Wine Pricing Dynamics: Analyzing Factors with a Winery Case Study

This report explores the key factors that influence wine pricing, examining the interplay between inherent production costs, market dynamics, and marketing decisions. It discusses how aspects like grape variety, region, vineyard resources, and winemaking processes contribute to the final price point. The report also highlights the significance of market reputation, consumer perception of quality, and the role of expert opinions in shaping wine prices. A case study of Stanton & Killeen winery illustrates these concepts, demonstrating how production methods and regional recognition impact pricing strategies. The report emphasizes the importance of communicating appellation and terroir information on wine labels to enhance price-perceived quality and marketing efforts. Ultimately, the report underscores the complex relationship between input costs, perceived value, and market forces in determining the price of wine.

Running head: INFLUENCING FACTORS IN WINE PRICING
Influencing Factors in Wine Pricing
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1INFLUENCING FACTORS IN WINE PRICING
Executive Summary
The purpose of this report is to discuss the influencing factors of wine
pricing. Factors like grape variety, region, vineyard resources,
winemaking process, reputation, and the price-perceived quality of
the consumers influence the price pointing of wine. The information
regarding the appellation and terroir of wine play significant role in
pricing wine as these two aspects are determinant factors of quality
as well reputation of the wine. This also indicates that this information
should be displayed in the wine label for the price-perceived quality of
the customers and subsequently marketing. The reputation of the
wine, created by various experts and rating system, is also crucial in
determining the price of wine as well as the marketing of the product.
The case study of Stanton & Killeen winery supports the discussion.
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Introduction
There are multiple factors that determine the price of products and
services, such as the cost of the production, the demand for the
products and services, the determined price of the competing
companies, the purchasing power of the consumers, regulations and
standards fixed by the government, company objectives, and the
used method of marketing. In the context of wine, a few additional
factors come into consideration while determining the price. Wine
price pointing is influenced by several factors including inherent
aspects to the winemaking (Staley, Blackman, & Oczkowski, 2017),
and features of the market (Lee, 2012). The former referring to
attributes like grape variety, region, vineyard resources, winemaking
decisions, among others, while the later focuses on the reputation of
the wines in the different markets, quality perceived by the customer
and all the emotional aspects related to the product (Ali, & Nauges,
2007; Cecchi, 2017). The purpose of this report is to explore the
various factors that determine the price point of wine and their
relationship with the input price.
Influence of essential wine attributes
What could mean obvious is the fact of considering inherent
production costs in order to determine the final price of the wine.
Quality of the wine could be determined by different aspects such as
grape variety, location, picking method, fermentation, among others
(Carew, & Florkowski, 2010), and at the end it is this quality the one
that could determine in good proportion the price of the final product
(Ling, & Lockshin, 2003). In other words, the determination of the final
price depends directly on the cost of its attributes. Producers might
consider historical sales, consumers demand and previous experts’
considerations in order to determinate the wine price (Oczkowski,
2016).One of the aspects that influence the most when considering
input costs is the wine region, as its level of reputation could support
the price (Ling, & Lockshin, 2003; Schamel, & Anderson, 2003).
According to Ling & Lockshin (2003) in majority of the cases, the
prices are mostly set by experts’ opinions as quality aspects are
subjective and may vary from person to person.
As stated by Oczkowski (2016), the price and quality of the wine
strongly depend on the available information on the quality of the
wine, which indicates to the geographic appellations of the wine.
Carew and Florkowski (2010) also support this by stating that
information displayed on the label regarding reputation, colour,
vintage, and appellation are significant factors for the customers
while purchasing. The area where the grapes have been cultivated
has a crucial role to play behind the quality of the wine as well as its
reputation. As observed by Atkin and Johnson (2010), the assessment
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of the consumers, in terms of buying wine, depends on the place of
origin, region, quality, taste, vintage, and reputation. The place of
origin of the grapes that are made into wine, are significant as they
are researched, described, and protected under laws.
Terroir is a French term that indicates to the range of distinctive
influences on a place or region. Terroir is useful for both the
winemaker and wine marketer – the winemaker utilizes the different
influences to create the wines, and the wine marketer uses the
information regarding terroir for marketing purposes. As different
regions have different terroir, the quality of the wine varies from
region to region. Hence, it can be said that terroir is significant factor
of deciding the quality of the wine. Appellation is a term that informs
about the unique terroir of a wine region. It not only defines the
geographic boundaries, but also protects the quality and brand image
of the wine region and the wine producers of that region by regulating
the cultivation and growth of the grapes and applied methods of
winemaking. Therefore, Atkin and Johnson (2010) put great emphasis
on the information regarding appellation to be displayed in the label
as a marketing strategy.
Marketing influences
Market conditions may significantly affect the price determination.
Even though the winery establishes certain input costs to be
considered as well as their own expectations in regards what is
expected from their own work, the forces of the market at the end
might determine in high proportion the final price as there are
aspects such as supply and demand that has to remain in certain
equilibrium and cannot be considerably affected only for production
characteristics (Oczkowski, 2016).
The influence of the cost and quality perception from the customers
on the price pointing was also corroborated by J. Jess (personal
communication, September 6, 2018) at the cellar door of Punt Road
with the particular case of Pinot Grigio, declaring that a bottle of this
wine should not cost more than $20 because the market is not willing
to pay more than that. For this reason, the process of making this
type of wine does not require the same effort compared with other
varieties.
The price variety of wine depends on the region, vintage year,
production technique, producer, and especially the reputation of the
wine classification. According to Ling and Lockshin (2003), the
reputation of the wineries as well as the ratings of the wine critics and
tasters are major contributing part of the pricing of the wine as this
information is crucial to the customers. Since sensory quality is
extremely important in the perceived value of wine, wine tasting is an
integral part of determining the cost of the wine. As demonstrated by
Folwell, Bales and Edwards (2001), 20% reduction in the tasting room
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price of premium wine has substantial impact of the profit levels. Due
to the reduction, both the net present value as well as the internal
rates of return decreased. Moreover, their research further proved
that change in the wine price has more effect on the profitability than
the change in the grape price.
The grape variety can also be considered as a contributing factor in
the pricing and marketing of wine. As opined by Staley, Blackman and
Oczkowski (2017), wine producers would benefit by providing the
information of using grapes from single vineyard while promoting of
the wine. The price-perceived quality of the consumers has always
been an important factor of consumer purchase behaviour. Although
this price-perceived quality technique is applied in a variety of
product categories, it has been employed more in particularly the
products that are the symbol of status, durable, and especially
difficult to evaluate. The evaluation of the quality wine is difficult as it
involves a number factors, such as age, packaging, winemaking
process, appellation, ratings, perception of the brand, critics opinion,
and word of mouth. According to Lee (2012), the relation between the
quality of the wine and its price is becoming increasingly significant
as, in today’s emerging markets and booming economy, the
consumption of wine is growing in the developed countries, the
expectations of the middle class is increasing, and the wine is turning
into an integral part of fine dining.
Where the wine is found and its levels of availability influence directly
on the price, as the more convenience to acquire the wine a lower
quality is perceived, and hence lower prices are settled (Taylor, &
Barber, 2008).
This was supported by T. Shand (personal communication, September
6, 2018), winemaker at Punt Road, indicating that in the particular
case of the Block 8 Shiraz the price was determined not only by the
quality of the wine and the inherent production costs but for the way
it has been sold. The specific market for this wine is the people who
visit the winery, as it is sold only at the cellar door, so it is a total
experience rather than only the mere purchase action. In other words,
the people who visit the winery and make of this a special occasion
are willing to pay for the overall experience and not only of the
product itself.
Influence of expert’s opinion and experience (or reputation?)
Being wine a product that needs to be tasted in order to determine a
quality consideration, customers rely on expert’s opinion, being those
knowledgeable and influential people who have tried the product
before and have provide their judgement that perhaps is now linked
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to the final product and affects directly the final price (Oczkowski,
2016; Taylor, & Barber, 2008).
In terms of economics, a product or service is called an experience
good when it has characteristics that are difficult to evaluate before
consumption. In the case of such experienced goods, the customer
must depend on various quality determinants, such as the evaluation
of the experts of the product or service. As observed by Taylor and
Barber (2008), there is a positive relationship between the ratings
regarding the wine quality and the price of the wine. The strength of
this relationship depends on the individual attention of the customers
on the product itself and its ratings. Since its first consumption, wine
has been evaluated. Based on those evaluations, the wines have been
systematically ranked through years. These ranks and rates have a
great impact on the pricing of the wine and the customers’ perception
of various wines. Although the informal ratings of wine by a number of
blogs, cooking magazines, and retailers have an impact on the
customers’ perception and pricing, it is much less than the impact of
the rating system created by the Robert Parker and the Wine
Spectator (Taylor & Barber, 2008). In the case of wines that are low in
quality, great accessibility indicates negative information regarding
the product, and thus, decreases customer demand for that wine and
lowers its price (Lee, 2012).
Case study
For this particular report it is analysed the case of Stanton & Killeen
winery. Stanton & Killeen is a winery located in the Rutherglen wine
region. This region is known internationally for if fortified wines, being
Muscat their main variety. This area also draws attention for its red
sparkling wine, being produced mainly by Shiraz and Durif, or the mix
of them. Apart from the above, this winery also produces different
varieties of red and white wines. The considerations of pricing the
wines vary depending on the type of the wine, but for this particular
research the focus was on the NV sparkling Shiraz and the Muscat.
According to W. Killeen (personal communication, September 23,
2018) the price of the Shiraz is determined mainly for its production
costs, as from winery to winery the production method changes and
hence its quality and price, being their Sparkling red unique for being
fermented traditionally. On the other hand, in the particular case of
Muscat, the consideration that affects directly its price pointing is
marketing, because as a region being known globally for this
particular wine they have to maintain similar prices that guide the
international customer to understand the region connection and its
value. In addition, it is clear to the wineries of the region that the
similarity of the price of this wine allows to be recognized that is why
this type of “agreement” is respected and followed when pricing.
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Summary/conclusion/recommendations
As there are several factors of determining the price of a product or
service, the pricing of wine depends on a few unique aspects, such as
the grape variety, region, appellation, and the process of winemaking.
the final cost of the wine does not only depend on the quality, but
also on the price-perceived quality of the consumers. As an
experience good, wine at first needs to be consumed and then its
quality is determined. Therefore, the consumers have to rely on the
systematic ranking of wines and the experts’ opinions while buying
wine. Hence, the rating and reputation are crucial factors in the
marketing as well pricing of wine.
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