In the down economy, wine makers are struggling to sell luxury wines, those that are priced $25 or more. The Wall Street Journal reports the slump in sales and how the winemakers are cutting prices to clear inventory. The sales of wines priced $25 or more fell 12%. These wines are priced at 10% to 30% discount to woo customers whose buying behavior changed since the beginning of the recession. Revenues in one of the California winery slipped almost 40% due to drop in volume and the price cuts to entice price sensitive customers. The danger with all the price cuts is whether the winemakers will be able to raise prices because of the low reference price they set now in the minds of customers. Trained to see price cuts and low prices, customers will balk at any future price increases.
How else could the winemakers have handled this? The lessons come from the playbook of CPG companies – increase prices, sacrifice sales and market share but deliver profit growth despite drop in revenues. The top-line number (revenue) is immaterial, it is the bottom-line (profit) that matters. This is especially true in a downturn when the customer mix change and there is only so much cost cutting a business can do. When the price sensitive customers switch or hold back, all you are left with are those who prefer your wine over others – hence you should charge them a price that matches their higher willingness to pay.