Pricing strategy for wine in today's marketplace

Ultimately, the pricing strategy used for marketing wines should be a function of the demand for wine. Consumers are not directly concerned with the cost structure inherent in producing a commodity they are interested in purchasing. However, the manager of the winery is concerned with the underlying profits and must therefore consider cost alterations in their marketing strategy. Especially to the extent that increased costs influence the price of all wines, the decision-maker attempting to price wines should reflect the alterations in cost resulting from different technological and economic conditions. As the managers of wineries are well aware, the prices of grapes and other raw materials are not stable but fluctuate from year to year. In addition, alterations in grape yield per acre or wine yield per ton of grapes represent technological factors which fluctuate substantially across years and across wineries and winery equipment. Whether price variations come explicitly from direct purchase of grapes or implicitly from the technological side through fluctuating yields in the winery's vineyards, the underlying economic cost per bottle is affected. In addition to grape prices, changes in other input costs (e.g. corks, labels, bottles) can have a significant effect on underlying cost to production. The purpose of this research study is to provide basic wine pricing guidelines to managers of wineries based upon the effects of several factors (grape prices, other raw material prices, advertising expenses and wine yield per ton of grape) upon average cost per bottle and overall net returns. MODEL DESCRIPTION AND EXPERIMENTS In this study, the decision-making environment facing the manager of a small winery is represented within an economic model. Mathematical programming techniques common to agricultural economic analysis are used to develop the computer model which projects realistic alternatives. The model's objective is to maximize net returns above total cost by choosing the optimal levels of management decisions. Readers interested in more detailed discussion beyond what is provided herein may contact the authors or refer to previously