of business cases.
Committing to a monthly payment is usually not the same as buying X coffees for a month.
*or close to immediately if it is one of those annoying poor over places
Maybe you wanted him to emphasize that particular aspect more.
I can't recall the keyword for this in the realm of economics, but it's a weird thing to compare 'good value' across sectors. I do it quite often, wonder why I think X is such a rip-off when I won't even blink at Y - perhaps for that reason I've never had a problem with coffee-currencied pricing.
At least for consumables (coffee, groceries, SaaS in the sense that even if you don't consume a quota you consume a timeframe) I think there is value to be had in comparing their relative value, but only secondarily to comparison against something of the same type of course.
Meaning, it is not just about comparing value of goods. It is much more about keeping strategy that is easy to remember and execute, but allows you to keep savings.
The person whom I addressed that was going to run a business selling access to a commenting feature. https://news.ycombinator.com/item?id=22209411
The competition for that feature is free comments via Facebook so anyone who does not want to spend money has that ability. The other set of "competitors" is accessed for free via open source software that one can install.
As soon as the person signs up a first client, he or she would have to provide the service for some period of time. Just shutting it down won't be an option. Any and all businesses are a pain in the ass to operate.
Say that in order for this "business" to be viable in the eyes of the person running it ( not profitable, just viable ) it would need to eick out $500/mo in revenue.
To do that at $5.00/mo he would need to get 100 customers. That's a very tall order because the competition is free and price sensitive customers are going to go to a free service (facebook) or they are going to go to whatever service that shows up that will underprice the OP.
There's however another group of potential customers. They are people who for some reason need a problem of commenting solved and are willing to pay for it. Not a lot. But a some reasonable amount of money. What's reasonable? Well, a dinner for 2 in major cities is the USA is going to run you about $120. People who go out in those cities 4-10 times a month are the same people who have a daily Starbucks/La Colombe/Joe's Coffee/Pete's Coffee habit. They could make the coffee at home for $0.25 a cup just like they could make a dinner at home for $3/per person. Instead they choose to spend money not on the cheapest option but on option that simply solves their problem. They demonstrate it by buying Starbucks coffee and going out to dinner twice or three times a week.
It is much easier to find 5 of people who spend $100/mo on Starbucks who need to have commenting problem solved and convince them to spend $100/mo on it than to find 100 people who would spend $5/mo who think that spending $100/mo on solving their problem is too much. Why? Because the second group has already demonstrated that $100/mo is an expense they are willing to take.
Are your customers likely to be the kind of people that go out multiple times a month in expensive cities?
Some of your customers are small outfits (single person, or side-project of multiple people), a group of people where I'd expect "daily expensive coffee" is seen as more frivolous then spending the same on a sensible business expense.
And larger businesses don't think in those terms at all when budgeting, but much more in risk, saved employee hours, saved money spent on contractors handling the same thing, ... The "nice meal" analogy might work slightly better here, but also always has the risk of seeming out of touch for people from other regions.
Not for the vast majority of people.
That's from 2013.
The vast majority of people are not potential customers for a small SaaS startup charging money for "it would be nice to have" service.
I have a daily coffee habit precisely because it's significantly cheaper than having an eating out habit, while providing me with the same or better satisfaction.
I disagree with the posters above who say there's a 90% markup on the coffee. What you're buying at Starbucks isn't a coffee, but a coffee plus the right to sit at a table and use the wifi for an hour or two. And as OP points out, at the moment, this is pay-per-use: when I need a place to sit down for a bit, whether in my own city or some other city, or when I need a table to sit and chat with someone that's not in either of our homes, I buy the right to take a seat for $4. They even give me a cup of coffee to go along with it.
Making it a subscription would completely change the way I related to such a business. I mean yeah, I wouldn't have to drink coffee just to sit down. But I'd be thinking each month -- am I getting a good value out of this subscription? I'd be sitting a lot more in the shop than I normally would; which would mean more regular income for the owner, but less space for random people in a strange town who want to have a nice place to sit for an hour.
$4 for a one-off, no commitment, pay-as-you-go service with instant gratification (buy the coffee, take a seat) seems like a pretty nice deal to me; and it makes cities nicer places to be than if you had to have a subscription.
That's how accounting works. The 90% markup is on the coffee, and if you sell enough coffee you can cover the overhead of the cafe. I.e. there's margin and there's net income.
A 90% markup on a product (even when taken away) is exceptional. Yea a subscription model could make sense, many local coffee shops struggle and end up closing doors after a while.
I rather propose reducing the margin, have more people consume such Beverage out instead of home made, or worse: the vending machine at the office. But disrupting the market pricing practices is very difficult of course. I would like that, a cup of coffee without commitment, for a fifth of the current retail price, that's still a 50% markup. As a coffee shop owner, I would also like that: My counter visited by 10 times more customers, seeing happy faces for coffee at great, in fact adequate, value.
I don't know why. It's a bit like how everything ends in .99. even when you know it's being used on you, it still works.
I know that Starbucks tastes better than my drip machine, but I don't really care. Coffee is coffee to me, java junkie that I am.
Moka pots work too and are cheaper (though espresso machines are real cheap at least here in Europe) but the coffee isn't as creamy and it takes a few minutes to boil (even though it needs no attention). With a large moka pot it's easier to make large quantities though (but I hate stale coffee so I favor espresso machines). Still better than drip.
If you're really into coffee get a superautomatic machine. Best coffee I've ever had, instant and with zero effort.
There's a lot of fiddly cleaning involved - the grinder has to be cleaned meticulously after use as do the various bits of the espresso machine. The finely ground coffee is very sensitive to static so tends to jump/attach itself to white t-shirts and plastic kitchenware - more cleaning. All this cleaning is required even if you just want to make one espresso - otherwise later uses will have a nasty taint.
There's a lot of experimentation required to produce a decent espresso with crema from such a set-up. Depending on the beans, their age, the weather, etc., the fineness for grinding and how tightly you packed the portafilter would vary. On good days I was getting 3 out of 4 but that still meant 1 in 4 (or more) were dreck.
Moka pots are a pain to clean though, but you can buy a huge one to produce a large quantity.
I'm suspicious of the espresso machines, though, as they reportedly leech cadmium into the coffee. Not something I want to drink all day.
Also fresh high quality beans often result in costs per coffee a lot higher than your number. While I would encourage people to get into espresso as an hobby, I wouldn't recommend it to save on Starbucks cost.
Don't buy high quality beans.
IMHO the end result is influenced mostly by preparation and water quality. I'd had to double blind it, but I've had store brand and expensive beans and the difference is negligible.
Note: I'm in Europe. Market differences might apply.
The most important thing I found was not to use municipal water. Bean quality is far less important than water quality. Great beans and city water is undrinkable. Lousy beans and good water is tolerable in a pinch.
> First off, I would personally never buy a cup of coffee at Starbucks. But I understand why some people would.
He'll only take his Arch Linux Pinebook (ok, I just assumed that) into his "local roaster"
> The cup-of-coffee-fallacy becomes much more obvious when it comes to subscription services. I might buy a cup of coffee from my local roaster, and would happily buy many cups, some beans, and snacks on a regular basis.