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SFbaybum
Monterey Bay, CA
Grape Sorter
Posts:253
 | | 03/05/2008 4:16 PM |
| I was thinking this morning about the marketing
ramifications of dropping prices. A lot of small allocation/mailing list
wineries have done a great job of creating a buzz, a sense of demand with short
supply and have built great businesses behind the model that "we make
great wine in short supply and you can get it while most others
can't." That is a great model when it's working, when the wine IS
great, when there are people standing in line to buy your wine at its current
price point, when the business is gaining momentum like a snowball downhill. But what happens when a bad economy hits and people don't
want to pay $125+ for a bottle and you see your repeat buyers dropping or
skipping a year or two and your waiting list either dwindles or disappears completely?
From a "how are you perceived in the market" standpoint, nobody wants
to have to drop the price of their wine in order to sell it but I have to
imagine some of that is occurring or will occur soon enough. It is ok for
the huge winery to do this from year to year, but does dropping prices do
irreparable damage to a boutique that has built its business on having people
begging to buy their wines in the past? Once the gigantic snowball is no longer running downhill I'd imagine it could be hard to get it rolling again. All I know is in this economy I'd rather be positioned like
the Karl Lawrence & Bresslers of the world instead of The Bonds of the
world. | | | |
| Dave
Wine Thief
Posts:2899
| | 03/05/2008 5:32 PM |
| I have never seen a cult/cult wannabe winery actually drop prices. I think that what many of them do is sell unsold wine at greatly discounted prices to restaurants. The restaurants make a nice profit, but don't undercut the mailing list prices. I see a lot of 1998 and 2000 cult cabs on restaurant lists. | | | |
| Drew
Sammamish, WA
Wine Bottler
Posts:3197
| | 03/05/2008 5:34 PM |
| From a couple of posts on eBob, it appears that the pricepoint stays the same on the mailing list, but the overflow gets shifted to the distributor channel.
I'm curious to see where this goes with CA pinot especially, given an abundance of producers competing for the same potential market, with the slowing economy acting as a minor catalyst. People at the $40-$70 pinot range have a ton of producers, many with competing vineyards (ie Garys, Kanzler, etc.) and competing winemakers, to choose from. I think it's safer to say most people opting in on $125+ cab lists are a step or two removed from economic pressures (at least as they affect discretionary funding) and are probably more apt to be moved by WA/Tanzer/WS scores than concerns about paying bills. I'll concede it's a gross generalization, but on the whole, I think people are more concerned with Harlan, Sloan, et al raising prices at >20% bumps than they are paying their power bill. | | | |
| JimmyV
Central Connecticut
Wine Connoisseur
Posts:5112
| | 03/05/2008 5:57 PM |
| | How can it possibly make sense to sell a $135 wine to the restaurant/distributor channel for $80-$90 instead of selling it through the mailing list for $100? I have to believe that the three-tier system is going to demand a much lower initial price than mailing list customers would. For example, Wades Wines just sent out an e-mail about the recent Loring Pinots. Price was/is $46 and change. Basically the same as mailing list (though shipping is extra). Gotta believe that Wades paid less than mailing list customers to get the wine in its door. If wineries treated their mailing list customers as well as they treat the distibution chain, they'd sell a lot more wine. Exactly why I love the Match model. I have yet to see a retail price that could touch my 'return customer' discount. | |
Beta testing a new signature. | |
| DukeRiley
McMinnville, OR
Barrel Sampler
Posts:2000
| | 03/05/2008 6:31 PM |
| JimmyV,
Your math/economics isn't quite right. It's worse for the winery. As a rule of thumb you can figure that that price out the winery door is about half of retail, so in the case you mention, substitute $65-$70 for $80 to $90.
If wineries treated their mailing list customers as well as they treat the distribution chain, they'd sell a lot more wine.
Having worked at a winery that was distributor-oriented and another that was retail customer-oriented, I think that this is generally true. Distributors provide a vital service to a great number of wineries though - there are very few mailing list customers that will buy 56+ cases in one order! | |
Heater Allen Brewing
www.heaterallen.com | |
| Drew
Sammamish, WA
Wine Bottler
Posts:3197
| | 03/05/2008 6:37 PM |
| Jimmy, it depends on the ratio of how many you can move at $135 vs. the demand you can generate at $100. If you can capture 1000 bottles at $135 and 1000 at $70, you've made $205,000. If you sell 2000 at $100, you're at $200,000. Keeping the distrubtor as a safety net isn't a bad idea, and I'd bank on an ability to dump to distributors over customer loyalty in this business.
Overall, it's a messaging issue. Dropping from $125 to $100 is a 20% price cut and the halo hits the next couple of years. Do you raise the price back again next year and risk having to do the same thing again? It hurts the brand as a whole, whereas dumping to the channel is more or less invisible to the mailing list and even then more easily explained - "increased coverage, growing the market, etc."
I think a lot of the wineries do treat their lists well, with Loring as a prime example. At the end of the day, it's a demand issue and the winery has to be on top of their forecast so they can maximize the return, both short and long term. Randy's customer loyalty model is great, but I'd say his service is even better and was the reason I was fencing Match across my friends so I could still order a couple of bottles. That said, for the last couple of years he was selling several vintages per mailer, which means he was sitting on inventory... | | | |
| JimmyV
Central Connecticut
Wine Connoisseur
Posts:5112
| | 03/06/2008 9:42 AM |
| Posted By Drew on 03/05/2008 6:37 PM
Overall, it's a messaging issue. Dropping from $125 to $100 is a 20% price cut and the halo hits the next couple of years. Do you raise the price back again next year and risk having to do the same thing again?
No. the whole point of raising prices is to find the breaking point. You test the waters to see at what price you hit the point of diminishing returns. Once you find out what that is, you have to naturally reel the line in a bit to keep it tight. If you sell out in a day at $70 in year one; sell out in a week at $85 in year two, and get passed by your loyal customer base at $105 in year three, you should conclude that the proper price for your wine is somewhere between $85 and $100. So logic dictates that year four should see a price decrease, with future increases based only on production cost increases, rate of inflation or general market trends. Neither of these three factors can account for the vast price hikes we have seen from the many wines that people here are WIML-ing. I don't understand why people have such a hard time understanding that lowering prices is just as necessary in finding the ideal market price as raising prices. Assuming, of course, that the rise in price was not done on a very small incremental basis. If you raise your price one dollar at a time, you probably will never have to lower it. But if you jump from $90 to $135, you have missed your opportunity to discover if $115 wouldn't have been the most efficient pricepoint. If $135 results in a lot of wine sitting in the warehouse, the only way to test if $115 would have been better is to lower the price. It ain't that hard to understand. Virtually every other consumer good is sold on a sliding scale of efficiency. Wine seems to be the only item that sellers feel should never drop. Of course, retailers put wine on sale all the time. But it seems to be taboo for direct sales. How many times does Pillar Rock have to offer verticals and "library" wines that it has on hand before it realizes that a price drop will move the wine out faster?
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Beta testing a new signature. | |
| Dave
Wine Thief
Posts:2899
| | 03/06/2008 10:18 AM |
| Posted By JimmyV on 03/06/2008 9:42 AM Posted By Drew on 03/05/2008 6:37 PM
Overall, it's a messaging issue. Dropping from $125 to $100 is a 20% price cut and the halo hits the next couple of years. Do you raise the price back again next year and risk having to do the same thing again?
No. the whole point of raising prices is to find the breaking point. You test the waters to see at what price you hit the point of diminishing returns. Once you find out what that is, you have to naturally reel the line in a bit to keep it tight. If you sell out in a day at $70 in year one; sell out in a week at $85 in year two, and get passed by your loyal customer base at $105 in year three, you should conclude that the proper price for your wine is somewhere between $85 and $100. So logic dictates that year four should see a price decrease, with future increases based only on production cost increases, rate of inflation or general market trends. Neither of these three factors can account for the vast price hikes we have seen from the many wines that people here are WIML-ing. I don't understand why people have such a hard time understanding that lowering prices is just as necessary in finding the ideal market price as raising prices. Assuming, of course, that the rise in price was not done on a very small incremental basis. If you raise your price one dollar at a time, you probably will never have to lower it. But if you jump from $90 to $135, you have missed your opportunity to discover if $115 wouldn't have been the most efficient pricepoint. If $135 results in a lot of wine sitting in the warehouse, the only way to test if $115 would have been better is to lower the price. It ain't that hard to understand. Virtually every other consumer good is sold on a sliding scale of efficiency. Wine seems to be the only item that sellers feel should never drop. Of course, retailers put wine on sale all the time. But it seems to be taboo for direct sales. How many times does Pillar Rock have to offer verticals and "library" wines that it has on hand before it realizes that a price drop will move the wine out faster?
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| JimmyV
Central Connecticut
Wine Connoisseur
Posts:5112
| | 03/06/2008 10:29 AM |
|
Insert Quote Here.
"If a winery can sell out at $150 a bottle..."
The big variable in the wineries' approach as detailed by Drew is "IF" the winery can sell out. Unbridled price increases of $25-$50 per bottle per year virtually assure that the time will come (sooner for some than they think) that their wine will not sell out. L-M is already deep into its waiting list in only year two, with no wine out the door, and only a mid-90 score from Parker. This is a perfect example of a winery that missed its opportunity to seek out its perfect release price. | |
Beta testing a new signature. | |
| Drew
Sammamish, WA
Wine Bottler
Posts:3197
| | 03/06/2008 1:09 PM |
| I don't think we're disagreeing. I think pricing comes down to an expected value play for the winery - figure out your COGS, pick 3 possible outcomes, assign your best SWAG on the chances of it occuring and go from there. Price increases are driven by a lot of things, from an increase in COGS to an attempt to capture money left on the table (Harlan) or sometimes just keeping up with the brand image (L-M). I think it's also important to take into account a winery's age, relative to its pricing model, especially on the CA Cab estate side. If you go in and drop $10-$20 mil on some vineyards and a business, you've got a lot less leeway about what price point you're playing at, vs. a Harlan/Rochioli/Quilceda Creek that's looking at pure greenfields (pardon the pun).
L-M is a great example of a wine that launched at a ridiculously high price because it was positioning itself as a top tier cab. If Screagle, Harlan and everyone else in that top tier raise prices, they're more or less forced to, or they risk being perceived in the market as being a second (or third) rate brand because of price disparities. I don't think L-M has the demand or brand cache (driven by 10-20 years of scores and "cult rep") that the other big hitters have, so life is going to get real interesting real fast for them. That said, dropping price would be devastating for them, as it's a message to the market saying "we're not as good as we thought we were," given the market they're competing in. | | | |
| JimmyV
Central Connecticut
Wine Connoisseur
Posts:5112
| | 03/06/2008 4:52 PM |
| You're right. We don't disagree. But how long can a winery sit on cases of unsold wine and pout that lowering prices is a concession that "we're not as good as we thought we were" ? Someone at Pillar Rock should be able to answer this. | |
Beta testing a new signature. | |
| Seamus Campbell
Portland, Oregon
Grape Fermenter
Posts:401
| | 03/06/2008 5:28 PM |
| It seems more dangerous than simply wanting to maximize profits, since a lot of this end of the business is built on the idea of scarcity (or the perception of scarcity) creating demand. The demand curve isn't a static thing. You might choose to buy a wine at a price point you wouldn't otherwise because you know you can flip it, or purchase a given wine over another because you anticipate being able to buy one locally... I think there's some merit to the concern that if you send a signal to the market that demand is soft, you might further depress demand.
One option that producers of other luxury goods have that is tougher for small wineries is to actually throttle the supply of a given overpriced good and introduce a slightly different product at the lower price point. | | | |
| GreenDrazi
Atlanta, GA
Grape Puncher
Posts:938
| | 03/06/2008 8:54 PM |
| Perceived value
From the wineries perspective, it’s all about protecting your price point. Sit on few cases from an off year to reap the much higher rewards in a better year. Americans have become extremely “brand” oriented and a variable price point doesn’t support that model very well. | | | |
| DukeRiley
McMinnville, OR
Barrel Sampler
Posts:2000
| | 03/07/2008 10:39 AM |
| This works as long as there isn't a big change in the market. A recession (which we appear headed for) may change this perception. If a winery has deep pockets, then they can probably hold out for a while. Otherwise the bank will make the decision for them.
Slight thread drift example - I remember talking to an Oregon winery owner about their marketing plan, which consisted solely of selling through distributors to restaurants. He told me that he really didn't care about the wine enthusiast market at all, that it was less than 10% of his market. The winery was well regarded locally - good scores etc, and relatively hard to find (most of the wine went out of state, and when you're only making 4,000 cases/year that can disappear into Morton's and the like pretty easily). After 9/11, his winery got hammered - he sold no wine through the distributor channel at all for more than several months. They ended up selling their wine through Costco (this is usually not a good thing) for a while. Since then, the winery has focused much more time and effort into the wine enthusiast market, and now does around half of their business into that sector of the market. It's taken them about six years to get back to their former perception in the local marketplace. | |
Heater Allen Brewing
www.heaterallen.com | |
| Randy Wigginton
Wine Connoisseur
Posts:5511
| | 03/08/2008 9:52 AM |
| California wineries generally don't lower their "official" pricing, but offering a "loyalty discount" appears to be the sneaky way out of the predicament. That and "special sales". As an example, just received an email from Havens -- the "Havens March Madness Sale" with special pricing on 2000 and 2001 syrahs!
| | | |
| Drew
Sammamish, WA
Wine Bottler
Posts:3197
| | 03/08/2008 10:37 AM |
| More drift -
Randy, was thinking about that with both the AP Vin model (flat mailing list discount) and then on Match's side with a customer loyalty discount driven by past purchases. Keeps the retail price set at a higher level (which is used as the base for distributors) but keeps members happy. To some degree, futures does the same thing AND you get the money in advance :-D
I wonder if the free-shipping model is even better for small wineries, given you can absorb the shipping fee into COGS. I keep hearing that it doesn't get applied to the bottle cost, but instead to overhead... but I wonder if you could do that to drive your retail price higher and keep mailing list members happy.
Suppose it's a lot easier to wonder about this stuff on Saturday mornings over a latte then having to figure this stuff out with the distrubtors themselves. Hats off to the wineries :-D | | | |
| Bob Bressler
Napa Valley
Wine Lover
Posts:4864
| | 03/08/2008 12:55 PM |
| Posted By Drew on 03/08/2008 10:37 AM
(which is used as the base for distributors)
FOB pricing (for distributors) is negotiated just like anything else. If the distributor sees that the street price is lower than the "retail", you know they are going to be pushing for a lower FOB price. | | | |
| EricLundblad
Grape Fermenter
Posts:557
| | 03/08/2008 4:59 PM |
|
Seems like the least 'image damaging' way for a winery to lower prices is to put more/better wine in their lower priced offerings (creating a new offering if needed)....keeping the price of their higher priced wines but lower the production. Course, you have to sell your lower priced offerings more...but improving the quality of those wines should, long term, make those an easier sale. In theory.
Also, I agree the 'free shipping' model is appealing for several reasons...one drawback is that, in effect, customers are paying sales tax on shipping, which seems wrong. | |
Ladd Cellars | |
| Bob Bressler
Napa Valley
Wine Lover
Posts:4864
| | 03/08/2008 7:57 PM |
| Posted By EricLundblad on 03/08/2008 4:59 PM
one drawback is that, in effect, customers are paying sales tax on shipping, which seems wrong.
Another benefit of living in sunny CA. Customers in NY, NJ, NC, ND, OH, SC, VT & WA already pay sales tax on 100% of shipping and handling
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| Dave
Wine Thief
Posts:2899
| | 03/08/2008 11:10 PM |
| | I bet back in the day when you were merely a computer genius you never would have guessed that someday you would come to know the intricacies of the tax code like the back of your hand. Welcome to the dark side! | | | |
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