Brand Value and Wines

28 12 2010
I’m guessing you have experienced the same situation I did recently.  My roommate runs up to me and pushes a glass of wine in my face.  “You’ve got to try this!” he exclaims.  Begrudgingly, I take a sip (who likes to be forced to drink wine?) and am pleasantly surprised by the delicious experience of drinking tasty wine.  “It was $5!!” he yells, ready to do a happy jig in our dining room.  Just the previous day, we had purchased an expensive bottle that ended up being vile.  How could it be that the cheap wine tastes so superior?  And before you suggest it – it isn’t an unrefined palate – we’ve both been testing a variety of wines for years.

A recent podcast by the Freakonomics guys illuminated this quite nicely.  Entitled “Do More Expensive Wines Taste Better?” (free download from iTunes), Levitt and Dubner include stories of experiments in taste tests, wine awards, and interviews with wine experts.  The end result?  The whole wine scoring industry is a bit flawed.  The incentive structure isn’t set up right, as is shown by a Wine Spectator mess-up in the podcast.  

But beyond the scoring system, when the features that create our assumptions of wine value are removed (where the grapes were grown, the name of the winery, the score it received) expensive and cheap wines were considered nearly interchangeable.  In the taste test performed by Dubner (unscientific but telling) the expensive wines were on even ground with the cheap wines in terms of taste – with the cheap wines sometimes preferred.  Maybe our collective palates are not as advanced as we would like to believe.  Obviously there is some nuance to this, since there are some wines, both expensive and cheap, that are just plain gross.  Those should be left out of the conversation completely.

So now this becomes a marketing problem.  How do two wines of comparable tastes get priced so totally differently?  Well let’s compare wines to another beverage: soda.  Aswath Damodaran, professor of Finance at Stern, argues that the taste difference between Coca-Cola and RC Cola are negligible, and that it is solely the brand difference that allows Coca-Cola to charge a premium for their product.  Mr. Damodaran also argues that the brand value is simply that ability to charge a premium, and does not include things like package design, logos, and taste.  Those he buckets as product attributes such as product quality, styling, service and reliability.  In total, I would consider those to be brand heuristics.  Heuristics are essentially shortcuts in memory that help us make decisions.

In the instance of purchasing wine, many are faced with the predicament of an entire wall of wine bottles, few of which they have any experience with.  While brand name is not completely meaningless (Mondavi or Barefoot wines) it certainly doesn’t have the type of strength it carries in the soda industry.  Because the consumer cannot taste each wine off the wall, our minds need a way to hone in on the one we believe we will prefer.  To do this, we rely on the combined hueristics: bottle design, description (“goes great with chicken” and “notes of pear”), awards won, home region, etc.  And the bottles with the highest strength heuristics are more in demand – therefore creating higher market prices.  

So maybe the brand is the only piece that creates the price premium in some places, but in wines there is so much more – and that creates the confusion that leads to the great disparity in prices.  While the Trader Joe’s $5 pinot might taste great, it certainly doesn’t carry the conversation like a 1977 Bordeaux.  In an economist’s mind, paying more for worse tasting wines is simply absurd, but to the aspiring wine snob out there, the heuristics trick his mind into not only thinking the expensive wine is a good value, but that it actually tastes superior to the cheaper bottle.

The lesson here is: pay attention to what customers are considering when looking at your product category.  How informed is your typical customer?  What are the heuristics at play?  Where can you tip them off that your product is worthy of a purchase, despite the potential price premium.  Once you have them, you must deliver the top-notch value that makes your product/service a good service again and again.

photo via Flickr user HomemadeRainbows

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