Since our last blog post, we decided that it made sense to separate the Tin Sheets Consulting presence from the Tin Sheets to the Wind presence on Facebook. In an effort to provide content on the Tin Sheets Consulting page, we have started farming news from various sources; as well as working on producing more original content. One of the articles that we recently posted got us to thinking about pricing.
Pricing. If your immediate reaction is to groan or run away screaming in the other direction, you’re not alone. We would wager to say that it’s no one’s favorite subject. The article referenced above discusses the “Marketing Placebo Effect”, which is best described as the influence of price on the perceived quality of wine. In simpler terms, more expensive wine tastes better than the same wine sold at a lower price. A number of other sources shared this piece on social media and there seemed to be a consistent theme in their respective takes on the article:
“Cheap wine is better than expensive wine”
“Stop wasting money on expensive wine”
“Uh huh. Don’t be fooled!”
In essence, these sources think that consumers are being hoodwinked by the producer and there is no reason to ever buy expensive wine, and furthermore that wineries should take the hint and lower their prices.
The study in the article does identify some limitations of the marketing placebo effect, namely that there is a range where this is a valid approach, i.e. when choosing between a $10 product and an $18 product; and a range where isn’t applicable, i.e. when comparing a $1 product to a $50 product, because the range is so large that there are noticeable differences in the products. While these are valid points and should not be ignored, discussing the merit of these conclusions is not the point of this post. The most important takeaway for you, as a winery, is that you should take advantage of these ingrained biases in your consumer and use them to make more money selling the same amount of wine.
Your wine prices in your direct-to-consumer (DTC) outlets are too low.
Go ahead and read that again. I’ll wait. This is contrary to what we as winemakers, winery owners, and general managers hear day-in and day-out. It is important to realize a few things about this feedback, sales to distributors and to licensees are not the same as DTC sales. As a sales agent for a winery, you hear over and over again how “the wine is great, but can you get the price down $1/bottle or $25/case, so we get a floor stack” or “this would be great on our feature list at ‘x’ price”, where ‘x’ equals current price minus 25%. This constant pressure to drop prices in the wholesale world can create a winery-wide attitude that you must always be strategizing about how to decrease product prices in order to increase sales. This is a good and healthy approach with wholesale sales where competition is both ever-present and fierce, but this attitude adds an unnecessary hurdle when it comes to DTC sales.
One of the things that’s easy to forget when you’re caught up in production, marketing, HR, or one of the many other hats you wear as a winery owner or manager is that when customers come into your tasting room it’s because they want to be there. They made the decision to walk through the front door or get on your website and you now have their singular purchasing attention. This is the time to forget your wholesale pricing structure and instead use a different structure of pricing to your advantage.
If you have multiple tiers of wines, separating them by price can significantly increase the sales of the more expensive wine without harming the sales of the cheaper wine. By keeping the prices too close, you are, in essence, cannibalizing your own sales. Let’s say that in your offerings, you have two Cabernet Sauvignons, whether it be that they are different vintages, one is a reserve, or any other factor, so long as they are titularly different; and you have a relatively “narrow gap” in pricing for these two Cabs at $14.95 and $17.95. This “narrow gap” does two things:
1) You have invited the consumer to actively compare the two products and immediately incentivized them to choose the cheaper product by “rewarding” their choice with a $3 savings. This is especially troublesome in the tasting room where a customer can taste wines side-by-side and judge for themselves; and with only a $3 difference in the wines, you have made it clear to them that the difference is slight.
2) You do not allow the customer to meaningfully upgrade their choice. For example, Mr. John Jacob Jingleheimer Schmidt comes to your tasting room on his second date with his significant other. In hopes of getting to a third date, Mr. Schmidt wants to impress his date with either a) his frugal choice of the $14.95 bottle, or b) his luxurious lifestyle by spending more and “upgrading” to the $17.95 bottle. We can all appreciate spending less and some people will always want to be frugal; but if Mr. Schmidt feels like impressing his date and wants to upgrade his product selection, he is unable to do so because $3 is not a significantly higher price and does not offer a meaningful upgrade in product or perceived value.
These same principles are potentially even more important when it comes to online sales. With nothing other than your eloquently written description of the wine (no tasting notes, please), a killer bottle shot, and the price, Mr. Schmidt has no other information to help him differentiate between two similar products. When the prices are close together, the message you are sending is that the two products are not noticeably different. Clearly, this is not an incentive to sell the more expensive wine.
Here at Tin Sheets Consulting, we are proponents of intelligently designed pricing strategies (seriously, who isn’t?). Based on the flaws in the “narrow gap” pricing structure, we suggest employing a “wide gap” structure when pricing products through your DTC channels. To help illustrate what using a “wide gap” structure can do, let’s look at a real-world example. One of our clients, that we’ll call “Winery XYZ”, produces a traditionally-treated Cabernet Sauvignon, its flagship wine, at a retail price of $29.95. In an average July and August, XYZ sells 120 cases of Cab Sauv in combined online and tasting room sales. In the midst of a great vintage and based on the success of their flagship variety, the winemaking team at XYZ decides to produce a small quantity (680 bottles) of a single clone Cab Sauv. XYZ, in consultation with their marketing team and Tin Sheets Consulting, decides to price the product aggressively at $64.95, more than 50% higher than the standard Cab Sauv price. The rationale for choosing this price is that XYZ has a reputation for producing high-quality Cab Sauvs, the single clone was produced in limited quantity, and it would be sold exclusively through DTC channels. Released in early summer, the single clone Cab sold out in just four months and earned gross sales of $20,754.47; and most importantly, had no negative impact on regular Cab Sauv sales.
In doing the math (which we’ll do for you, since no one likes math), the average bottle price, including samples, was $30.53. While not that close to the $64.95 retail price, this was not concerning and expected. First and foremost, XYZ did not spend any additional money in creating this product compared to the production cost of the traditional Cab Sauv. Second, one of the primary objectives of the winery at this point was to increase wine club memberships. To accomplish this, pricing was used as a tool to “buy” more wine club members by providing incentive with a significantly lower price for the single clone Cab. Although the retail price was $64.95 to a regular consumer, existing wine club members and anyone that chose to sign up while this wine was available, had a significantly reduced price of $34.95. The value to the customer of joining the wine club is blatantly spelled out on the tasting menu by comparing the two prices of this limited production special product. This pricing structure easily demonstrates the value the winery places on their club members. Ultimately, this pricing structure led to an increase in club conversions of 25% when compared to the same time frame in the previous year, an increase in Cab Sauv sales, and more engaged customers for the winery.
The three big takeaways from this pricing experiment at XYZ Winery are:
- Setting a higher price with a wide pricing gap for a similar product set ensures that the lower value product is not affected by the higher value product or vice versa.
- Leveraging customer perceptions on value versus price can be used to incentivize customer buying behavior.
- Intelligently designed price structures can serve to protect the bottom line, increase revenue, and create more loyal and engaged customers.
TL;DR = Spend some serious time thinking through your price structure for DTC sales and don’t just copy your wholesale prices.