I’ve resisted this for too long, mostly because we have a culture of secrecy around income, as if somehow you knowing how much money I make puts me at a disadvantage. But quite honestly, I’ve grown weary of one question: “Why do I have to pay shipping?”, usually followed by the observation that the customer can get free or cheap shipping from some other roaster. So I decided to do the math on the breakdown of where your coffee dollar goes when you buy a pound of beans from us. Here it is for the world to see:
Contrary to my intuition, this chart was fiendishly difficult to make, and really it’s an approximation, don’t let all the <default> decimal places fool you. It speaks more tot he retail side of the business than to the wholesale, which are difficult to tease apart financially. It speaks to both walk-up retail and internet, because we build ALL of the costs related to order fulfillment of online orders into the cost of shipping. But it’s good enough to be instructive. Some of the difficulties include varying green coffee costs and selling prices, the fact that we have products other than coffee that we also spread the fixed costs over, etc., etc., etc. At the end of the day, however, the chart above is pretty good.
What does it tell you? Well, first thing that jumps out is that there’s a lot of costs that go into selling a pound of coffee. Green coffee is about a third of the price you pay. The top 4 components of cost account for more than half the costs. The cost of compliance (everything we have to do simply to comply with laws, things that do not add any value to your product) is about the same as merchant fees, or maintenance. And there’s more.
Let’s talk about taxes. About 2% of the price you pay are hidden taxes. My tax accounting does not include sales tax, which is a pass-through from you to the state. The taxes I’m talking about there are real estate taxes, business personal property taxes, vehicle taxes, etc. I’m sure there are even more than I’ve accounted for. Given that every slice of that pie chart has their own pie chart, I estimate that “hidden” hidden taxes (all the taxes paid by suppliers, plus things like sales tax on supplies) are about another 2-4% of the product price, or 4-8% total. Add the 2% NC food tax to that, and between 6 and 10 cents of every dollar you spend are taxes, the vast majority of which are not identified as such to you. To add insult to injury, after I’ve paid all my taxes on my 17% (which amounts to about 7%, i.e., my net is 10% when you include income tax, social security tax, Medicare tax, etc.), the government’s take on a pound of coffee is larger than mine. They get somewhere between 13% and 17% of the total, while I keep about 10%. And that’s without considering the ripple effect of all the people involved in that pie chart being taxed, too, which seems likely to bring the total government take into the 20′s.
Finally we get to the heart of matter… all the money that I keep because somehow I’m so greedy. About 17%. That’s gross profit, not net. I have to pay my income taxes out of that 17%. Let me save you the trouble of doing the math – that’s about 10% net, or $1.30 on a $13 bag. To calibrate you further, I frequently stand in a hot farmers’ market parking lot for the better part of a Saturday for less than $100 profit.
Still think I’m so greedy?
But let’s get back to that pesky shipping question.
Pretend we had free shipping. How much would you have to buy before I wasn’t paying you to take the product off my hands, after I worked hard to source it and make it? The answer is usually at least 6 pounds, and in some cases as many as 10.
Still think I should give you free shipping? Well if you’re a 2-pound customer, it would be smarter for me to give you a $10 gift certificate to my competitor’s free shipping site. That way I break even on your transaction, it saves me the work of making the product I gave you for free, and it hurts my competitor, too. That looks like a win-win-win from where I sit. Add to that the fact that I no longer hear you complain about free shipping, and we’re really over the top.
That was harsh, I know. But true. And it felt good to say it out loud. And maybe they’ll give me back that MBA-card I lost when I admitted I’d rather read Garden & Gun than The Economist or The Wall Street Journal.
“Then how do the other guys do it?”, you ask. Let’s talk about that. There are many possibilities, as these costs are idiosyncratic to OUR business.
- Different cost structures. Not everyone has the kind of state-of-the-art clean roasting equipment we do, which leads to a big depreciation expense every year. Not everyone travels to origin to buy coffee, and thus they avoid travel expenses. So there are some choices that can be made to reduce costs, but in our estimation those choices also reduce product quality, customer choice and harm the planet.
- More volume. I have to divide my fixed costs by the number of pounds I sell. If the denominator increased, the cost per unit would decrease. To come extent, our volume is a function of the time we’ve been in business. But it’s also a function of the fact that we don’t employ sales people, that we finance our working capital needs almost entirely from revenues, and more. Bigger volumes are one legitimate path to better costs for us, but it will take time.
- Art of the upsell. Amazon is probably the best-known free shipper. When’s the last time you went to Amazon and bought only and exactly what you went for? If you’re like most Amazon customers, you bought twice as much as you intended to buy. Because they are upsell GENIUSES. “people who bought this also bought that”, “spend another $3 and you get free shipping” (then you spend $15), etc. The obvious enabler of this is their kickin’ web site, which would cost a FORTUNE if you could even do it. But even more important than the website is the intelligence behind it. I don’t even want to think about how much they spend to know what and how to upsell you. I’m sure it’s staggering. And then they also have to have the variety of products available. Amazon is an amazing operation, not to be thought of as typical retailer in any sense of the word.
- They’re willing to give some away. If you have large enough tickets, and enough of them, you take it on the chin once in a while and grin. We don’t have enough transactions, or big enough transactions for that. That’s just reality.
- They don’t have walk-in customers, or they don’t mind cheating them. One way to offer free shipping is to hide the fact that you actually paid for it. The most common way to do that is to raise ALL your prices a little, and use that extra to pay your shipping bill. You’re familiar with the M.O., it’s the same one that lets retailers raise prices and then have a sale with a straight face. But what about the customers who don’t have the product shipped? Well, they pay, too, of course. Everybody pays for shipping. It’s just a few cents. Or a buck. Sound fair? No, not to me, either. I may be naive and/or idealistic on this point, and I suspect it costs us some mail-order business, but it’s our philosophy that you pay what you sign up for, and others pay what they sign up for.
- Last but not least, my favorite: they don’t know they’re giving it away. I have multiple engineering degrees from a top school, and an MBA from a Top 10 business school. I thought I had a good handle on where my expenditures are. I say this not to pat myself on the back, but as a prelude to the admission that aspects of that chart surprised me when I actually made it. If I wasn’t trained to think about these things, and didn’t do the math, I can totally see how you could be lured into giving away the shop. We get a LOT of pressure about free shipping. It would be much easier to give in and work harder to subsidize the loss in another part of the business.
At the end of the day, asking a small business for free shipping is certainly not good for them, and I would argue not good for you either. Because you want them around. We happen to believe the same way that rockstar chef Thomas Keller does: pay people what they’re worth.
After all that, I hope you’ll consider placing an internet order, and viewing the freight costs as what they are – payment for a useful service that brings things conveniently to your door.