4 ways to keep your coffee shop from going bankrupt

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It’s a pretty well known fact that most coffee shops and small restaurants go bankrupt fairly quickly. Within the first year, many coffee shop owners will reluctantly close their doors and say goodbye to their life as a small business owner. Bottom-line: running a coffee shop is a lot of hard work, and there are no guarantees.

We’ve been learning a lot from the successes and failures of others over the last few years, and we think we have a pretty good plan for how to achieve our goal with starting this small coffee company. Of course, we love to share our ideas with our community, too. So here are a few thoughts on what we think might help specialty coffee shop owners get launched and stay running.

1. Don’t start with a full-service coffee shop.

Right off the bat I’m are saying something that could be pretty controversial. Trust me, though, this is an important tip to take to heart.

If you’ve never owned a coffee shop before, an especially if you’ve never even managed one, you’ll be surprised at how many unexpected money-sinks will show up. A hundred tiny events occur every single day that will threaten to take your hard-earned nickels, dimes and quarters, and before you know it you’ll be losing all of your profits. By starting smaller and adding in more services and products to your menu over time, you can find these tiny money-sinks and stop them before they overtake your company.

This is incredibly important for a first-time shop owner specifically, because a loss in even a small amount of profits and cash-flow can destroy your business and render you incapable of moving.

Let’s take a look at an example I read somewhere online recently. Imagine you are selling cupcakes to increase your average purchase amount per customer. You buy 20 cupcakes from your local bakery for $1.25 each, and you sell them for $2.00. That’s a $0.75 markup profit, and things are looking good on first glance, right?

Well, because you’re just getting started and word-of-mouth hasn’t spread about your new shop yet, you only sell 10 cupcakes on that day. You still made $7.50 extra, and you only just got started so you expect to not make a huge amount of profit your first few months. Things are still looking good.

But you didn’t just “not make a huge profit”. You actually lost money. You sold 10 cupcakes for $20, but you bought 20 for $25. As soon as the other 10 cupcakes go stale and you have to throw them away, you lost $5. If you do that once a week, or if your employees eat a cupcake every few days, or if you drop a couple, or if a customer complains about one cause they hated it and return it, or whatever happens on the regular – you are cutting tens of dollars into your profit every month off of just this one thing.

Multiple that a few times and you’ll start feeling the pain pretty well.

2. Don’t expand your menu beyond reach

First off, If you’re opening your coffee shop with a starting missing, then you should keep that mission as the final deciding factor with whether or not you add an item or service to the menu. If something you are offering doesn’t line up with that mission, then it should not go on. Ever. Your brand image and company culture is everything – and those two things include the image that products you offer portray to customers.

In coffee, though, you could probably justify everything on your menu as being in line with your mission – unless you realize that your mission is to also remain profitable each and every month. It’s just not feasible to offer every kind of latte, soda, cake, pastry, flavoring, slushy, brewing method and brand of bottled water imaginable to your customers. Just like in the above point, the first thing this will do is cut into your profits each time you have to throw away expired products.

A side point, though, is that your customers will be overwhelmed with options, which plays a psychological effect that keeps them from making additional purchases (and again, killing your profits). Having a larger menu also has the negative side effect of keeping your employees from being able to really own their drink recipes and preparation skills. Even the best barista gets a little bogged down during rush-hour. Now imagine rush-hour with a menu that’s 100 items long.

It ruins morale of employees who are trying to juggle too many things at once (many of whom will hate making sandwiches when their real passion lies in pulling shots of espresso), it cuts into your profits when you have to throw away that one-off ingredient that’s used rarely in a product that’s only purchased by that one guy who comes in once a week, and it keeps your customers from comfortably choosing high-quality items (and more of them more often) that you are proud to serve them.

Plus, it’s good for brand image when you add items to the menu – it’s terrible when you take away items (it gives a sense of failure that makes customers weary of the stability of the business, plus it immediately alienates those few people who are loyal to the items you just took away).

3. Keep your passion at the fore-front

Subtitle for this point: If you don’t have a passion for coffee or customer service, then don’t even think about going into this business.

Passion is different than talent or ability. You and your staff must have a true desire to serve great coffee and create an excellent coffee shop environment if you’re going to be successful. Potential means nothing. Talent means nothing. If you aren’t actively pursuing your passion in coffee and customer service and creating those excellent experiences, then it will only be a matter of time before you say “This isn’t worth the hard work” and back out.

Even the successful coffee shops that you know about don’t make a whole lot of many in their first year, if they’re making any at all. If you don’t have the passion and drive to get the work done, you’ll start seeing those numbers and quickly get burned out.

Getting burned out, of course, has a funny way of trickling down the totem pole to the rest of the staff, who will lose confidence in their leader and reflect that burned-out feeling in their own work ethic. That’s bad for business. Incredibly bad. Bouncing back from poor customer reviews and a company culture that is going down the drain isn’t just insanely difficult – it’s one of the number 1 reasons why startup businesses in any industry fail.

4. Listen to what your customers say about everything – even when they aren’t talking

Starting up a company is about a whole lot more than just selling a product. You need to build a brand, market to your target demographics, build great business relationships, provide amazing customer service, increase profitability, hire the right people, watch the markets grow or shrink and always be ready to change directions.

In order to do those thing successfully and keep your loyal customer-base following along with you, you’ll need to make sure you’re listening to what your customers are saying (even when they aren’t talking).

Obviously, listening to the critiques of your customers is incredibly important and easy to do. Just make a quick note and keep it in a file somewhere to look back on once a month and see if you need to make adjustments to make your customers happy (do NOT, however, give into feature creep – give customers what they want, not what they ask for).

More importantly, though, watch how customers are responding to your offerings. Do they seem excited or interested? Do they glance and walk away? Are they listening attentively or shrugging it off? When you mention the price do they seem shocked because the price is too low or too high? Do they always buy the same drip coffee and never try any snacks or other (better) drinks? Are they bringing in friends to see your shop or are they always alone? That last one is a big one – if your customers never invite their friends or families to meet up at your store, what can you do to encourage them to do that?

When your customers start watching you make small changes to be more accommodating, they’ll fall in love ever more than if you provided them with a discount at the cash register.

One-time customers come for the sale, repeat customers come for the experience. Listen to what they have to say.

These four tips aren’t the end of the line for what can be done to improve the success rate for coffee shops, but it should get people thinking about the decisions that need to be made before making them. There are thousands of factors that play entire the success or failures of cafes, restaurants and espresso bars, and as the business owner you need to be ready to address all of them.

In a future article, we’ll talk about some different ways to keep track of everything that’s going on and how to quantify the data to make better decisions, but for now I want to turn it over to you in the comments to read your thoughts on how to make a more profitable coffee company.

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