Wayne Fowler, managing director of coffee distributor Gilkatho Coffee, says operators cannot rely solely on the quality of their coffee to justify any increase in prices.
"People will pay for whatever is asked as long as they're getting a great experience... [However] coffee is sensitive; it can't go up too dramatically or people will drink something else," he says.
Fowler's comments come in light of recent reports that wholesale coffee bean prices are at a 13-year high due to poor growing seasons, a spike in demand for coffee in Asian countries, and a weaker US dollar.
Agricultural markets show Arabica coffee – a bean favoured by Australian cafes – have reached prices not seen since the 1970s, while some of the world's top roasters have hiked prices by more than 20%.
Fowler says the cost of raw beans is just one factor driving up coffee prices, with operators experiencing other increasing costs including shop rents, staff wages, water and electricity.
He says smaller operators are more inclined to hold off on a price rise for several years before hiking up prices as much as 50 cents.
"If prices go up by five cents, people won't notice but if prices go up by 50 cents, people will notice," he says.
Fowler says small businesses should review their prices every six to 12 months, and look at their competitive landscape when deciding how much to raise them by.
"Look at what your competitors are doing in the area and look at volume – if you're sell at a higher price, you need to gauge whether you think you will sell more or less," he says.
Fowler also advises against dropping prices too dramatically, as it could be perceived that the product is of a lower quality or the business is struggling.
Most importantly, Fowler says operators must focus on the coffee experience for customers, which can include convenience, quality of the venue and location, service, waiting times and product range.
He says coffee wholesalers can also "wrap up" their clients' experience by incorporating other services such as freight.
Fowler says cafes that allow customers to order items on their mobiles also do well, as these customers are often more resistant to changing cafes due to the added convenience.
"The main point is to be confident that the service you're offering is relative to the price you're charging. People will pay on a range of prices so it's important for operators to know what their market is," he says.
The Coffee Club, which operates franchises across the Asia Pacific, says any price rises in its outlets are likely to be moderate.
"Just because wholesale coffee bean prices have gone up, doesn't mean that the price of a cup of coffee will go up 50 cents a cup," a company spokesman says.
The Coffee Club recently released its results for the 2010 financial year, with Australia recording almost 32% growth in annual profits, indicating coffee demand is still strong.
This article first appeared on StartupSmart, Australia's top site for anyone starting a business.
