Developing a Pricing Strategy for Your Winery
I got my start in the wine industry when I was ten — young, I know. That was when my father’s downtime project of creating a winery turned full-time as he made the leap from geologist to a winemaker. This caused some unique challenges, so my father decided to hire some of the world’s leading viticulturists to help us get our vineyard planted. Fast forward four years, and we were ready to build a winery with a well-known winemaker, Bob Pepi. One year later, we turned out our first vintage. I don’t give you this background to give you insight into how I got into the wine world or why I still work in this field. Instead, I want to show you that while my father spared almost no expense getting the significant parts right, there were some blind spots that we had to learn about the hard way. For example, pricing.
After buying 50 acres of land, planting eight varietals of grapes, waiting four years for our first usable crop, then another nine months for our first white wine to be released, we were more than ready to launch into sales. Do you want to know how we picked the price of the wine? We guessed. We tasted all of the wines with Bob, and he said that in California, he’d charge a certain price for each wine, and because we were in Colorado, we should charge that minus 50%. That was that, and from that day forward for ten years, that is how we priced out wines. It wasn’t until I came back into the business full time that I discovered a better way, or really, many better ways.
The first kind of pricing that I want to talk about is additive pricing. Additive pricing is a pretty simple approach that should be familiar to folks in the restaurant world. To arrive at a product price, simply add up all your cost elements, desired margin, and incurred overhead to yield a price. Additive pricing is a great way to defend your minimum price for a product, especially with pricing your product for wholesalers or distributors, because it will help maintain a minimum revenue per product.
This is an excellent tool for establishing a defensive price point, but it can miss some significant elements impacting your company. First, this is not an optimal method to develop a direct-to-consumer price point. Secondly, this method ignores what happens to the consequences of the price you choose for wholesale and distribution sales.
The second pricing method is called reductive pricing. Reductive pricing is mostly the reverse of additive, and in many ways, closer to the guessing or gut method my family first employed. To arrive at a price for strict reductive pricing, choose the price you want the product to be sold at and remove all fixed costs from that price. Then, you’ll arrive at the remaining margin.
For example, you want to sell a bottle of Cabernet for $39.95. Subtract grape cost ($2.40), packaging cost ($1.15), labor ($2.80), oak ($1.75), bottling cost (35 cents), and that leaves $31.55 of margin in the tasting room. The overhead of the tasting room should also be subtracted from this remaining margin for all wine sold directly to consumers in a winery tasting room. I would also argue that shipped wine would not have the tasting room overhead subtracted. Instead, the wine’s shipping cost should be subtracted from that margin.
Additive and reductive pricing methods are great ways to establish a price and there are significant advantages to using both methods in parallel to get a price point for your winery’s desired outcome. The desired outcome for your winery may be different than the desired outcome for another, so my pricing philosophy is a hybrid pricing model.
Hybrid pricing is a holistic model that considers the channels of sale, the desired price to the end consumer (not the retailer or distributor), and uses reductive and additive pricing to achieve a set of prices that defends your cost structure and optimizes your margin. Here, a set of prices means not attempting to maintain a consistent price in all outlets and channels. While it is something that some brands are justifiably concerned with, most small producers don’t need to worry about it. Do you, as a brand, care if your tasting room price is the same as the local liquor store? How about a national chain liquor store? I’d argue the answer here should be no — you aren’t selling the same thing in a tasting room and a liquor store. In one, you are selling your product. In the other, you are selling an experience, a relationship, an education, status, and a product. Should those be competitively priced?
Hybrid pricing also makes sense when pricing for wholesale. Instead of focusing on market value prices from a reductive or additive standpoint, it makes more sense to use hybrid price analysis to anticipate the markups between you and the consumer to maximize your margin and maintain a flat price to the consumer.
For example, in the competitive ski resorts of Colorado, many liquor stores operate around a 35% markup depending on the product, and many distributors have fixed blended margins for their brands. In this example, we will call it 27%. If you price your Cabernet to the distributor price of $23, the distributor will turn around and sell it at $29.21. The liquor store will take that $29.21 and add their margin, making the wine priced at $39.43 on the shelf. How many times have you seen a product in the liquor store end in 43 cents? What will happen is the retailer will round it up to 95 cents or 99 cents, whichever they have chosen for a storewide price. That liquor store just “earned” 56 cents because of your market price. If you raised your initial price to $23.32, that would get sold by the distributor at $29.62, and the liquor store would add their 35% margin getting the shelf price up to $39.98, which they would probably bump up to $39.99. So now, instead of giving the liquor store an additional 56 cents, you get to earn an additional 32 cents per bottle without impacting the consumer price.
Pricing is a complex game with many variables on both sides of the equation. Hopefully, this blog shed some light on some items to consider when you choose your next wine price.