I was very surprised by the strategy
Inniskillin used to develop and price its higher tier Oak Aged Vidal Gold
Icewine. To be honest, I found it somewhat inauthentic to first determine the
price point they needed to enter that part of the market, and then to reverse engineer a wine to fit
this price point. It made me question whether the wine was truly worth the $65, or if it was all just a big marketing ploy? The detail around the company contracting
of a French design agency to design the packaging, and the various PR campaigns
in Asia Pacific led me to conclude that the pricing and the quality may not have
been as correlated as I would hope. (Or perhaps they were and they just needed to expend more effort to educate consumers...)
My strong reaction to this
strategy has raised the question: how should wine be priced? From Base
Marketing last year (indeed I am no expert) I remember 2 methods:
Cost Based Pricing – the producer
sums up his costs and adds a profit (in $ or %) on top of these costs to
achieve the product price
Market Based Pricing – driven by supply/demand economics. Producer
may optimise for her profit, volume, attaining as much market share as
possible, etc. Successful implementation of this strategy requires detailed market-by-market
analysis.
More detail on pricing methods is provided in
this article.
And so, given the complexity of
the wine industry by market, including the sheer volume of SKUs , the difficulty in obtaining information, and the
non-market forces (due to legislation in different geographies), I see that this
issue is likely much more complex than I had originally thought. I think my reaction to
Inniskillin’s practices was biased by our class discussion on biodynamic wines,
where the product price appears to be an after-thought to the more
cost-intensive practices employed by the producers. This seems much more
romantic and appealing to me.
Nonetheless, I would love to hear from those of
you with pricing experience or more visibility into how wine prices are set by
wineries across the world.
My perspective is that market-based pricing is used widely throughout the wine industry.
ReplyDeleteI actually did not see the Inniskillin strategy as being terribly different from what Christine Wente and Pete Mondavi described when they were in class. They both said that when they think about their overall product line they identify price points where they lack an offering and they think there is an opportunity and then they craft a wine or a label to fit into that niche. From my perspective, Inniskillin essentially identified a market niche that could be a platform for international expansion, determined the characteristics that a product would need in order to be successfully in that niche (including price point & margin to DFS) and then figured out how to produce that product. The consumer marketing part of it in Japan seemed similar to any other luxury product where good marketing can create demand for a good that is priced far above its costs.
ReplyDeleteFrom my experience with market-based pricing, this approach can cause a big headache for the wine companies. If the price of a bottle of wine is set based on market demand, we'll call that a fixed price. However, the COGS will vary based on how productive a specific harvest was. Wine is essentially an agricultural product so you never know how many grapes you'll get in each harvest. Sometimes there is tons of supply which drives the price down and sometimes there is little supply which drives the price us. Assuming wineries set up long term relationships with certain grape growers, this means that sometimes COGS will be high and sometimes they will be low causing margin to vary year by year. It gets further confusing once you layer in the fact that some wineries grow some of their grapes and buy some of their grapes. How does a winery mitigate as much risk as possible by combining these two sources of grapes?
ReplyDelete