
The cup-of-coffee pricing fallacy - gingerlime
https://blog.gingerlime.com/2020/the-cup-of-coffee-pricing-fallacy/
======
NikkiA
I've always hated it because it makes the assumption that everyone is at the
same position in the class hierarchy - I'm poor, the last time I drank a
coffee shop coffee was something like 8 years ago and even then it was bought
for me by my psychologist, your 'cup of coffee a day' price just sounds
extravagant to me.

~~~
pembrook
But if you’re poor...you’re probably also not in the market for a $100/m B2B
Saas product.

~~~
notyourday
If you're poor you are not a target customer for any non-essential paid for
monthly service.

~~~
vhvjkyhkogvv
A cost of doing business is one of the most essential expenses there is.

~~~
monadic2
The absurdity of an “essential price”... essential to what, class?

~~~
tomnipotent
To doing business? Doesn't seem absurd at all. Do you think business should
just land in your lap for free without having to spend anything for it? That
what seems absurd to me.

~~~
monadic2
"business" is just one mode of industrial production, even in a marketplace.
So, essential for business, perhaps, but hardly essential in a general sense.

------
nunez
I hated this assumption too, but for different reasons.

First, the price for a plain old cup of coffee at Starbucks differs from
region to region, but it usually normalizes at around $1.80 (taxes included).
Refills are $0.52. While, yes, Starbucks’s coffee-based offerings (like
lattes) are more expensive, coffee from Starbucks is quite cheap and VERY
consistent (and cheaper than at a mom and pop coffee shop).

Second, there is more value from that cup of Starbucks coffee than the coffee
itself: the space, the music, the Wi-Fi, etc. Products that make this
comparison usually don’t offer the same value proposition.

~~~
OJFord
> First, the price for a plain old cup of coffee at Starbucks differs from
> region to region, but it usually normalizes at around $1.80 (taxes
> included). Refills are $0.52.

That sounds really cheap, or what's a 'plain old cup of coffee' \- does
Starbucks sell filter coffee over there?

~~~
gvjddbnvdrbv
Starbucks sells filter coffee in the UK.

~~~
OJFord
Oh, so they do. Sorry I've just never been aware of that.

------
RealDinosaur
I found it hilarious when a LA based startup compared their pricing structure
to a 'nice meal' (50-100$)

Not only did it insult my definition of a 'nice meal', but also made me not
want to give them any more money for 'nice meals'. A nice meal is 700 calories
from healthy sources. An extravagant meal is the price they quote.

Similarly $5 is not the price of a coffee... It's about 30p.

~~~
grecy
I've never spent more than $35 on a meal in my life, and I like to think I've
had some mighty good ones!

~~~
dhxudkwjwhh
Even in big cities I have trouble spending more than this on a single meal. If
I'm covering a date or sharing a bottle with the table that changes obviously,
but unless you're going to a suit and tie or otherwise haute kind of place
then $50 is absurd.

------
ineedasername
The "cup of coffee" analogy always struck me as though it was asking, "Hey,
wouldn't you be willing to pay twice as much for your coffee as you do now?"
And, well, no. It also misses the mark for anyone who says, "I'm not paying
$100 a month for coffee, that's rediculous, I'll make my own.

Now for those who actually _do_ buy their coffee daily, it still assumes
Also,it still asdumes a sort of laziness in personal budgeting. If you keep a
personal budget and diligently track luxury extras like buying coffee at many
x the price if making your own, and a the other little things, then you're
going to be very aware and deliberate about incurring additional expenses of
that sort. And so if you position your value-proposition in terms of "only a
cup of coffee" instead of the value-add of the service itself, then you're
automatically poorly targeting your message to the entire population of people
that keep careful budgets.

~~~
LeoTinnitus
I'm pretty sure there was an article on here just recently about how people
who spend money even on dumb things don't do it because they don't budget, but
because it provides other particulars of happiness. It stated that human life
is complicated and min maxing life financially differs from person to person.
So while they may spend $200 on coffee, but may also bike to work daily. Or
they just flat out enjoy it and trade money for that enjoyment.

However, the Lionshare of consumers are not rationalizing their purchases like
people such as myself often do (I know that comes off as incredibly
pretentious, I'm just using myself as an example). I've gotten worse with my
money (or better) intentionally so as not to be too cheap and give off the
feeling that I'm tight. Normally I'd be that way, but people dislike those
kinds of people...like a lot.

Overall just think of it as people paying a tax for something to further
continue. It's a tax you don't have to pay, but can freely do so if you
choose.

~~~
ineedasername
You can spend lots of money on dumb things and still budget. But a person who
diligently budgets their money will not spend money on dumb things at the
expense of debt, lack of proper long term financial planning, etc. Dumb things
can fit into a careful budget.

------
pixelmonkey
On the other hand, most SaaS founders, especially in B2B, are inclined to
charge too little for their service. So the coffee analogy can wake you up
that $5/mo or $10/mo is an almost ridiculously low price for a piece of
software that solves any sort of problem.

It's worth pondering why SaaS founders are so inclined toward underpricing. I
think this is because SaaS founders, especially if they are developers, tend
to be really frugal in their SaaS and PaaS spending. For example, they'll use
things like their DigitalOcean Droplet cost or their GitHub Pro subscription
as a point of comparison. They'll think, "Those services are _so_ valuable,
and so cheap, so why would anyone buy my thing for more? I certainly
wouldn't."

But what they tend to forget or ignore is that, especially in B2B, it's not
your buyer's wallet or money at stake. It's your buyer's (or your buyer's
department's) allocated budget. And budget allocations for businesses in mid-
market and enterprise are always measured in thousands of dollars, and
sometimes in millions.

All they care about is spending the money wisely -- that is, appropriately
trading money for revenue, for cost reduction, for time savings, for company
cultural impact, or, ideally, for all of the above. At that point, pricing too
low can be counterproductive: many enterprises will, consciously or
subconsciously, worry that your pricing being that low means you are a
counterparty risk and thus not even worth hiring as a vendor.

In the B2C space or in the "B2B tools for individual employees" space, to
understand your pricing power requires understanding your buyer demographics.
If you are selling productivity software to executives, they will think in
terms cost relative to their time and the time of their assistants and
subordinates. If you are selling hosting software to entrepreneurs, they will
want low starting pricing but be OK with pricing that scales quickly with
growth. If you are selling a video streaming or premium content service to
consumers, they will anchor you against Netflix, Disney+, Hulu, and cable.
Selecting your price is a very important part of your strategy and how your
service is perceived. Picking the lowest price you can afford at reasonable
margins, which is a kind of obvious default, is often a terrible strategy.

------
jmnicolas
The problem with "cup-of-coffee pricing" is that if I trust everybody that has
a subscription to sell to me, at the end of the month I will be broke.

Too much subscriptions is death by a thousand cuts.

~~~
notyourday
Exactly. People who want a service for $5.00/mo aren't viable customers for
SaaS

~~~
WWLink
They can be if the SaaS is really really simple. I'm imagining stuff like what
used to be $25 shareware that the owner now charges $10 a year for.

------
gnicholas
This article frames the cup-of-coffee pricing comparison as: "$100/mo is less
than a cup of coffee every day". But I most frequently see the comparison as:
"$5/mo means giving up just a cup of coffee once a month".

In this formulation, I think it's a pretty reasonable comparison, since a
prospective user doesn't have to sacrifice much (just a semi-luxury item, one
day a month) in order to use your service. The author's criticisms don't seem
to hold as much purchase (no pun intended) in this context.

I'd be curious to know if others think of cup-of-coffee pricing as $5/mo or
$5/day. The only context where I can remember hearing per-day pricing is life
insurance or supporting a child in a developing country.

~~~
bryanrasmussen
$100 a month is less than the amount I spend on coffee, but most people seem
to think I have a problem.

~~~
gnicholas
If you spend this much in coffee shops, I highly recommend you try the Cash
app, from Square. If you turn on the "coffee shop boost", you get $1 off of
every purchase made at a coffee shop. There's a 30-minute recharge period
required between purchases, and a $1.50 minimum purchase.

The sign up process is a little bit of a hassle, but for anyone buying
multiple cups a day, it's probably worth it.

If you sign up via an invite code, you get $5 free (and your referrer does
too). For anyone who wants it, my referral code is:
[https://cash.app/app/HSMSVXP](https://cash.app/app/HSMSVXP), or you can just
sign up at [http://cash.app](http://cash.app).

note: I do not work for the company — I just find this perk to be very handy!

------
seanwilson
To me, the coffee price comparison makes your service sound like it's a
frivolous and unimportant purchase.

You're better pointing out how much it will cost a business in time and money
to solve a problem themselves and compare that to the cost of your product. If
you're selling too cheap, the problem probably isn't big enough or important
enough.

------
ewams
In many instances I would argue relationships in the B2B sale are more
important than price. I have both lost and won many deals because of only the
relationship.

Just recently a fairly large one we lost had a fantastic ROI, about a 10% ramp
time to the competition, and even had the CTO's buy in. But we lost and found
out it was bc the VP was neighbors to the other sales rep and he convinced the
CTO not to buy from us. From what I can gather from the other folks that were
championing for me was mostly untrue FUD was used by this VP, all in an effort
to help his buddy. Their cost was supposedly ~30% higher and I usually stomp
that product to the ground - because of business cases.

------
richk449
Article misses the fallacy of the comparison. If I buy a cup of coffee, I get
my end of the bargain immediately* and no further commitment on my part is
needed. For most saas offerings though, I’m basically committing to a regular
payment in perpetuity. Usually if I stop paying, I not only lose the immediate
benefits, but also whatever I have put into the app in the time I used it.
Even if it is just storage, if I cancel it, I have to find a way to replace
the storage and the access to the storage from my devices.

Committing to a monthly payment is usually not the same as buying X coffees
for a month.

*or close to immediately if it is one of those annoying poor over places

~~~
hsitz
I think the article did discuss your point, "But [with a cup of coffee]
nowhere am I asked to 'subscribe' to anything. I buy it, enjoy it, and that’s
it. I’m not committed to buy another cup ever again."

Maybe you wanted him to emphasize that particular aspect more.

~~~
OJFord
I actually do 'subscribe to coffee' though; I get beans delivered by
[https://pactcoffee.com](https://pactcoffee.com) (UK only I think).

I can't recall the keyword for this in the realm of economics, but it's a
weird thing to compare 'good value' across sectors. I do it quite often,
wonder why I think X is such a rip-off when I won't even blink at Y - perhaps
for that reason I've never had a problem with coffee-currencied pricing.

At least for consumables (coffee, groceries, SaaS in the sense that even if
you don't consume a quota you consume a timeframe) I think there is value to
be had in comparing their relative value, but only secondarily to comparison
against something of the same type of course.

~~~
watwut
Most people can afford a thing for price x easily. Had they never balked at
price x, they would pay 20 times x and that is entirely different number.

Meaning, it is not just about comparing value of goods. It is much more about
keeping strategy that is easy to remember and execute, but allows you to keep
savings.

------
laurex
When I lived in NYC, a local coffee-place-slash-home-design-store offered a
subscription, whereby if you used it almost every day, you'd be getting
significant discount on your artisanal latte. I think they went on to try and
create some kind of loyalty rewards app, but for a while, this concept was
real. [https://www.10best.com/destinations/new-york/new-
york/articl...](https://www.10best.com/destinations/new-york/new-
york/articles/fair-folks-a-goat-more-than-meets-the-name/)

------
notyourday
I'm the person who has been quoted.

The person whom I addressed that was going to run a business selling access to
a _commenting feature_.
[https://news.ycombinator.com/item?id=22209411](https://news.ycombinator.com/item?id=22209411)

The competition for that feature is free comments via Facebook so anyone who
does not want to spend money has that ability. The other set of "competitors"
is accessed for free via open source software that one can install.

As soon as the person signs up a first client, he or she would have to provide
the service for some period of time. Just shutting it down won't be an option.
Any and all businesses are a pain in the ass to operate.

Say that in order for this "business" to be viable in the eyes of the person
running it ( not profitable, just viable ) it would need to eick out $500/mo
in revenue.

To do that at $5.00/mo he would need to get 100 customers. That's a very tall
order because the competition is _free_ and price sensitive customers are
going to go to a free service (facebook) or they are going to go to whatever
service that shows up that will underprice the OP.

There's however _another_ group of potential customers. They are people who
for some reason need a problem of commenting solved and are willing to pay for
it. Not a lot. But a some reasonable amount of money. What's reasonable? Well,
a dinner for 2 in major cities is the USA is going to run you about $120.
People who go out in those cities 4-10 times a month are the same people who
have a daily Starbucks/La Colombe/Joe's Coffee/Pete's Coffee habit. They
_could_ make the coffee at home for $0.25 a cup just like they could make a
dinner at home for $3/per person. Instead they choose to spend money not on
the cheapest option but on option that simply solves their problem. They
demonstrate it by buying Starbucks coffee and going out to dinner twice or
three times a week.

It is much easier to find 5 of people who spend $100/mo on Starbucks who need
to have commenting problem solved and convince them to spend $100/mo on it
than to find 100 people who would spend $5/mo who think that spending $100/mo
on solving their problem is too much. Why? Because the second group has
already demonstrated that $100/mo is an expense they are willing to take.

~~~
sukilot
> Well, a dinner for 2 in major cities is the USA is going to run you about
> $120.

Not for the vast majority of people.

~~~
notyourday
[https://www.zagat.com/b/48.56-what-can-you-get-for-nycs-
aver...](https://www.zagat.com/b/48.56-what-can-you-get-for-nycs-average-meal-
cost)

That's from 2013.

The vast majority of people are not potential customers for a small SaaS
startup charging money for "it would be nice to have" service.

------
bravoetch
The author misunderstands people. Nobody is doing the math or spending effort
to otherwise rationalize spending decisions this way. It's an emotional plea -
and we're all dumb so it works. Same reason all retailers are always having a
'sale'. We really are that stupid.

------
tootie
It's funny because I've often had the opposite thought. Cafes should sell
subscriptions. The margin on a single cup of coffee is humongous because
there's so much overhead in running a cafe and such variable demand. That
seems like a perfect business case for a subscription model.

~~~
gruez
Sounds like a great way to end up with a cafe full of freelancers working on
their macbooks.

~~~
moolcool
That's a good "problem" to have if you price and market it correctly

~~~
gwd
Right, but then you don't really have a coffee shop anymore.

I disagree with the posters above who say there's a 90% markup on the coffee.
What you're buying at Starbucks isn't a coffee, but a coffee _plus_ the right
to sit at a table and use the wifi for an hour or two. And as OP points out,
at the moment, this is pay-per-use: when I need a place to sit down for a bit,
whether in my own city or some other city, or when I need a table to sit and
chat with someone that's not in either of our homes, I buy the right to take a
seat for $4. They even give me a cup of coffee to go along with it.

Making it a subscription would completely change the way I related to such a
business. I mean yeah, I wouldn't have to drink coffee just to sit down. But
I'd be thinking each month -- am I getting a good value out of this
subscription? I'd be sitting a lot more in the shop than I normally would;
which would mean more regular income for the owner, but less space for random
people in a strange town who want to have a nice place to sit for an hour.

$4 for a one-off, no commitment, pay-as-you-go service with instant
gratification (buy the coffee, take a seat) seems like a pretty nice deal to
me; and it makes cities nicer places to be than if you had to have a
subscription.

~~~
WWLink
Out here Starbucks has been building/opening a ton of new places lately, some
of which are replacing old ones. The new ones are strictly outdoor seating.

~~~
frosted-flakes
How does that work in winter?

------
SllX
Coffee is cheap. Anytime you go to a coffee shop and purchase coffee, you’re
paying for everything that isn’t coffee: lease, labor, worker’s comp, milk,
sugar, taxes, syrup, whipped cream, cups, lids, sleeves, straws, equipment
maintenance, etc.

~~~
imtringued
That's not really what the article is about. Getting coffee is low risk. Apps
are high risk. There are so many garbage apps that aren't worth a single cent
and choosing the right one is very difficult.

~~~
SllX
And there are many “coffees” that people are overpaying for because the coffee
itself is so cheap. I think we’re in agreement here.

------
orasis
There is little need for opinions here - just A/B test and see what works
better.

~~~
TomGullen
It’s hard to test in some cases when there’s high variance, and customers
seeing regular price changes comes with its own downsides.

~~~
orasis
This isn’t A/B testing a price change, it’s just an associated message about N
cups of coffee.

------
segmondy
The cup-of-coffee pricing does make sense. It's not for everyone, there are
folks who drink coffee at least 5x a week by paying for it. Those sort of
statements are targeted to them. However the fundamental flaw is that in that
thinking is with software, someone might just show up and offer free software,
we don't see the same with coffee. What makes B2C software hard to sell today
is the free apps. Consumer's are now price sensitive to useful apps and most
companies think they can make it with ads.

------
Gunax
One more thing: things seems cheaper when priced over smaller intervals. For
some reason, 50 cents per day sounds cheaper than $15 per month which sounds
cheaper than $180 per year.

I don't know why. It's a bit like how everything ends in .99. even when you
know it's being used on you, it still works.

------
WalterBright
I drink a pot of coffee a day, which works out to around $.03 per cup. Pretty
cheap for that vice.

I know that Starbucks tastes better than my drip machine, but I don't really
care. Coffee is coffee to me, java junkie that I am.

~~~
kaoD
Just get an espresso machine (the real ones, no capsules) and a bean grinder.
Coffee from freshly-ground beans tastes way better than Starbucks, is still
$.03 per cup and takes only a few seconds to make with an electric grinder.

Moka pots work too and are cheaper (though espresso machines are real cheap at
least here in Europe) but the coffee isn't as creamy and it takes a few
minutes to boil (even though it needs no attention). With a large moka pot
it's easier to make large quantities though (but I hate stale coffee so I
favor espresso machines). Still better than drip.

If you're really into coffee get a superautomatic machine. Best coffee I've
ever had, instant and with zero effort.

~~~
derriz
"A few seconds to make" is a slight exaggeration no? I had such a
grinder/Gaggia set-up and it took time and effort. Producing good espresso at
home without very expensive automated machines, is a commitment.

There's a lot of fiddly cleaning involved - the grinder has to be cleaned
meticulously after use as do the various bits of the espresso machine. The
finely ground coffee is very sensitive to static so tends to jump/attach
itself to white t-shirts and plastic kitchenware - more cleaning. All this
cleaning is required even if you just want to make one espresso - otherwise
later uses will have a nasty taint.

There's a lot of experimentation required to produce a decent espresso with
crema from such a set-up. Depending on the beans, their age, the weather,
etc., the fineness for grinding and how tightly you packed the portafilter
would vary. On good days I was getting 3 out of 4 but that still meant 1 in 4
(or more) were dreck.

~~~
kaoD
That wasn't my experience. The grinder and espresso machines I used just
needed rinsing between cups and a quick scrub at the end, plus cleaning the
water tank once a week (depending on water quality, tap water is gross).

Moka pots are a pain to clean though, but you can buy a huge one to produce a
large quantity.

------
fortran77
Of course this author has to virtue signal about how _he_ would never buy a
Starbucks coffee

> First off, I would personally never buy a cup of coffee at Starbucks. But I
> understand why some people would.

He'll only take his Arch Linux Pinebook (ok, I just assumed that) into his
"local roaster"

> The cup-of-coffee-fallacy becomes much more obvious when it comes to
> subscription services. I might buy a cup of coffee from my local roaster,
> and would happily buy many cups, some beans, and snacks on a regular basis.

