How Much Does It Really Cost?
A number of years ago, in what seems a surreal part of my life, I was hired by a major bank in this metropolitan area. Yes, I know what you are thinking, and eventually they too arrived at that conclusion.
While I had only a smattering of operational experience when it came to banking, I did have quite a bit of background in bank marketing. And that little bit of knowledge/dangerous thing condition kicked in rather quickly, like before lunch on the first day. I was asking a lot of questions that were more likely to be heard by the second grade tour during Spend-the-Day-With-Your-Parents-At-Work afternoon.
One of those questions which was so stupid as to be intelligent, I have come to the conclusion, was, “How much does it cost the bank to maintain and service a consumer checking account?”
Take all the raw costs of labor, computers, overhead, then determine whether the cost is sufficient for profits, or even if checking accounts were a money-making service. The bank, when pressed by little ole me, did not know how much it cost to maintain and serve a checking account.
I then asked, "How do you price a fee for a checking account? How do you know if the price the consumer pays covers the costs?" Again, no answer here that makes any sense. How does any bank price the monthly cost of a checking account?
Simple, I was told. “We look at what our competitors are charging and then price somewhere in that range.” But how do you know if your competitors are not following the same regimen, and, in truth, they don’t know any more than you do? “That’s probably exactly what happens, so we all just assume we are making money at the fee structure set by somebody at some time, and we all go from there.”
I was flabbergasted but believed that I was being told the truth. Try getting a loan from a bank, and when they ask you about your business pricing practices, give them that answer.
I bring all this up because the question is often asked, “How does a winery price the cost of a bottle of wine? Where does that number come from?”
Oh, we could talk about the investment in land and the long ramp-up time to even get to a first crop. Or the incredible expense of research, root stock, the vines themselves, and the personnel necessary for care, pruning, harvesting.
Then there’s the cost of what goes on in the winery. Lots of specialized equipment, loads of stainless steel, and the skyrocketing cost of a barrel, more than $950 each. Wineries need many, many barrels, into the hundreds, maybe even thousands. And then there’s the real cost of letting a product lay down. Nothing happens for a very long time, years in some cases. That’s money spent but not back in the bank.
Out of every $10 the consumer spends at the retail level, not the restaurant cost, on a bottle of wine, only $3 belongs to the winery. Other costs of getting the bottle to the consumer include transportation, the percentage earned by distributors and the percentage that goes to the retailer or restaurateur.
After all costs incurred by the winery are paid, left over from the $3, is 25 cents, pre-tax. Not really a princely sum, and not at all near what many folks believe contributes to the “outrageous” cost of a bottle of wine.
Given these thin margins, and keep in mind that we are dealing with an agricultural product subject to the whims of Nature, how does a winery owner price his wares? Why not just add a few bucks to every bottle and build in additional margin and/or profit?
Can’t be done for a variety of reasons, not the least of which is that adding to cost may mean you won’t buy. You’ll drop down a level or two in what you like to drink, and let the expensive juice linger on the shelves of your favorite retailer. Don’t think so? This is exactly what happened when the recent recession took hold in 2008/09. Consumers backed off the expensive wines in droves and settled in about the $20 a bottle level when they had been drinking $40 to $60 wines.
Also raising prices is not allowed by consumers for wines they know, made with grapes they know, in places that are familiar.
Wineries are trapped in pricing given the types of grapes they are working with, and where they are located. A great bottle of Napa Valley Oakville Cabernet Sauvignon may be perfectly acceptable to you in the $75 range, but move just a few miles north to Alexander Valley in Sonoma and that won’t fly. You are probably fine paying $40 for the Sonoma offering. The wines may be equal in pleasure but the address of origin drives pricing in a big way.
Even when Nature delivers a whack to a vintage, such as may be going on this year with three significant hailstorms in Burgundy, the winery can’t just raise prices on the resulting wines to make up for shortfall of product. Consumers will move on to another label, another area, another grape and never think twice about the decision.
Maybe a winery really can’t explain how it arrived at a bottle price, no more than a bank can quantify the price of their services, but people in the business can “feel” at what point consumers are resisting. Some wineries, like the great chateaux of Bordeaux, are not sensitive to the furrowing of brows in the marketplace, until it is too late, which is what is going now in that hallowed place.
Most wineries look to their neighbors and what they perceive to be their peers. Then they watch the market reaction. And that’s about as scientific as it gets when it comes to pricing the wine you buy.
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