A pricing strategy should aim at profit maximization
As a small business start-up, it is wise to start with the research of the target market and the existing service and product providers in that market. A pricing strategy should aim at profit maximization.
Consider making an advertisement to the nearby college using posters and invite people for a free coffee tasting for two days in the morning and evening once the business opens up. The feedback must be obtained from the tasters on their preference of the brand over other brands and what could be improved. The coffee shop should have a few more items on the menu as snacks to accompany the coffee for those who might be interested. This will help attract more people and ensure they recognize the brand.
It is very important to consider the cost of operation which includes the rent of the premises, cost of acquiring the necessary equipment, advertising costs, cost of the raw materials to make the coffee, and paying the employees.
All these costs should be divided with the amount of premium blend coffee that is prepared and sold plus a profit margin of about 40% to start with. It is important to research the demand for coffee and what amount could be sold per day. Considering that the target market is college students and people who would fit in that class the best option is to aim the price to be at least 5 cents below the competition per cup. This small price difference may not affect the profits with a big margin but will automatically attract the students more.
The rationale is; The biggest competitor in the market would be Starbucks who sells its coffee at small=$1.85, medium=$2.1, and large=$2.45. The cost of making a small, medium, and the large cup would be $1.2, $1.35, and $1.6 respectively. Applying the profit margin of 40% the coffee would cost $1.7, $1.9, and $2.25 for small, medium, and big sizes. This means that the business is breaking-even and at the same time being able to compete with a well-established brand.