Balance Sheet Marketing

What happens when wine purchasing behavior changes from a consumer accepting, “what you sell it for” to instead dictating “this is what I’m willing to spend on it?”  The answer, of course, is the wide gap between pricing and purchasing activity in the luxury segment of the wine market.

However, it’s not like this gap in the market has gone unnoticed.  With all of the press coverage the upper price spectrum of wine is receiving as it languishes on retail shelves, gathers furtive glances on restaurant wine lists, takes a prolonged respite in winery cellars, and goes unacknowledged in waiting list mailers, you might think this price segment was the new, new thing; a drug-addled Hollywood ingénue – the recipient of paparazzi curiosity and unblinking sympathy from the general public, with the attendant macabre press coverage.

Everybody from the Wall Street Journal to Forbes to Fortune to the Santa Rosa Press Democrat has reported on the deathly pallor of the luxury segment of wine pondering if and when it will return to form.

In early August, I wrote a post called “The Setting Sun on Luxury Wine” that presaged much of what I’m writing today: simply, people are no longer paying for things that aren’t justifiable in cost.

Despite my feelings in this regard, most of the wine coverage I’ve seen related to our economic climate continues to explore just two market realities – “the high-end of the wine market will come back,” or “the high-end of the wine market has been forever changed along with people’s perception of value.”

What if it’s neither of those, or, perhaps, both of them?  What if the high-end of the wine market comes back, but in a different form?  Stephen King’s Pet Sematary for the wine world.

I’d like to suggest a hybrid circumstance whereby sales in the upper-end of wine will return, but it will be with significantly more justification and transparency.

In doing so, it will counterbalance what the current popular predictions fail to grasp—Lewin’s Equation.  A psychological equation that indicates B=f(P,E),  in simple terms it explains that, “Behavior is a function of the person and the environment.”

Without trying to get too high-minded, what’s likely to happen is that when the economy does recover, a hybrid reality will occur that accounts for the consumer experience of having gone through the worst economic period of time since the Great Depression, while still satisfying a uniquely American trait of desiring more.

It won’t be an “if this, or that” circumstance.  It’ll be door number three.  I hope … but, luxury wineries need to cooperate.

The problem with wine is that, as a convenient blanket statement, it isn’t branded well on an individual basis so when a consumer goes through their mental cycle to rationalize price versus value for a bottle, they frequently fall back to reasons that are less than rational like, “$40 must be better than $20.”

Unfortunately, not only is that often not the case in terms of the wine quality, but even more egregiously, consumers don’t know “why” one bottle costs $40 and another costs $20, all things considered equal. 

And nobody is stepping up to help them understand, either.

Based on everything I’ve read and heard, I think the upper-end of the wine price spectrum will adjust by price adjusting down incrementally, declassifying wine, and creating second labels, but what if they just accepted a reality of being rational about their pricing?

Help consumers understand why a bottle of wine costs what it does.

Why do this?  It’s no more dangerous than starting a 2nd label and a lot more reasonable.

In a post-recession future, I believe a completely rational wine consumer emerges, one that acts as a function of themselves and their environment, Lewin’s Equation incarnate. 

How does a winery combat this?

They get honest.

I think the first thing a luxury priced winery has to do is engage in what I call “balance sheet marketing.”

It’s simple and at its core it’s highly transparent – luxury wines need to explain, in very clear terms, why their wine is priced the way it is.

There are radically different economic scales for a winery that produces 2500 cases, versus a winery that produces as little as 10,000 cases.  Is there any reason why those reasons can’t be enumerated in the name of justifying cost structures?

Grape contracts, low yields, land lease, business loans, operating costs, French oak, sales and marketing expenses, distribution costs, etc.  It would be my suggestion that a luxury winery list all of the costs out in detail, along with a reasonable margin.  Explain to a customer why, exactly, a wine is priced the way it is.  Make it a part of the story – the winery isn’t trying to make an unreasonable profit, just a fair profit based on the risk and cash outlay that is the wine business.

This way, absent consumer irrationality, potential customers can at least be armed with an understanding, and likely a sympathetic understanding.

I fear, in this new reality, when customers behave as a function of their experience and their environment, when they say, “this is what I’m willing to spend” that absent greater insight into what they are paying for in wine, the hybrid I suggest, than the reality given by the media, of consumers seeking value at lower price points, might be truer than we want to admit.