Most small wineries fail to properly maximize profit when setting prices.
In fact, most wineries evaluate and change their wine pricing too infrequently – a decision to not change wine prices is still a price-setting decision by default.
A good wine pricing exercise needs to be a three-way conversation with sales, winemaking, and accounting. More importantly, the discussion needs to go beyond just a gut feeling about the market. Most wineries have data to guide the discussion, but it requires some effort to identify and analyze the necessary information, as it is rarely in plain sight.
The sales team can provide a sense of the market’s likely response, but the results from the winery’s most recent price change are likely to be more instructive. If your accounting team can estimate the price elasticity of demand (basically, a measure of how sensitive the volume of sales is to a price change) for the wines, management can then have a better guide to evaluating the price-volume trade-offs. (Yes, there are some step functions in the demand curves, but management should use data, not gut, to evaluate the actual magnitude of these wine pricing changes.)
Equipped with this price elasticity estimate and the current cost of production, the accounting team can then estimate the total gross profit at each combination of price and volume. We have seen so many wineries that haven’t changed wine prices in years, but costs have steadily crept up, eroding their margins. In this scenario, especially when gross profit margins slip below 35%, it is actually much easier to raise total gross profit with a price increase (rather than trying to increase volume). Furthermore, given the length of wine’s product cycle, the return on capital for growing through volume is often lower than the return on growing through price (but this is a topic for another day).
Conversely, some wineries with very high gross profit margins may be able to increase total profitability through a decrease in wine pricing, but this is actually a rarer situation, so a winery should be very careful and examine the data thoroughly before dropping prices.
Another reason for making small, thoughtful changes to wine prices more frequently, is to develop a deeper data set from which to develop insight to drive a more strategic and profitable pricing strategy.