Why Does Iced Coffee Always Cost More?

At a shop near our office, there is a really nice stall selling reasonably priced coffee. We are not referring to the Long Black or Latte that many people pick up but rather the traditional Kopi-O and Kopi.

At an affordable $1.20 per cup, it is probably as good a deal as you would realistically find within the CBD area. No surprise, the place is well-frequented by hordes of office workers around the area.

Interestingly, the difference between the price of a cold coffee ($1.80) and a hot coffee ($1.20) is about $0.60, or a cool 50% (no pun intended). We are not sure about you, but we think adding five cubes of ice into our coffee should not cost so much more, even after taking into consideration the cost of having to have ice machine (although canned drinks probably won’t sell as well without one).

So what is the reason for why cold coffee costs more?

Earning A Higher Margin Simply Because You Can

All over Singapore, cold, chilled drinks are always sold at a premium compared to their less cool counterparts. For example, a can of coke could cost $0.80 off the shelves in the supermarket but $1.20 if you take it out from the fridge.

While it costs some money to keep the fridge running, it is also safe to assume that selling chilled/iced drinks at a higher price provides a higher profit margin for the shop owners because the only additional cost is the ice. Selling cold drinks at a higher price is a great way to differentiate between customers who are willing to pay more and those who are not.

The same concept applies for many other products being sold. For example, computer software aimed at professionals are usually sold at a much higher price just for the few additional features compared to one sold toward home users. This is in spite of the fact that both software probably cost almost the same to produce. In some cases, the professional software is even developed first before money is spent “dumbing” it down for home users.

In the case of ice-coffee, simply adding a few cubes of ice to chill the drink and then serving it in a bigger cup gives the illusion that you are paying more for a larger, different drink even when you are not. If you don’t believe us, order a hot drink, and then say you wanted the iced version instead. You’ll see your hot drink fits nicely into the larger cup meant for iced drinks.

Higher Demand For Cold Drinks

With Singapore’s warm temperatures, a cold drink is usually preferred over a hot drink. Because of this, demand for cold drinks is higher and thus, it makes sense from a business owner’s point of view to charge more for it.

Think about it from a different perspective. The time taken to make iced coffee is almost the same as it takes to make a hot coffee. The act of pouring ice into a cup would roughly take about 3 seconds more.

As a business owner, if you know that more people are going to order the cold drink even though both drinks take almost the same time to produce, you would try to charge more for the cold drink to maximise your profits.

This is the same reason why some places charge more for drinks like diet coke compared to regular coke, or why you pay more to upgrade your coke to an ice lemon tea at McDonalds.

More Beans Used For Cold Coffee

There are some cafes (though we are not sure if big chains like Starbucks and Coffee Beans follow this) that will use more coffee beans for a cold drink to compensate for the extra ice put in. Cafés that practice this will incur a higher cost when selling iced coffee.

Others simply put the ice in without changing the way the coffee is made or how much of any ingredient is used. It is also the reason why it is easy to find cafes that serve terrible iced coffee, and why, by and large, you should avoid ordering an iced coffee altogether whenever you go into a café that you are not familiar with.

The baristas and coffee enthusiasts among us will also be familiar with the process of cold brew coffee. Cold brew coffee is produced via a different process that requires more time and beans.

Because it are less acidic, it is more suitable for it to be drunk without any milk or sugar. It goes without saying that cold brew coffee would definitely cost more than your regular hot coffee.

Now that you understand this, we hope you have a deeper appreciation of your coffee and what you are actually paying for.

Top Image

Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.