Margins are shrinking, and the cost of doing business continues to increase. Will the Office Coffee industry be consumed by another vertical industry? The one-stop-shop principle in office delivery has legitimate cost-saving opportunities through increased order size, but often increases delivery cost because consumers can purchase small orders every day without penalty. Operators may require a delivery charge for small orders, or add a benefit for large orders. Regardless of delivery method or requirement, the consumer will buy what they want when they want it. The pricing strategy is an important component of the business plan, and remains a valid tool for success.
BANANAS provide certain health benefits, and may hold a secret to pricing strategy. Today many people will purchase bananas from their favorite grocery store, or as an impulse buy from a convenience store. What is the price of bananas today? Perhaps the price is $0.49, 0.59, 0.69, or more per pound. Some people will know the price of bananas before they buy; most will not know the price, but will buy because this is an item they buy on a regular basis. Bananas are not the only product this pricing strategy applies to, but provide a clear visual for fluctuation in price.
Consumers become loyal to certain grocery stores for many reasons. The reasons for loyalty may include consistently low prices, consistently high-quality items, loyalty programs, good/friendly service or a convenient location to name a few. One misstep in service by the grocery store pushes the consumer to other options. These basic ideas parallel why consumers purchase from Office Coffee Service (OCS) operators, and why consumers move to other providers.
Some pricing strategy in the OCS industry is based on competition, wholesale, and green coffee prices. Responding to wholesale and green coffee prices is predictable, so competitors know when operators increase prices. Raising prices based on wholesale increase only allows operators to maintain a margin. Perhaps the pricing strategy should reflect the needs of the OCS. Operators desire growth, and profit through a pricing strategy provides the medium for growth. Pricing for growth requires a daily strategy.
Many accounts are won and lost because of service or new product options. Most customers are loyal until a misstep occurs, and do not analyze every price on each delivery. A select few customers have contract pricing, and prices must match purchase orders. Operators should not base the entire price strategy on the select few. Operators need to maintain a high level of service and convenience to keep customers, and the profit margin dictates how many assets are available to sustain the service.
The concept for price increases is simple. Review the items sold most frequently, and create a strategy to increase the price. Raise prices less than 10% no more than twice per year on top selling items with a goal to recapture lost margin. Common sense strategy moves coffee prices in the summer and cold beverages in the winter. The strategy is not based on a wholesale price increases, or coffee rust in Brazil, rather the need for more profit to maintain service levels. What is the price of roll towels on Wednesday?
The price strategy is the most important task each day. Operators have seen margins erode from 60% or greater down to upper 30%, or lower 40%. The original margins were not based on greed, rather the need to maintain equipment, and service. Lower margins compromise operations, and are unsustainable. Occasionally operators increase pricing across the board on a single customer because of the customer purchasing habits, or location. This method increases the possibility that a customer will stop purchasing, and is counter-productive. What is the price of Splenda on Thursday?
Grocery store advertisements circulate regularly, and do not advertise increases. The circular explains when the prices are in effect, and when the pricing ends. OCS operators may employ a similar strategy to promote new items, or increase sales on items not selling well. Operators are not required to send a letter to customers explaining price increases. Some customers, not the majority, may push-back on an increase, and should be addressed individually. The push-back is an opportunity to become a hero by moving the price back, but should also be used as a sales opportunity. Take time to meet with the customer, and talk about other product categories available including new coffee options. What is the price of tea bags on Friday?
New customers prefer to have a term for price guarantees, which is negotiated during the sale. The pricing strategy should be in effect when the guarantee term ends. Prices should not be static, because the cost of doing business continues to change. This method is not a dishonest shell game used to trick customers, rather a justifiable process to maintain a high level of service to the consumer. The pricing strategy is an obligation to shareholders, and provides an expected return on investment. What is the price of hot chocolate today?
Big Box stores and other competitors continue to reduce operator margins. Consumers desire good service at fair prices. Operational costs continue to increase. The OCS industry is not bulletproof, and operators should continue to educate themselves to provide the expertise the consumer desires. The industry will continue to innovate, and bring solutions to consumers expecting convenience and quality. The price strategy allows operators the financial needs to transform the industry, and provide the best service possible.
by Dan Ragan, Pod Pack International, LTD.