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Opening A Coffee Shop Pt. 2. — The Problem With Being Too Coffee Focussed

By Michael Cleland

Opening a Coffee Shop And The Problem With Being Too Focussed On Coffee

Michael Cleland

If the theory of competitive advantage provides a background for understanding how cafes create unique value, then perceived value explains specifically why doing so can attract a greater share of consumers. This article details the individual components which contribute to a customer's perception of value, and considers the applications within the independent industry of coffee.

Cost Leadership, Differentiation and Segmentation, proposed in 1980 by Michael Porter, are three competitive strategies implemented across all industries. These have proved successful as a means of developing valuable attributes, unique within competitive markets. This is also known as a competitive advantage which, if perceived by consumers, results in a position of competitive superiority – a greater share of the market. The purpose of the listed strategies is to create greater value relative to competitors. Cost Leadership achieves this by lowering costs, Differentiation by increasing benefits and Segmentation by isolating and catering to groups of customers with shared needs. The extent to which the value developed through these strategies is perceived by consumers will dictate whether their respective commercial potentials are realised. The extent to which value is perceived hinges on how well value is communicated.

Cafés compete to attract a profitable share of the broad coffee market. Those which do this by serving a higher standard of beverage, perpetuate a section of the coffee industry which is usually tied to greater social responsibility and re-order of value towards farmers, These cafés can be seen as creating two valuable points of difference- a better product and a socially responsible image. This means they can be categorised as differentiation strategists. Based on the assumption that consumers will buy from the business they perceive as having the greatest value, cafés following this method of differentiation possess a source of competitive advantage. Whether this is realised commercially in the form of greater market share, depends on whether consumers are aware of the points of difference, the amount of value they attach, and ultimately how this compares with alternatives. The theory of perceived value explains the process by which consumers form perceptions of value in greater detail.

As an application of this, take two identical cafés in competition with one another, each being identical in every possible way. Following a Differentiation strategy, Café, ‘A’ may implement a change which increased the level of service dramatically. This would cause a unique increase in benefits and therefore perceived value. In response to a subsequent loss of customers, Café, ‘B,’ may respond by applying a Cost Leadership approach and minimising the wait time for coffee. In theory, assuming consumers value short wait times and good service equally, this will neutralise the competitive superiority gained by Café, ‘A.’ The result would be a scenario where, although through altering different variables, both cafés return to the same perceived value.

 

The issue with a ‘coffee-centric,’ strategy.

Independent cafés serving a higher standard of beverage, within a segment of the industry committed to social responsibility, have increased value by increasing benefits. Benefits are increased primarily by the quality of the product and the positive image attached with social initiatives and ‘real’ accountability. In doing this, the business is differentiated from competitors, and potential is established for competitive advantage. Whether this potential is realised depends on the extent to which these benefits are perceived by consumers.

It is proposed here that the value created by increasing the quality of the coffee and higher levels of social responsibility is not perceived accurately by a significant proportion of consumers. Moreover, that without stimulating engagement, followed by a process of perpetuated sequential learning, this is unlikely to change. Without this, it is suggested that the inherent value cannot be realised as perceived value, therefore inhibiting the commercial viability of cafés pursuing solely this form of differentiation.

As an exercise to test this, select two coffee experiences, for example, as a guest in a chain store and a renowned, quality focused independent cafe . In each case, assign a value between 1-10 to each of the components contributing to both total benefits and total costs. For example, professionally executed table service may score highly. In contrast, ordering and collecting at a coffee cart, would score comparably low. Waiting less than a minute for a coffee is relatively insignificant in terms of costing time and could therefore result in a low value. A wait such as fifteen minutes would score comparatively high. Tallying the individual components which comprise both benefits and costs will arrive at the respective totals. Calculate perceived value by dividing total benefits by total costs. Resulting from this process is a quantitative, and comparable measure of perceived value from the viewpoint of the reader.

Finally to complete the exercise, reflect on how value is perceived from the viewpoint of a hypothetical consumer, representative of the broad public. This consumer being someone whose knowledge of coffee has been formed by experiences with cafés and coffee, which until recent years, existed in the absence of widespread independent alternatives. He or she routinely consumes coffee but has had little if any exposure to analytical tasting and the comparatively small segment of the coffee industry which offers a higher quality product. Contemplate in which ways their assessment of value may vary.

In a ‘blind,’ evaluation of the quality assigned to the product, individuals’ perceptions of values may vary. A head judge for the Cup of Excellence Awards for example could be expected to assign value which more closely reflects the ‘real,’ quality of a coffee than perhaps a habitual consumer of coffee, whose experience of 'tasting' coffee is limited. This is not to say that he or she who judges the merit of coffees professionally for Cup of Excellence is genetically superior to the coffee consumer. A head judge however, has developed the ability to comprehend his/her palate with acute detail, and objectively attach value accordingly. This is acquired through the process of routinely tasting and analysing an extensive range of coffees. That is, he/she has learned sequentially. A similar example could be applied to the process for appraising value in regards to the socially responsible images embodied by different businesses. In this case, a greater level of knowledge regarding the impact of a purchase on all stakeholders including producers, informs a more precise assessment.
Costs however are immediately evident for all consumers. Businesses which commit to the highest beverage standards inevitably create the cost of time by attentively extracting coffee to more precise parameters. They also add psychic costs which arise from unfamiliar or intimidating menu options. Increasing costs correlates to less competitive perceptions of values

It is presumed that due to the diverse range of experiences, engagement and, therefore, knowledge possessed by individuals, carrying out the exercise above from different perspectives will result in varied ratings for perceived value. It is surmised that the source of this inconsistency arises predominantly from obscured perceptions of value attached to the product and the image of the industry. Furthermore, the extent to which perceived value mirrors the intrinsic value of respective cafés will increase proportionally with the sequential progression of knowledge.

If this is accepted, then it follows that herein lays the greatest inhibitor to realising the competitive potential of differentiation based solely on producing a higher quality product. The inherent value, and therefore source of competitive advantage, is visible only to an insufficiently small segment of informed consumers. while specific costs are increased for all consumers
Put simply: for the majority of coffee consumers, what is valuable isn’t visible, and what is visible isn’t valuable. This means, low perceived value, unfavourable comparisons with alternatives, and ultimately less customers.

“The inherent value, and therefore source of competitive advantage, is visible only to an insufficiently small segment of informed consumers. while specific costs are increased for all consumers”

In addition to appealing to an incredibly narrow segment of coffee consumers, the preparation of a higher standard of beverage has another adverse effect for businesses. Sourcing and preparing higher quality coffee inevitably increases overheads. This ultimately compounds the impact of unrealised competitive advantage on the commercial viability of a café. If increased expenses absorbed by a business are not mirrored by increased value from the perspective of consumers then pursuing purely ‘coffee quality,’ as a form of differentiation cannot reasonably be justified as an efficient business strategy.
 

Going with what makes pence – If you can’t sell the product, sell the packaging

Costs are accumulated through the more diverse, expensive and time consuming sourcing and preparation of high quality coffee. Based on the assertion that these are inevitable in order to adhere to the absolute highest standard of beverage, then here, two rational strategic options are presented for businesses to pursue.

From a cost-efficient perspective, the logical solution is to minimise inefficient overheads by focusing strategy on only creating value which will be perceived accurately by the largest proportion of consumers. In other words, create only as much value as will be apparent to most consumers. In this case, overheads incurred in the sourcing and preparation of coffee which do not correlate directly to an increase in perceived value should be identified and eliminated. Streamlining costs improves the financial efficiency of a business, while potentially allowing for the lower costs to be passed on to consumers at more competitive levels. For example, in the form of faster, more competitive preparation times.

The success of such a strategy naturally relies upon accuracy in estimating a measure for the knowledge possessed by an ‘average,’ consumer. Ideally, this will be derived from accurate and valid market research, although characteristics of existing successful businesses could provide a guide.

Alternatively, any manipulation of the respective variables which contribute to both costs and benefits could be combined to create an experience which is perceived as unique and more valuable, relative to immediate competitors. For example, more engaging personnel, or reducing psychic costs with a simplified and thus, less intimidating menu.

“ create only as much value as will be apparent to most consumers”

The second proposed solution applies to differentiation strategists committed to presenting coffee at the highest attainable standard. It is proposed that for this, both short and long term implementation plans be adopted. The ultimate objective being to decrease disparity between prospective customers’ perceptions of value, and inherent value. This means, communicating the inherent value.

If the realisation of inherent value requires sequential learning, then the short term strategy must be to gain the regular custom of consumers. To attract and retain customers in the short term, the theory of perceived value specifies that a business must be deemed more valuable than alternatives. It must, achieve a higher perceived value.

To increase perceived value, businesses can either decrease costs or increase benefits. If minimising costs has reached a point where further decreases involve sacrificing quality, then to inflate perceived value, new, valuable and unique benefits must be generated. In order to appeal to the widest possible audience, benefits which are immediately evident to consumers, independent of their knowledge of coffee naturally bolster the potential for success.

“to decrease disparity between prospective customers’ perceptions of value, and inherent value. This means, communicating the inherent value”


An example of how benefits which are visible to a wider audience are used to increase the value of an experience can be observed in the restaurant industry. Differentiation in restaurants is not solely achieved by the quality of the product but usually also with increasing levels of service, corresponding to ‘finer,’ dining experiences. In fact, nearly all aspects of a fine dining experience are visually differentiated to create value and communicate market position. Within the coffee industry, equivalent additions of benefits, having immediate impact, might include innovative interior design or table service for beverages consumed on premise.

If in the short term, repeat customers are acquired via the addition of value, then longer term tactics can be implemented for revealing inherent value. It is proposed that in order to achieve this, stimuli necessary for engaging awareness and interest of consumers be integrated into the café experience. In addition to this, it is suggested that implicit communication which takes place within the context of the café be examined strategically. In this way, communication which best perpetuates sequential learning and the realisation of inherent value can be implemented. Once again, accurate market research is ideal for developing plans to this end but some resources exist already which can help stimulate ideas. A survey for example, of industry peers or existing customers who share an engaged interest in the industry may shed light on effective stimuli. By asking respondents to recall their own experiences, common responses can then be explored further.

In regards to perpetuating the learning of engaged customers so that sharing knowledge may progress most efficiently, it is asserted that communication must be adapted. It must be adapted to communicate in the 'language' of the consumers with whom knowledge is to be shared. In this case, this is the broad coffee drinking public. How this is accomplished is topic for further consideration.