Last night, I was scrolling through my Instagram feed, which is largely dominated by a variety of stakeholders in the coffee value system. There’s always a coffee shop with some new seasonal beverage or new bag of coffee, but this particular coffee caught my eye:
Azahar is the cafe in Bogotá I frequented most, as it was closest to my flat off Parque 93 and had a nice workspace, good coffee, and several good food options. Surely, the staff had to be questioning the gringo who came in 2-3 times a week, speaking little Spanish, ordering the same things with a poor accent, and not much in the way of conversation (except when Andrés and I would meet up to work… or when the Jonas Brothers made an appearance).
The Azahar business model is interesting, as they have vertical sourcing elements, but also export green coffee internationally, plus have a handful of cafes. As well, they make various efforts around value chain price transparency, not the least in displaying to consumers how much they pay for their coffee compared with the (imperfect) c-price through their Sustainable Coffee Buyer’s Guide tool.1 They also work with various domestic non-profits such as their subsidiary, Manos al Grano, whose Proyecto Recolectores (Pickers Project) serves as a way to formalize the labor market and increase wages for coffee pickers– coffee production’s “hidden” labor.
The Instagram post for this bag of coffee (archive) reads “in this edition, you are the one who makes the decision on how much to pay.” Where the coffee label normally provides some farm name or brand (e.g., “Fruta,” “Sol Naciente,” “Bomba Jugosa”), this label reads “How much do you want to pay Ederleth for this coffee? | Ederleth Lozano has been producing coffee for 34 years in Algeciras, Huila.” We hear a lot of folks in the coffee industry talking about the need for “more consumer education” and “getting consumers to pay more.” Yet, the outcomes of consumer responsibilization are rather heterogeneous, challenging wider scale transfer of economic value from consumption to production.
In conventional pricing models, sellers use a variety of pricing strategies to cover cost-of-goods-sold, consider market competition and consumer price sensitivity of target markets, before providing consumers with the retail price. However, participative pricing mechanisms incorporate the direct involvement of the consumer in making a price determination. Typical pay-what-you-want (PWYW) participative pricing mechanisms allow consumers to set the maximum price they are willing to pay. Additional participative mechanisms such as name-your-own-price (NYOP) and pay-what-you-can also exist. And while the intuition is that consumers would pay nothing (zero) when given the opportunity, a variety of reasons including social norms and altruism all support conditions where consumers do not partake in freeloader effects, instead paying valuations significantly greater than zero. This is consistent real world anecdotes, such as the infamous 2008 PWYW release of Radiohead’s In Rainbows, which netted 38% of downloads paid, averaging $6 per download; adding in the 62% of unpaid downloads, the average was $2.26 per download– a number still significantly greater than nonzero.
In the instance of Ederleth Lozano’s coffee at Azahar, a participative pricing model is partially applied in the form of consumer choice. First, Azahar’s Sustainable Coffee Buyer’s Guide helped them set two pricepoints for the consumer for the exact same beans from Ederleth:
- Precio digno (living income) – 59.500 COP ($14 USD) per 340g (12oz) retail bag, which is enough to afford housing, meals, essential needs, and a living wage
- Precio prospero (prosperous income) – 75.500 COP ($17.75) per bag, which factors the same as the living income above, but with a 20% profit bonus for Ederleth, her partner, and the farm workers
This choice allows consumers to decide if Ederleth should comfortably break even or if she should be profitable.
I should note a couple of things here:
- First, Azahar’s locations and price points are among the highest in Bogotá. For reasons expressed elsewhere on this site, Colombia’s domestic specialty coffee consumption market tends to skew toward wealthier consumers and/or younger consumers with more disposable income and/or expats, all of whom are better able to afford specialty coffee.
- Second, the real vs. nominal value differences in terms of purchasing power with the US are nearly 50-75% apart with some back of napkin calculations.2 In other words, a medium cheese pizza at Dominos in Colombia is 25.900 COP ($6). That same medium cheese pizza at Dominos in the US is $12. So the $3.75 per bag difference between the living and prosperous incomes is around $7 difference in purchasing power terms per retail bag. In real or nominal value terms, this margin is quite substantive for a producer and their team to be able to save, on top of a living wage.
- Third, there are a number of studies that look at the effects of reference pricing on PWYW. Almost all external reference prices (in this case, these are the prices of other coffees on the e-commerce site or on the menu in store) serve as an anchor of how consumers make determinations around how much to pay.
The participation mechanism in this instance is constrained by binary choice, rather than willingness-to-pay (a standard continuous ($0 ➡️ ∞) variable used in consumer research). However, the combination of product attributes themselves do not change, leading me to argue this still a form of participative pricing, since the consumer is still getting to decide on the final price of the product. This is a novel experiment for pricing out coffee, as some roasters offer tipping or proportional pricing; I’m not aware of other coffee roasters using participative pricing.
My hypothesis would be that, although Azahar has bolded “+20% de ahorros personales” (+20% for personal savings), which frames the “prosperous wage” choice, that many of Azahar’s consumers would display low price sensitivity, regard the bonus akin to an embedded tip,3 and pay the precio prospero.
However, the external reference prices for the current lineup of 340g bags are 34.500 COP (Arcoíris), 34.500 (Fruta), 39.500 (Dulce Nocterno), 39.500 (Bomba Jugosa), 46.500 (Alquemistas VI), making the 59.500 COP choice of precio digno seem like it is already significantly higher than the reference price. Justly or not, external reference pricing may counteract the PWYW choice that pays Ederleth more profitably by, paradoxically, making the additional 20% seem like too much.4
I’d be very curious to know the results and outcomes of this experiment. It’s possible that an additional decoy introducing asymmetric dominance to the context of “prosperity” as an ethical attribute would increase the probability of the precio prospero choice.
Although I find the novel use of participative pricing interesting to draw consumers into the process of value setting– which, in and of itself, may be valuable as an indirect form of consumer education (not a bad thing!), it still puts the responsibility of value setting on the consumer, rather than on the producer. This manifestly reinforces a power dynamic in the market that is partially moderated by the fact that production and consumption of this coffee is largely domestic; adding more dimensions to the value system with net-consumption countries could alter the effects in ways that do not necessarily translate back to FOB, let alone EXW or farmgate.
…Which still begs the question, how do we get producers to become price makers instead of price takers? Is there a way producers will be able to leverage consumer-knowledge to invert this experiment and reset the pricing power dynamic? Perhaps that’s just the next step….
- However, domestic consumption implies far fewer intermediaries from farm to cup, especially since export and import functions aren’t necessary. This doesn’t alter production costs, but changes the cost structures for domestic retail. ↩︎
- I’m sure there’s a better, more precise way to ascertain differences in purchasing power, I’m just using my anecdotal experience here to contrast with my experience back home in the US. ↩︎
- In Colombian restaurants, food service must ask if customers would like or not to add flat 10% “servicio,” but this is clearly a retail purchase, altering the context. ↩︎
- I’ll note one more series of reference prices offered and that is the price paid per carga (125kg sack of green coffee). Azahar lists it as 2.312.500 COP ($540 USD). At 20% moisture loss from the roasting process, that would net 100kg of roasted coffee. And 100kg of roasted coffee divided by 340g per retail bag yields approximately 295 retail bags. So for 2.312.500 COP paid for a 295 roasted retail bag yield, means each retail bag has about 7.840 COP ($1.83 USD) of roasted coffee. However, this reference price is far more complex to ascertain, let alone determine costs of goods sold among other things, let alone evaluating cost of living and other value attributes. ↩︎
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