Scarcity Pricing

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When I am speaking or teaching and it comes time for people’s questions, one topic takes over every time: wine pricing. People have endless curiosity about why wine costs what it does, what’s the best wine for the money, what’s the most overpriced – you name a wine pricing angle, I get a question on it.

Often I wind up explaining about scarcity pricing, which is just the ancient law of supply and demand in silk lingerie. (Listen, if people on food shows can describe pork sausage – pig parts stuffed into intestinal linings – as having “sex appeal,” then I can dress up economics in something flirty.)

Scarcity pricing works like this. If enough people want a wine you make, you can put the price up higher and higher until they stop buying it. On the other hand, if you’ve made a large quantity of wine and need to make sure you sell it all, you can take the price down lower and lower until enough people decide it’s a bargain. Pretty simple.

Also powerful. So powerful, in fact, that it totally trumps wine ratings. In other words, if two wines get the same score but one is scarce, its price will almost always be higher. If you look around, you’ll start to see this everywhere in the wine business. In fact it’s an embedded part of the business model for many smaller producers.

Once you know what you’re looking for, examples pop out everywhere. Here’s a good recent example that you can go verify for yourself, if you’re so moved.

Wine Spectator, in its April issue, gives two Sonoma County Chardonnays the same numerical rating: the dread 89. This rating officially means “very good” verging on “outstanding.” Unofficially, for winemakers, it means “kiss of death.” But I digress.

What first caught my eye concerning these particular wines was how similar they sounded. The reviewer found them both “sleek” and “elegant” with “citrus” and green apple” flavors. There were other similarities as well, which would be apparent to you if you read the back pages of Wine Spectator closely over the years, but you get the point: two remarkably similar wines from the same grape and same appellation, with the same descriptors and the same quality rating.

In a world where wine ratings ruled, these wines would cost the same. But they don’t, and scarcity is the reason why.

The first wine was listed in the review at a quantity of close to 10,000 cases and priced at $17 a bottle. The second wine was listed at just a shade over 300 cases. It tastes like the other wine, and according to expert testimony merits the same score, but there’s just a few hundred cases of it. So where do you suppose its price lies? Twice as high as the first wine? Three or four times as high?

Try more than ten times as high. Try $175.

I can think of only two rational reasons to pay ten times as much for what amounts to the same fermented grape juice. One is that the 10X wine is going to mature into something the $17 wine will never become, and 10 years from now it will taste ten times better. I say this is a rational approach, though I doubt hardly anyone is going to actually take it. For one thing, there’s a good chance it won’t work out and the $175 will be an expensive bet that didn’t pay off. For another, most people don’t hold Chardonnay long enough to find out what it becomes.

The far more likely rational approach has to do with scarcity: the desire to drink something hardly anyone else will get to drink. In other words, paying $175 for a bottle of wine is rational behavior if you want the scarcity as much as the wine itself. Some people want that, and they’re willing to pay for it.

If what you really want is to drink good wine, however, then it’s not rational. It’s nuts.

- Thom Elkjer
Check out my regular wine coverage at www.winecountry.com.

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