Cool article and informative anecdotes, and I ultimately agree that a $500 of wine is overpriced but for different reasons. I can't agree with the article's reasoning which is essentially: products should be priced based on how much they cost to manufacture.
A couple counter examples: Apple computers and high-end cars.
A few more extreme counter examples, where the cost to "manufacture" is almost $0: a $30 ebook, a web app subscription, or a top 10 iPhone app.
If you are going to say something should be priced based on the cost to produce, I think you need to prove that it has been commoditized.
What I mean by that is that if there are, for example, one hundred different pure gold nugget distributors, you should choose the cheapest, pure gold you can find since it is all exactly the same. If you pay more than the base value for your gold nugget, you are truly paying for nothing more than the packaging, marketing, and other fees, since the end result is simply a pure gold nugget.
So has wine been commoditized? That would be a more interesting article, and I don't know the answer myself without doing more research. My grandfather founded a famous California winery which actually holds its own against ye olde European vineyards in many high profile taste-tests. He was an engineer at SRI and produced wine with a scientific philosophy, happy to share his "secrets" with anyone, so my guess is that he would agree. I'd love to ask him his thoughts but sadly I can only speculate.
Egad. Cost to produce = (Fixed cost / total units) + marginal cost. That's why design-heavy items like software, music, books start out expensive and get cheaper over time as the fixed cost is amortized, while "manufactured" items like cars or wine are heavily dependent on marginal cost of each item.
For items where the cost per unit is dependent on marginal cost of each item, it's 'fair' or 'efficient' if it is priced with a reasonable markup over the marginal cost. Whether high prices that pay for marketing are justifiable is a different discussion, because the heavily marketed product is arguable more valuable to the customer because they don't have to take the time to discover it.
> For items where the cost per unit is dependent on marginal cost of each item, it's 'fair' or 'efficient' if it is priced with a reasonable markup over the marginal cost.
With the quote marks, I'm not sure if you're being serious or not, but a fair deal is one that both sides agree is good for them. Now often, there's a range of prices that make sense for the seller to sell at (anything $40 or higher will be fine for them) and a different range that is okay for the buyer (anything $60 or lower). Anywhere between $40 and $60 they can do the deal and be happy, and it'll be a fair deal so long as it's voluntary and nothing crazy is happening.
As for efficiency - again, there's no ideal profit margin. If anything, if you really like a field, you want higher profit margins in that field, because it encourages new competition and investment and innovation. Getting good value is more important than ensuring the person selling is making a small margin. For instance, McDonalds only marks its food up a tiny bit, but it's still not a good value for me because I don't value McDonalds highly. But there might be some Brazilian food that's marked up 50% or 80% that seems like a real bargain for me.
tl;dr - "Everything is worth what its purchaser will pay for it." Publilius Syrus, ~100 BC in Rome.
The Syrus quote is exactly what I meant when I put the quotes around fair and efficient. I still remember when I learned that lesson: when I took my comic collection to sell and got maybe $50 for what the Wizards guide said was worth $700 or so. I couldn't find anyone willing to pay guide prices so it was actually worth much less than what I thought was 'fair'.
Are you claiming that books, software, and other pieces of intellectual property become cheaper over the years because the creator has finally recouped his or her costs of the initial creation and benevolently decides to give consumers a break on pricing?
Before I start explaining how I believe the economy actually works, I'd like to make sure I understood you properly and you're not being sarcastic.
Right effect, wrong explanation. IP products don't become cheaper because creators magnanimously lower the prices, it's because they become less valuable because they've used up the market and are replaced by new products from competitors and creators.
For instance, when people stop seeing movies for full price, they go to second run or dollar theaters. Paperback books come out when hardback sales lag (note - this is on a predicted schedule based on experience, not on real time signals). Windows Vista costs a lot less than Windows 7 does right now, and everyone has seen the disgusting bargain bins of DVDs for $5.
IP creators would happily charge high prices until the end of time but competition prevents them from doing so. In circumstances where competition is limited or markets have failed, they can do so for a long time. Windows + Office is a good example - they're so embedded in people's and companies' experience that they can't be commoditized, so they have maintained high prices and profit margins for a generation.
I assure you that your counter examples of an ebook, web app subscription, or top 10 iPhone app do not have a zero cost.
Since when is anyone's time free? Good books are not written overnight, and neither are top 10 iPhone apps. Good web apps have similarly thousands of man hours of coding behind them.
What I meant was that they have a single fixed cost (which may actually be very small) and the cost to manufacture an infinite number of them is near zero, despite charging a pretty penny for each one.
> To me, when the consumer dollar is going more toward advertising than toward materials or production, it’s a paradigm case of overpricing. It bothers me that the mainstream wine media doesn’t take brands to task for this.
No doubt because much of the advertising is spent with the mainstream wine media.
Replace Wine with Jewelry and you've got almost the same issue.
Consumers are unable to tell a synthetic diamond from a real one. They couldn't tell you Tiffany's from something made locally, and the cost of production has very little to do with the cost of the item. In short- spending a ton is rarely justified and a lot goes into marketing.
A late friend of mine was a master jeweler for 30+ years and he made some fantastic stuff that was often 1/4 the price of something that a 'big brand' would have. His was handmade, unique, and often better made as well. He said that most of the industry was a joke and to never buy jewelry from a major retailer.
If wine is just grape juice that gets you drunk, this makes sense. But wine is also a signally mechanism. There should be a convenient way to say "I have more money than I can possibly spend," and spending $5000 at a time on wine is one way to do that.
Scarcity and uniqueness or at least the illusion of thereof is probably the big difference between wine and water.
With water you can advertise purity and maybe some minerals or additives. You might advertise the uniqueness of the source, but I think you get limited by the whole H20 thing.
With wine you can bring in the uniqueness of the grapes and the growing (read weather) conditions in a particular little piece of land on the Earth's surface in a given year. In addition to the arguments about the raw material you can add differences in fermenting, bottling, etc.
I think wine has a much better set of facts to build a marketing story on. I'd imagine with sufficient technology you could make some really good and standard wine but then the story aspect would be weakened.
This isn't to say that I don't think water markup (30$ a bottle) isn't an extremely impressive display of marketing. In terms of a difference between the cost of the base product and the marked up product water is probably even more amazing than wine. I just think that, in commanding absolute amounts, the scarcity arguments for wine probably make a better story.
Water as well. Is bottled water that much better (however you want to define that) than tap water put into any other container? There's a good deal of marketing in the bottled water industry.
This displays a clear lack of understanding of expected value. There is a popular saying in the wine industry: "The best way to get a small fortune from the wine industry is to start with a large one." Most producers of fine wines lose money. Owning a winery is a badge of honor among the ultra wealthy, often at the expense of being a terrible investment.
In any hits-driven business, like wines, there is a large risk. It's more akin to starting a rock band than a traditional business. For every Screaming Eagle there are hundreds of upstarts who can't even push bottles at $30.
It's not fair to evaluate the pricing of only the most successful. That's like saying rock CDs cost too much because the Rolling Stones make billions off of them. Sure, maybe, but overall the industry's profit margin is in line with other industries with similar risks and opportunity costs. Since we live in a free market, if it were not competition would spring up until it were.
From my understanding of the methodology, I don't understand what conclusions I could possibly draw from reading these reviews. My experience has been that people who don't drink much wine tend to prefer sweeter whites over those more dry. If you asked 500 of those people to compare a bunch of Chards in the $15/bottle range, they would end up choosing the sweetest of the bunch. As someone who drinks wine frequently, I would probably be upset if I paid $15 for those bottles. Like Netflix recommendations, I want to know which wines I will likely find enjoyable.
How can this problem be solved? I want to know which wines are liked by people who tend to like the same things I do. Could one do something like Netflix recommendations for wine? Would every user have to be calibrated by a bunch of blind tastings? Is there a more efficient proxy for calibration? Could a set of small, unlabeled bottles be sent to one's home where each represents a wine of a know, objective quality (oaked white, etc.)?
Unlike Netflix, I want to know if I'll like a $20 bottle more than another $15 one. It's not like movies are different prices, and we want to know if the $10 rental is sufficiently funnier than the $2 rental to justify the price differential.
the comparison with netflix is a little misleading, i think, because there's a much clearer difference between films than their is between wines (famously, people have rated white wine + dye as red wine with no problems).
pulling numbers out of my ass i would guess that grape variety, colour / tannin content, sugar concentration and acidity would cover all you needed if context wasn't so important. but context does dominate, so if you have faith in the site you'll enjoy whatever it says it is good...
[actually, the more i think about this, the more i like the idea of something like you suggest based only on hard numbers for factors like i gave. if nothing else, it would be a lot of fun following different trails...]
Apparently I haven't rated enough beers to get recommendations yet... but perhaps if a bunch of HN people sign up and add their own likes/dislikes, it'll have enough data to get started.
Also might be of interest that this is by one of the Basho (Riak / Webmachine / Erlang_JS / etc) developers (and a friend of mine):
There are a number of wine review sites out there, though I don't know of any that give you an easy way to figure out which other users' tastes match yours.
If you haven't read "Predictably Irrational," you should go out now and find it.
In the book, it states that people have "price imprinting." That the first price someone hears about a product will have dramatic impact on how he will perceive future prices.
For example, the Apple iPhone. It came out at $599 and when people heard it dropped to $399 then $199, they think it is a great deal, because they are comparing against the high price they first heard.
There has to be a demand aspect in the price because otherwise it wouldn't at all be economic to sell aged wine. Scarcity becomes a big thing once there are only a handful of bottles of something left.
The question is though, is what is coming out of those bottles any better than the stuff you can buy cheaply? Being a predominantly beer and bourbon drinker though I can't answer that.
A couple counter examples: Apple computers and high-end cars.
A few more extreme counter examples, where the cost to "manufacture" is almost $0: a $30 ebook, a web app subscription, or a top 10 iPhone app.
If you are going to say something should be priced based on the cost to produce, I think you need to prove that it has been commoditized.
What I mean by that is that if there are, for example, one hundred different pure gold nugget distributors, you should choose the cheapest, pure gold you can find since it is all exactly the same. If you pay more than the base value for your gold nugget, you are truly paying for nothing more than the packaging, marketing, and other fees, since the end result is simply a pure gold nugget.
So has wine been commoditized? That would be a more interesting article, and I don't know the answer myself without doing more research. My grandfather founded a famous California winery which actually holds its own against ye olde European vineyards in many high profile taste-tests. He was an engineer at SRI and produced wine with a scientific philosophy, happy to share his "secrets" with anyone, so my guess is that he would agree. I'd love to ask him his thoughts but sadly I can only speculate.