Mine's a skinny latte... it's how much?!

In my rural market town with a population of 6,000 and one small high street, we have 7 thriving coffee shops. All are independent as Costa Coffee and Starbucks haven't seen the need to move in but you can still get a good latte and free wi-fi (well if you keep your device tilted and your finger's crossed - the monk's didn't account for the internet when they founded the abbey). The point is that coffee shops are big business as 'Business Boomers: Coffee Shop Hot Shots' on BBC2 informed us this week with the average customer spending £450 annually (hmm, they haven't seen my bill).

The programme said the average price of a cappuccino (£2.30) breaks down as follows:
£0.15 ingredients
£0.15 cup and napkin
£1.20 fixed costs - staff, rent, utilities
£0.45 VAT
£0.00 corporation tax (joke...!)
£0.35 profit

We could say that the pricing framework being used is cost-based - the coffee shops may be establishing all the costs then adding a percentage, set amount or arbitrary figure to reach the price. Or it could be competitor-based: what are our competitors charging? They can use that as a benchmark or set the market price to lead the competition.

Where pricing gets interesting is when it comes to customer-based frameworks... Psychological pricing is when the purchase of the product creates an emotional response in terms of the value or status we get from it. I could buy a cup of normal white coffee in a polystyrene cup from the station cafe but I like the experience of seeing my frothy coffee made and having a moment to myself in nice surroundings. The product-line pricing approach is in play as drinks vary by size, complexity or ingredients. But the most important framework here is differential because the price can vary by customer. The Starbucks representative said that they can't possibly list all the options of drinks available on their menu. Once you start adding cream, marshmallows, extra shots and syrup, the price goes up exponentially and profits rocket! It's an affordable luxury we're prepared to indulge in and one that is keeping our high street alive.