What Drives The Price of Wine? And Who Buys What?

How is wine priced and what sort of a wine purchaser are you?

The price of wine (and pretty much everything else, for that matter) is driven by two fundamental factors; cost-to-produce and seller's margin.

Some wines are priced on a cost-plus basis, others are value priced.

Certain industries, such as airlines, are famous for the sophistication of their pricing approaches, including dynamic demand-led pricing.

However, the basics are always fundamentally the same.

Cost to produce

At its most basic, the cost-to-produce is simply the cost of making a particular wine (including selling and distribution costs as well as duties and taxes). Key variables in this include:

- the cost of the land for growing the vines

- labour in tending the vines, picking the grapes and making the wine

- cellar techniques, such as aging (requires vessels, space and time), oak (the newer, the more expensive) and lees stirring (requires skilled labour)

Another factor is the amount of grapes produced for a set area of land; some vines are naturally more prolific than others and in many areas, maximum yields are defined by regulation. Frost, hailstones and even wild boar can all reduce the amount of fruit produced per hectare.

In cooler, damper climates vines do not live as long (so therefore need replacing more often), and require more attentive care to deal with late frosts and vineyard pests. These can be some of the most expensive wines to make.

For this reason, English wines and Chablis, for example, will always be expensive to produce and this will be reflected in the price. 

Dessert wines from cool-to-moderate climates are also much more expensive to produce; late, manual harvesting, sometimes on a berry-by-berry basis and the need for botrytis brings a greater risk of disease and harvest failure.

Sauternes can often be a great bargain vs production cost, since it is expensive to produce yet largely unfashionable due to being sweet.

Land prices are driven by a combination of fashion and quality; well-appointed vineyards producing better-quality fruit will command a premium. Even more so if they are inside delimited areas that also command a premium, so you will pay more for land in AOP Pauillac vs generic Bordeaux vs vin de pays.

You will pay less for land in Languedoc-Roussillon or Cahors vs Bordeaux or Burgundy, yet may well find yourself able to produce very high-quality fruit from sites with the right combination of altitude, cooling breezes. the right aspect and good soils.

Margin

The margin on a wine depends on how much profit the seller wishes to make; wineries that invest in making themselves distinctive are able to command more of a premium than those that don't, can't or won't.

Fashion is a significant factor here; rosé has gone from deeply unfashionable in the early noughties to the insta-influencer's bottle of choice, so the entire category commands something of a premium vs the cost-to-produce.

Within the category, Provence rosé commands a further premium and a celebrity association adds more again. A well-branded celebrity Provence rosé will generally command very healthy margins for the producer.

Other super-margin wines include First Growth Bordeaux and top Burgundy as well as classic regions within Italy and California.

Unfashionable wines, be they individual producers or entire regions, may struggle to command any premium and may have to be sold at a discount; for years, sherry and entry-to-mid level German wines have been a difficult sell and therefore relative bargains.

Austrian wines are a case study in a region (rightly) going out of fashion and then gradually, but successfully rebuilding its reputation and increasing prices over time.

In principle, however, any wine can command a price premium over cost of production plus margin, provided the producer invests in effective brand-building.

Cost-plus pricing

Cost-plus pricing is the simplest to understand for supplier and consumer; you simply take your total cost to produce, say £10 for a bottle of wine, and then add your margin, say 20% mark-up. This gives you a selling price of £12 per bottle.

In reality, the system is more complex than this as there are wine producers, importers, retailers, packing and distribution costs as well as fixed vs variable costs and differing sales volumes, but conceptually cost-plus is simply cost + margin = price.

Cost-plus pricing is best suited to undifferentiated commodities where premiums are hard to command; it encourages scale and efficiency in the production process to gain share and increase overall profits.

It is not at all suited to small-scale production such as mid-level wines produced by artisan winemakers (rather than the corporate behemoths of the New World).

However, small-scale mid-level producers may find themselves in a difficult "squeezed middle", lacking the budget to invest in professional price-enhancing branding activities and therefore unable to create a meaningful distinctiveness vs more commoditised, high-volume, low-priced wines.

Mid-level producers / sellers risk getting trapped in a perception gap of simply being more expensive versions of a basic wine and constantly trying to persuade reluctant buyers to trade up.

The solution to being in this squeezed middle, however, is not education but distinctiveness; as the saying goes, the market can remain uneducated much longer than you can remain solvent.

Value-based Pricing

Value-based Pricing does not begin with the seller's cost to produce as a starting point, but with a consideration what the market will pay.

A value-based pricer will look at what people are prepared to pay for a product and set a price accordingly. High-end Bordeaux, vintage Champagne and Napa Cabs all command prices that are in no way based on their cost of production.

A large proportion of what you spend on these wines is margin to the seller; the benefits you get in return are rarity, exclusivity, bragging rights and status.

Examples of value-priced items from other sectors are Apple phones, Nike trainers and Vans clothing.

Cap-and-Collar

Some wines exist in an interesting cap-and-collar spectrum; English wine is expensive to produce but does not yet command the reputation and margins of Champagne and Burgundy. So it is expensive at the bottom and cheap at the top.

The same is true of Beaujolais, New Zealand and, to an extent, Austria.

What type of wine buyer are you? 

It is worthwhile assessing your own attitude to wine and the type of buyer you are, in order to find wines that suit your own buying preferences, as well as palate.

Aside from a preference for red or white, New World or Old, classic or edgy, your wine buying approach can be categorised in several ways:

Maximisers vs Satisficers

If you mainly just want a wine to enjoy without needing to know too much about rootstocks, clones, training methods, lees aging and so on, then you are a Satisficer; that is, someone who wants their wine to be "good enough" with minimal choosing effort. This is said to be around 85% of all wine buyers.

For Satisficers, the liquid in the bottle is just a small part of the overall experience of buying and drinking wine; other benefits may include social elements, appreciation of the packaging and a sense of inclusion as part of a commercial wine club.

If you love reading up about wine, discussing bottles with sommeliers and understanding how Portlandian soil types affect flavours vs Kimmeridgian, then you are a Maximiser who wants just the right wine for the occasion and is prepared to put in a lot of effort to get there.

Sophisticated and enthusiastic, you are representative of a minority of around 15% of wine buyers and you are likely only interested in the liquid in the bottle, rather than any extraneous factors.

Price-Sensitive or Not

The less Price Sensitive you are, the more you are willing to pay extra for the same thing. This is not about absolute wealth or the ability to splash your hard-earned cash on life's finer things. Rather, those who are Price Insensitive simply do not worry if something they want is available more cheaply elsewhere.

A Price-Insensitive buyer does not especially consider price or relative value-for-money when buying a wine; she has some money in her pocket and wants some wine - it is as simple as that.

By contrast, a Price-Sensitive enthusiast will scour the offers and discounts sections for bargains, or attend auctions in the hope of knock-down prices on high-end wines.

Conservative vs Open-Minded

Conservative drinkers will tend to drink the classics, well-known wines from reputed regions; this could be Burgundy, France or the Old World generally, but the overall aim is to choose wines that will be socially approved of and not in any way embarrassing.

It bears repeating; it is not always just about the wine itself. A conservative drinker may well be more interested in reducing her risk of social embarrassment at choosing the "wrong" sort of wine than concerned about the quality of the liquid in the bottle.

By contrast, open-minded drinkers seek out the new and unusual, be it location, production-method or flavour profile; they do not feel the weight of societal pressure to conform, so will happily champion Georgian qvevri wines, amber wines from Croatia, Japan or Israel. At any rate, they will be open to suggestions from a sommelier.

My buying style

I am a Price-Sensitive, Open-Minded, Maximiser; I would hazard a guess that that makes me one of the rarer types of wine purchaser.

I love a genuine bargain, I am interested enough in wine to read up and learn about it regularly and I actively enjoy tasting wines from countries, regions and grapes that I have not encountered before.

It's not much of an exaggeration to say that I prefer the novelty of trying a new wine to the actual quality of what is in the bottle.  In practice, years of wine tasting have taught me what a good wine is like and the sorts of wines I prefer - usually mature classics from cooler regions.

For that reason, you'll often find me picking up an eclectic mixture of quirky marked-down bottles and fire-sale classics.

Mine of course, is just one of many possible approaches; neither "right" nor "wrong", it just is. Equally valid are other approaches, such as a Conservative, Price-Insensitive Satisficer who is very pleased with her purchase of celebrity wines from a large retailer.