Could a pay-per-minute pricing model save coffee shops?
As inflation and soaring energy costs hit coffee shops, some are seeking alternative strategies to stay afloat. UK-based coffee shop owner Ben Mitchell explores whether a system of charging for customers’ time could work.
To stay afloat in a fiercely competitive market, coffee shops are always keen to keep down prices. Even a small rise can quickly see footfall drop, as customers turn to cheaper alternatives, leaving only the most loyal as regulars.
However, as energy prices remain high and inflation causes the price of everything to soar, from cups to arabica beans, coffee shops have found it increasingly difficult not to raise their prices to cover their costs of production.
Most of those who haven’t increased their prices have resorted to cutting back on expenses such as labour or high-quality coffee. Yet for many, this has also had an adverse impact on footfall.
The challenging landscape in which coffee shops find themselves has prompted a renewed focus on slightly more left-field strategies. And one particular approach that has stirred interest among owners is the pay-per-minute model.
In this scenario, customers are charged a rate depending on their time spent in the café, and usually have access to unlimited coffee, tea, snacks, and Wi-Fi. The question facing many owners, however, is whether this actually helps at all.
Indeed, a full, bustling, café is often appealing to customers, but a shop full of silent, focused remote workers can often deter further footfall.
What’s more, dine-in customers are relatively expensive. George Benaroya, Senior Vice President Finance at Long Term Investments, explains that it costs Starbucks $1 to prepare a takeaway coffee, while a dine-in coffee can cost the store over $10.
Combining marginal costs with all costs associated with the rent, George estimated that it costs the store around US $9 for every three hours that a customer spends in the shop, comprising energy costs, rent, and other factors.
Pay-per-minute coffee shops attempt to address this issue directly – customers pay for time.
How does the pay-per-minute model work?
A pioneer of the pay-per-minute model is Russian entrepreneur Ivan Miti. In 2011, he founded Ziferblat, an “anti-café” in which customers are given a clock upon entering which they return at the end of their visit.
For the first hour, every minute costs customers 10 cents. For the second, third, and fourth hour, it’s 6 cents per minute, and charges are capped at $16.50 per day.
Those who pay can help themselves to tea, coffee, cakes, breads, and salads, but they’re asked to tidy up after themselves. Ziferblat locations feature lounge-type decor and people are encouraged to relax as if it were their own sitting room. The concept proved so popular that Miti expanded his philosophy to Slovenia, Ukraine, and the UK.
As energy prices soar and rents rise, a costing system that accounts for the time customers spend in the store – taking up energy and taking up space – seems more sensible than ever. But is this system really viable?
For many hospitality business owners, the idea of a buffet offering comes with a significant risk: people looking for a bargain can enter, fill their bellies, and leave with food still falling from their mouths. In fact, Ziferblat’s smallest ever customer spend was less than 30 cents for a total of three minutes.
Similarly, a full table indulging in breakfast and three coffees each will likely bear no fruit for the business. It’s simple: revenue per customer is not affected by the amount of product purchased, but how long people stay, so if a shop has an average spend of $3.95 and an average stay of two hours, this model may be suitable.
Conversely, the aforementioned Starbucks in the centre of New York, with an average stay of 15 minutes resulting in an average transaction of $1.20, will certainly not make enough money to pay its staff, suppliers, and landlord.
Will pay-per-minute coffee shops take off?
Fundamentally, the pay-per-minute model faces several obstacles that are particularly challenging for business owners at the moment.
In the UK, rent-rises limit the rates pay-per-minute coffee shops can charge, and in 2018, Ziferblat was forced to close its Shoreditch location because it could not match the rate that the landlord was asking while keeping prices competitive.
This specific closure centred around a lease dispute: Ziferblat was operating in a legal grey area between a “shared workspace” and a venue for “selling food and drink”. It is indeed an anti-café, as there are no trained baristas to brew the coffee, and no chefs cooking meals on demand.
On one hand, this reduced need for labour is the very reason Ziferblat is able to keep costs low. On the other hand, it’s a departure from what’s traditionally considered a café, and it’s probably more accurate to call it a communal workspace with added benefits.
While the shared workspace business model has experienced great success in recent years, many customers simply aren’t willing to forgo café service. In 2014, one London Ziferblat customer was quoted as saying, “I don’t want to go to a cafe and have to make my own coffee and wash my own dishes”.
Ultimately, price increases and cost-cutting shouldn’t scare coffee shop owners as much as they do. Coffee is an inelastic product, and the public isn’t willing to give it up. United Baristas says that cutting costs are good, but pushing prices is necessary – and it almost always boosts financial performance.
With most coffee shops spending over 50% of revenue on labour costs and cost of goods, with a net profit margin of 10%, price increases that are balanced out with forecasted customer losses will still result in financial reward.
Coffee shops can also benefit from being transparent about the challenges they’re facing. Sometimes, all it takes is a simple conversation with a customer about price increases, profit margins, and business viability.
Yet, with increasing prices and the changing landscape of the working environment, now may be the time for pay-per-minute coffee shops to shine. With many workers intent on retaining their remote lifestyle, these spaces can offer a good value alternative to home offices, and one where the shame of an unbought flat white doesn’t loom over them.