How to Get Your Three-Tier Wine Pricing Strategy Right
One of the most common wine pricing strategy mistakes, even among seasoned suppliers, is not leaving enough margin for multiple tiers in the sales process. It seems like a simple fix on the surface, but these margin errors often derive from internal teams that drive a winery’s pricing (such as sales, marketing, or finance) not fully understanding or incorporating the complex and dynamic three-tier process involved in the US wine industry’s marketing chain.
In this article, we break down the three-tier wine pricing model and outline some of the associated challenges and obstacles. We will also explain supplier programs, strategy components for success, and how full-cycle pricing management can be quickly and easily leveraged to dial in your wine pricing at all levels.
Three-Tier Wine Pricing Model Overview
Some basic stuff first—in the US, three-tier wine suppliers are either domestic wine producers or import sources. The supplier sells to a wholesale distributor, who sells to retailers and restaurants, who sells to the end consumer.
If you are in this game already, you know the drill. The basic three-tier sales chain looks like this:
Supplier → Wholesale Distributor → Retailer or Restaurant → Consumer
Of course, there can be differences in this chain, such as when a winery acts as a wholesale distributor or sells directly to consumers, like in tasting rooms. However, the three-tier model is the most common distribution channel in the US.
Pricing in the Three-Tier Wine Pricing Model
No surprise here, sellers at each tier want a profit and must price the wine based on the cost they paid their supplier (the previous tier). At one time, there was a standard profit margin for each level, but that has changed in the last decade because of varying market forces: consolidation of wholesale distributors, internet sales, more competition at each level, etc.
As a result of market changes, the producer needs a wine pricing strategy that projects the price for each supplier to provide a simultaneously profitable and motivational distributor price, as well as a market suggested retail price (SRP) for their wine that supports the brand and value promise.
At its simplest level, price projection involves the following:
- Tier 1 – Supplier: Wholesale FOB (the price the wine supplier charges the wholesaler) = cost of sale (COS) + tier 1 profit margin
- Tier 2 –Distributor: Wholesale (WHSL; the price the wholesaler charges the retailer or restaurant) = FOB + laid-in-costs (taxes, shipping, operations) + tier 2 profit margin
- Tier 3 – Retailer/Restaurant: Suggested Retail Price (SRP) = WHSL + tier 3 profit margin
Suggested Retail Price (SRP) = COS + supplier profit + FOB + laid-in-costs + wholesaler profit + retailer profit
Having fun yet? Plus, let’s remember that at the consumer’s end, SRP can represent anything from a retail shelf price (off-premise) to a restaurant bottle or by-the-glass (BTG) price (on-premise), and it all reflects on the brand and the bottom line.
Three-Tier Wine Pricing Challenges and Obstacles
Determining the components that make up the distributor pricing and suggested retail pricing (SRP) is the easy part. The challenge is determining the added costs and profit margins you constantly need to consider.
Several elements can change wine costs within tiers, and you must factor all of these into a price projection:
- Internal factors: Operating costs, production costs, and variables, taxes, rent, salaries, shipping costs, etc.
- External market factors: Location, world events, demand fluctuations, etc.
- Distributor factors: quantity purchased, discounts, promotions, or incentives
- A 4th tier involved in some supply chains such as a national sales agency or regional wine broker
Because of varied and changing pricing factors, pricing should always be an ongoing process rather than a price-it-and-forget-it practice. Unfortunately, many suppliers don’t do this, and pricing remains stagnant, eating away at the margins.
Problems with Suppliers Underpricing Wines
Many wineries set prices arbitrarily or based on well-intentioned guesses that result in far too low profit margins on a national scale.
Mid-sized and larger wineries will find that each market will have different tier prices to consider. Setting an SRP for a national chain can be complicated when they have different FOB and WHSL prices in various locations. Having a different price for each market is essential.
Even small producers (under 1000 cases per year) can run into complications in mispricing wines. Underpricing wine can be a problem if they decide to increase production or need to work with a wholesale distributor or in-state wholesale broker.
Results of Mispriced Wines
When suppliers misprice wine, the end retail SRP can be different from market to market. These vast fluctuations in prices can be a real problem when consumers can search the internet to find products at a lower cost.
A supplier should consider each market and build in enough profit margin for each partner in the supply chain.
If taxes, shipping prices, higher rents, etc., elevate out-of-state retail prices for the same product, wholesale distributors will have a smaller profit margin or have to provide more price support. If your product isn’t making as much profit, wholesalers will be less likely to want to sell your product in these areas.
Another risk is appearing to favor in-state or tasting room purchasers with lower prices. If suppliers misprice so that smaller purchasers get a better price on the product, this can lead to resentment from wholesalers who are making bigger purchases.
A supplier should also not price a wine too high if it doesn’t have adequate brand recognition or supply and demand power. If sales are so slow that retailers or wholesalers must discount the wine to sell, it resets the ultimate cost, decreases profit, and decreases the desire for repeat purchases.
Three-Tier Wine Supplier “Programs” for Distributors
Programming is a practical solution to assist suppliers with reaching their sales and marketing goals. It is an effective sales tool if a particular line of wine is not selling, inventory is backing up, or you have a new wine you would like to promote.
Once a supplier understands their market, they can create special “programs” to help promote their brand. These programs can include anything from new account contests to special purchase or depletion allowances.
Suppliers should design their program around a specific goal, such as increasing sales to new retailers or selling a large volume of wine at once. A successful program both increases wine distribution and results in larger profit margins.
Don’t be afraid to rely on your distributors’ expertise to determine what types of programs they have enacted successfully in the past. You both succeed together.
It’s also a good idea to start the fiscal year with a program calendar so that you can more easily project upcoming shipments and income.
Keep in mind that a program should be steady and long-term because it’s difficult for distributors to respond quickly to changes, and some of the changes can take months to filter down to retailers (even longer to restaurants).
Before enacting an incentive program, check first with state liquor boards or a compliance consultant to determine program legality.
Special Purchase Allowance (SPA)
SPAs are temporary price drops for a specified time. An SPA allows your distributors to order more wine at lower prices for a limited time.
Depletion Allowances (DA)
DAs are credits or money that you give back to the distributor when they sell specific items from their warehouse during a certain period. For example, you might offer the distributor $5 cash or credit for each case of one particular wine that they sell during a month.
Offer a distributor salesperson an incentive (such as cash, a prize, a trip, etc.) to meet a goal during a specific time frame. This goal could be anything from establishing new accounts to floor stacks or selling a certain number of wines-by-the-glass.
Wine List Placement or Wine-By-The-Glass Incentives
Wine list placements and wine-by-the-glass incentives are among the most popular programs. Wine-by-the-glass incentives are monetary incentives a salesperson gets for each glass of wine they sell. Wine list placement is usually a year-long or ongoing program. It can be either a reimbursement of a certain amount of money for each item a restaurant lists on their menu or an agreement to share menu printing costs.
Rather than wineries and distributors relying on invoicing and check payments, credit memos can help preserve cash flow. Credits also may allow distributors to re-order more quickly to take advantage of their credit when they don’t have to use cash.
For more promotion options and details, READ: Tracking Success of the Top 5 Wine Sales Promotions: BTG, Quantity Discounts, Closeouts, Incentives, and Samples
Components for a Successful Three-Tier Pricing Strategy
A successful pricing strategy should include your COS, brand recognition level, three-tier sales chain, marketing objectives, programming for distributors, and pricing support.
Most importantly, it’s essential to document all the factors of your pricing accurately, plot trends, patterns, and the success of your programs. That means taking the guesswork, like manual pricing processes, disconnected Excel spreadsheets, and word-of-mouth negotiations written on cocktail napkins, out of the mix.
Successful suppliers update their pricing approach when they release a new wine, receive a new review, or make label changes. But without the proper tools to automate and streamline full-cycle pricing management across the sales, finance, and IT operation, it makes it nearly impossible to accomplish this. And the rest of the story ends up just being slimmer margins and money flying out the door.
In the current three-tier industry climate, the supplier has less persuasion than the wholesaler in setting prices due to wholesaler competition and consolidation. Thus, being able to justify pricing and program strategies with accurate figures is paramount to successful wine pricing and branding.
How Tradeparency Drives Successful Three-Tier Pricing Strategy
Accommodating all the factors and changes necessary to have a successful three-tier pricing strategy is complicated on paper, but it doesn’t have to be in practice. Tradeparency helps you manage the three-tier distribution for maximum profit, saving you time, stress, and dollars. Tradeparency integrates into any ERP or core business management application to bring together all your data into one place and drive out successful and profitable pricing.
Tradeparency seamlessly brings together planning, pricing, claims, and analysis. We focus on the wine business so that they can cater service and support specifically to your company’s needs.
So, what does full-cycle, three-tier pricing management with Tradeparency look like?
Price Management, Reporting, and Analytics
- Validates invoiced deals
- Establishes consistent pricing throughout markets
- Provides reporting and analytics details on pricing and profit per unit, case, state, distributor, market, brand, programs, discount brackets
- Automates price approvals, provides chain pricing, and enables mobile sales from any device
- Tracks every dollar from actual data rather than assumed data
- Helps repair margin leaks immediately, maximizing margins
- Tracks actual agreement or data rather than 3rd-party depletion numbers
- Validates agreements against chargebacks and invoice adjustments
- Covers all distributors, markets, promotions, incentives, and expenditures
- Checks program effectiveness and profitability in real-time
- Adjusts programs when needed
- Plans program models for performance overviews at any level
Final Thoughts on Getting Your Three-Tier Wine Pricing Strategy Right
Getting your three-tier wine pricing strategy right involves understanding all your distributors and all your markets to determine reasonable SRP for each one. Promotional programs are also a key to moving products, establishing rapport, and making a profit at each sales tier.
Keeping a healthy profit margin and maintaining successful programs can be challenging no matter how many bottles of wine you sell each year and how many markets you serve. However, using Tradeparency can help take the guesswork out of serving your markets and making profits, allowing you to focus on other aspects of your business.