Some Thoughts on How Winemakers Should Price Wines

One of the greatest challenges for any business that sells a branded product is how to price it.  This is particularly challenging in the wine business.  Winemakers sell to a global market and have limited information on actual demand in most markets outside of their own country because they sell through distributors.  I’ve been observing the different pricing strategies of various winemakers through my 6 years as an importer and have noticed two distinct approaches.  I’d like to offer some background on how consumers buy wine and then discuss the two approaches.

Background
What Impacts Demand for a Wine?
Demand for a wine is really impacted by 4 factors: price, quality, scores and consumer perception.

First, scores.  Whether we like to admit it or not, scores matter a lot.  The polite reason is that readers
view critics as impartial and highly knowledgeable.  There is a grain of truth to this.  Critics are generally impartial as to specific winemakers although they all certainly have a style of wine that they prefer.  The impolite reason is that some customers feel that retailers are trying to offload certain wines on them.  There is a grain of truth to this in traditional US retail as many distributors force retailers to buy large quantities of wines that they do not want in exchange for the right to buy underpriced “cherry wines” that they do want.  This is one reason that I left traditional retail to start my own company.

The second thing is quality.  Quality helps because knowledgeable people who interact with customers can better sell the wine if it is of high quality.  Remember that if a customer has not had the wine, they have no direct knowledge of the quality.  Quality only helps when people have already had the wine.  And customers have not had in excess of 99.999% of wines on the market.

The third factor is customer perception.  If a customer has had a wine and liked it, then they are far more likely to buy it again.  If they didn’t like it, there is almost no chance that they will buy it again.  Of course, quality does impact customer experience if the customers have had the wine but this does not necessarily translate 100%.  Customers often drink wines when they are in bottle shock.  Or they drink them when they are too young.  Or they drink them within 5 minutes of opening the bottle before the wines have a chance to breathe.  This is one of the reasons that I advise customers with every ship to wait 3-6 weeks before opening any wines (even then, I always get a few customers complaining that I sold them dead wines 4 days after their shipment arrived).  I even started a tasting notes blog to advise customers when wines are in their optimal drinking windows (and often write this in my E-Mails).

I should add that in the modern age, consumers can have an opinion about a wine that they have never had.  Certain wines get “buzz” on social media when certain consumers drink them.  I’ve seen demand for some of the wines that I sell increase because of positive social media play.  Certain consumers are almost micro critics in their own right.  I’ve been fortunate to aggregate a solid list of sommeliers (who buy for their own cellars) as well as respected collectors.  This is actually one of the key ways that I try and increase demand for my wines.

The final factor is, of course, price.  While certain customers are almost completely price insensitive for certain wines, most customers are very price sensitive.  I’ve found that price sensitivity is not necessarily linear (i.e. a straight line).  Obviously, there are price breaks (e.g. $19.99, $29.99, etc.).  But there are also category breaks.  So good Cru Beaujolais sells for $21.99 - $29.99 and a really great new producer comes out and wants to sell his wine for $39.99, even if it is as good as the other top 4-5 producers who can sell wine for more than $30, he will have a very difficult time selling his wine at that price point.

The Importance of Brand Value
Obviously, brand value is a combination of the general knowledge that consumers as a whole have about the wine.  This is a combination of scores and consumer perception which includes personal experience and buzz.  It is critical to understand that two wines with the same level of quality will certainly not have the same demand at the same price if one has a more established brand than the other.

The US 3 Tier System Magnifies Everything
In Europe, if you raise your prices 2 Euros, it’s not usually that big of a deal.  In the US, where the wine store sells to an importer who sells to a distributor who sells to a retailer, that 2 Euro increase can mean a $6-7 dollar increase in the price of the wine at retail.  This can push it out of one category (e.g. normally priced for that wine) and into another category (a premium price in that category).

The Curious Case of Italy
Americans generally understand that high quality French winemakers can make at least good wine even in “bad years.”  They have some vague notion that winemakers can reduce yields, select certain bottlings from the best vineyards, etc. and recover from all but the absolute twice a century disaster years.  And they will support their favorite winemakers in the less “good” years.  They know that they cannot necessarily cellar every vintage for 30 years but that some years, the wines can be enjoyed young and it gives them a useful historical perspective on their favorite winemakers and the act of comparing vintages over time is a useful and interesting exercise in and of itself.

Italy, is another kettle of fish.  There are certainly excellent estates in Italy who use the same techniques to produce consistent wine year in, year out.  As a generalization, I believe it is fair to say that historically, these producers made up a smaller percentage of the overall number of producers than they did in France.  In any case, Americans generally believe that other than a few top producers, Italian wines are great in great years and garbage in the other years.  I’ve been yelling and screaming about this for some time but I can say with certainty that demand for wines is significantly affected by critics’ vintage scores.  There are two funny things about this.  First, Italian wines are even harder to score at bottling time than French wines and the vintage scores (which are made 3-7 years before many of the wines are ready to drink) are even less reliable than they are in France.  Second, the variation in microclimates in Italy is immense and region wide vintage scores are not necessarily useful in all years.

I would make one final point about Italy.  Many US consumers believe that Italian wine is either 1) modern uninteresting plonk that is ready to drink on release and cannot be aged or 2) wine that needs to be aged 10-15 years before it can be looked at.  While this generalization might have been true 10-15 years ago, it is certainly not true today.  Italian producers have upped their game over the past 20 years and there is a new generation of winemakers who use the same techniques that the French do to produce a range of wines that are drinkable (with a decant) on release or shortly after but that will age and improve with cellaring.

Why does this matter?  Because many US consumers of Italian wine will be highly reluctant to buy a producer whose wines they have not yet tried.  They believe that it is impossible to tell if the wines are any good or not until the requisite 10-15 years have passed.  At this point, there is a good chance that they will have wasted their money.  Many just say, “I should keep on buying Cavallotto because I know how it ages.”  Now I like Cavallotto but there are plenty of other Langhe producers that are as good that cost less money.  But Cavallotto has a great brand among consumers of traditional Barolo and if a consumer has a choice between Cavallotto and brand X, all else equal, they will buy Cavallotto.

The Two Strategies for Pricing Wines

1. My Wine Is As Good As His Wine

The first strategy is to look around at comparable producers and price the wine at the same level as a producer with the same perceived level of quality.  This is a misguided approach that can cause significant short and long term harm to a winery.  The reason should be clear: quality is only one factor that impacts demand for a wine.  If the winery next door has been selling in the United States for 20 years, has a following and has been reviewed by critics, they will be able to sell more wine at a higher price than a relative newcomer.  I know a producer in Montalcino who followed this strategy.  They felt that their wines were among the best in Montalcino (they are correct) and priced them accordingly.  The producer also refused to talk to critics.  And very few people bought the wines.  Because at the prices that the wines cost, they could buy the familiar top tier Brunellos.  And they did.  And the winery is still a small winery that has trouble selling out its wines.  I think after 40 years, they are gaining some traction in Europe but they should have been a superstar.

The point is that there is that pricing is not a moral issue.  It is not a reflection on the quality of the wines or on how good a person the winemaker is.  And consumers know very well that as wines gain in popularity, prices increase.  They actually sort of like it because they can open a bottle and proudly state that they bought it for $50 and it now costs (an unaffordable for that person) $200.

2. Target the Intersection of the Supply Curve and the Demand Curve

The plain English summary here is that winemakers should price the wines so that they can sell them all (or mostly all) in the year that they are released.  If that price is somewhat below what they”should” cost based on the quality or even below the average cost for wines in that region, that is fine.  From a cash flow standpoint, it is better to have cash in hand to pay bills than to have bottles sitting in the cellar chewing up space.  More important is the following.  One of the key steps in building a brand is to have consumers actually drink the wine.  If lower prices result in more sales, this means that more consumers are getting the wines and drinking them.  If they like them, this increases the brand value of the wine and increases demand in future vintages.  Again, wineries can always increase prices.

I like to think about one of our more popular German producers.  He is located in a part of Germany that was not known for top quality wines.  When I started with him, I could not give the wine away.  I begged customers to try them and basically stuck my reputation on the line.  He had a huge back stock of wines from previous vintages which he sold to me at close to the same prices as the current release wines.  And I sold a ton of these wines because it is hard to get older vintages of German wines in the States.  And you know what?  Customers got the wines, tried the wines, iked the wines and his brand equity increased.  Sales of his wines gradually increased.  Sales of those old wines at reasonable prices really helped grow his brand.  I blogged about the wines non stop and a top critic I know eventually rated the wines (and they scored quite well).  And now, I can sell 2-3 times the amount I can get from the producer.  But this took 3-4 years of hard work and some not so great offers.

Now I will make one caveat that the consumers who drink the wines have to be the right consumers.  Dumping 3 cases on a supermarket chain with stores in a region that does not cater to higher end, knowledgeable customers will not help build the brand long term.

My Advice
Pricing “Moral Victories” Are Really Losses
If wineries charge too much for their wines and don’t sell them, they should not feel that this is some moral victory.  The best marketing for a winery is consumers actually drinking and enjoying the wine.  Ultimately, it’s the only way to build brand equity.

Learn the Demand for Your Wines
I try and be honest with my winemakers and tell them if I have excess demand for their wines.  If they increase their prices, I increase mine.  I’m happy for them to make the extra money.  After all, they are the ones breaking their backs in 100 degree heat (38 degrees celsius) all summer.  Many importers are not like that.  They want to have underpriced wines for 2 very important reasons.  First, they can mark them up more and make more money.  More importantly, they use these underpriced wines to wrangle extra sales out of underperforming wines out of their customers.  So the harder working better winemakers get less money and the less hard working winemakers get more money than they otherwise would.

Winemakers should know the demand for their wines.  The best way to do this is to have more than one importer.  If you have two importers and there is excess demand for wine, the winemaker will know instantly.  As a parenthetical, there are really no importers of fine wine who have excellent distribution nationwide.  Most of them have a distributor that they run in one or two states and they work with distributors in other states (but almost certainly not all 50).

Winemakers should also check winesearcher.com and see how much of their wine is on the shelves.  If there is none, either the importer is not getting the wines into top retailers or the wines are selling out (indicating that demand is exceeding supply at that price and a price increase is in order).

If an importer says that they need to have national control of the wine to have a coordinated campaign, winemakers should have the confidence to tell them that this is simply self-serving BS designed to increase the profits of the importer at the expense of the winemaker.

If You Have Back Vintages Sell Them
Selling back vintages is one of the most effective ways to grow a brand.  Customers love to get wines that are expressing a different set of characteristics than just released wines and it gives them confidence that the wines will age well.  Selling the back vintages of the wines from my German winery was one of the most effective things that I did to increase his brand.

Conclusion
I can say that from my experience, winemakers are among the most hard working and generous people I’ve ever met.  Most of them are not living in castles and driving Mercedes.  And the costs of buying vineyards in prestigious appellations is only increasing.

Sadly, even though most winemakers do not like the business part of the business, running a winery is in fact a business.  And running the business side well can make a huge difference in terms of the profitability of the winery.  Given how hard winemakers work, in my opinion, they deserve every penny.