big discounts

F**k Discounts

No I really mean it: f**k ’em. Much as I don’t like to start a post on a negative, I’m just so done with discounting. No, we are not going to haggle on the price of that bottle of Pinot—I will sell it to you at a discount if (and only if) you join the wine club and accept at least one shipment before you cancel. No, you can’t have a free tasting unless you make a $50 purchase (update: no free tasting, period). I’m already selling into wholesale at FOB pricing, so no I will not cut another 20% off—and yes, I know you are trying to sell in a market where every SWS rep is giving away three cases to sell one. OK, I will negotiate on the 3-case minimum drop to get by-the-glass pricing, but no, you can’t have it at the BTG price unless you are actually pouring it by the glass. And on, and on…

Thankfully, it looks like the market is starting to come to me—at the retail level anyway people are increasingly accepting of front-line pricing. I have even been able to roll back some of the price cuts we had to take just to stay in business when the Great Recession hit.

We’re not out of the woods yet, and if the stories I hear from friends are any indication the Recession may have spawned a new and persistent consumer demographic who simply won’t purchase anything unless they think they are getting a “deal.” Not that long ago I overheard a group outside the shoe store next to our shop, commenting on the “SALE” sign in the door: “Are they kidding? 10% off? I won’t even walk in unless they are selling at least at 50% off.” Ugh. Thank you for not coming into my store, either.

“But Wines Are SO Expensive! Why Won’t You Sell To Me At A Discount?”

This morning Ryan O’Connell posted on “What Is A Wine Really Worth?” where he points out different scenarios on wine pricing from the producer’s perspective. He says:

I belong to the supply-based school that says you take the cost of making wine and add a bit. …you add up the cost of viticulture (or grapes if you’re sourcing fruit), the cost of vinification, the cost of elevage/aging, the cost of bottling, the cost of shipping, the cost of storage, the excise and local taxes, and the cost of marketing/selling, and then add a bit for each person in the chain of custody that brings the wine to the consumer.

Our pricing model is a little more complicated, but not rocket-science-complex. First I lay out what percentage of product I believe I can sell direct-to-consumer (DTC) at full retail and at discounted retail (wine club and case discounts), and to selected retailers at wholesale. (Note that I entirely leave out selling at FOB into distribution—these days the entire middle tier is so dysfunctional when it comes to small wineries that there is no point courting distributors. It’s a waste of my resources for the return distribution offers.) Then I look at our burn rate: cost of goods and overhead costs: salaries, marketing, rents and other expenses, taxes, debt service, etc. Then I figure out how many cases I have to sell in each category across our mix of price points to cover our burn rate. That is my sales bogey. Clearly the more I can move at DTC (and loyalty-discounted DTC) the fewer cases I have to sell to hit that bogey—and the more likely it will be that there will be a bit of profit to pass through to myself and to my investor partners.

Back in the day I worked for an ex-fighter pilot. During a discussion of our enterprise-wide crop forecasts he said: “In bombardier school, they taught us to ‘measure it with a micrometer, lay it out with a ruler, and hit it with a sledgehammer.'” To a degree that is how our pricing/sales model works; being a small, single-vineyard operation we are more at the mercy of the whims and vagaries of nature than bigger wineries. Regardless, we need to hold the line on the pricing we have set because that it what we have to make to stay in business. Top line to bottom line, discount pricing makes it that much harder to keep the doors open.

The Wine Spies, inVino, Lot18

“Then Why Do I See Your Wines On Discount Sites?”

A month or so ago I had a wine club member in the shop. As we were wrapping up our transaction he stepped into my office and whispered: “Is everything going OK? I saw one of your wines on a discount site and wondered if you were having money troubles.” No more than usual, I assured him. I went on to discuss with him how we move a tiny fraction of our wine through these outlets, and given the discount pricing (essentially around FOB) these sales represent an even smaller fraction of our revenue. “Then why do you do it?”

In a word, marketing. Every one of us producers of ultra-premium wine caters to a tiny slice of the incredibly long tail of the wine consumer demographic distribution. Consciously or not, in order to grow our sales (or even to maintain them flat) we rely on a continuous trickle of new buyers who decide to trade up from entry-level wines. We have thanked the large industrial producers and gateway wines like White Zin and Moscato for introducing people to wine, and prayed that enough of these casual consumers would “get the bug” and trade up to keep us in business.

This modality is still in play. But the discount sites offer small producers a more targeted approach. No doubt the majority of buyers on these sites are there for the deal; maybe they are even part of the persistent new demographic I mentioned above. The difference from the gateway wine approach is that this demo has already traded up to a degree, and they are being contacted directly by the discount sellers. And a few of these buyers are going to taste the wines we feature, get excited, and trade up further—perhaps even to the extent of looking specifically for my brand—ready to pay retail. This is way more powerful than just praying that the random entry level graduate is going to stumble across my brand.

Every Bottle Moved Through Discount Sites Represents a Direct Appeal To The New Buyer

Every dollar lost relative to the retail price of that bottle is a dollar spent on marketing, and arguably a far more effective marketing dollar than one spent on print ads or medal competitions. We are leveraging the huge mailing lists of the discounters—renting their list for a day or two, for what amounts to a tiny fraction of what it would cost to buy a mailing list—and we incur no hit with the potential new customer for filling their inbox with ads. The discounters take that hit for us.

The downside is the certainty that some consumers are going to think that because we are placing wines on a discount site we are having financial difficulty. I’m putting up this post to address that mis-perception. We are not. We are hoping to reach new and potentially loyal customers.

I’m also putting up this post to let my readers know that tomorrow, Saturday March 17th, 2012, my friends at The Wine Spies are going to feature our 2004 Los Carneros Library Selection Pinot Noir. Today in our Salon we are pouring one of our 2003 Pinots. People are loving it, and spending $58/bottle for it. I won’t be pouring the 2004 Carneros as a Library Selection in the Tasting Salon until some time next year. Tomorrow only you can buy it from the Spies for something like $40. So stock up. And after you fall in love with it, come visit us in Sonoma. Or at least check out the website.