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Saturday, January 31, 2009

Variable Pricing - The Retailer Perspective

In the discussion of variable pricing below, Chris from Belmont Station gives a fascinating account from the retailer's perspective. I almost never bump comments up to the main page, but this one is exceptional. Thanks, Chris.
Saying "The grocer sets the price" isn't really reflective of reality. Admittedly, the final shelf price is up to the grocer, but the breweries know what margin the distributors will take, and roughly what margin most stores will take, and the price they charge the distributors determines what it will cost when it finally hits the shelves.

So, if the brewery wants their beer on the shelf at $8.99/6pk (assuming a 20-30% margin for the store and 20-25% margin for the distributor) they have to sell the beer to the distributor for around $18-20/case.

Some breweries (like Rogue) are quite proud of their beer, and regardless of whether or not Dead Guy cost significantly more than Inversion they want to project an image high quality, expensive beer, so they price it higher.

Simple socioeconomic research will tell them that a certain percentage of shoppers will always gravitate towards "the best" (i.e. most expensive), and while this might cause some folks to regard them as over priced, if they can sell everything they produce at that price then there's no reason to go lower.

Other breweries like Deschutes or Widmer want to be perceived as "great value for the money" so they set their prices to be competitive with most of the other 6pks in the store. Many of them will take it one step further by having what's called a "false front-line" price of say $27.99/case (wholesale), and put the beer on "post off" (on sale) every month. This gives the grocery stores more flexibility in their sale pricing and allows them to use the false front-line price as the "regular price" on the shelf tag and put it "on sale" at the post off price without actually sacrificing any margin.
Not only does this clarify some points, but it also raises some fascinating philosophical questions about pricing. Pricing a product at a premium to communicate quality is nothing new, so Rogue's strategy, while distinctive in Oregon, isn't surprising. This is particularly true given that Rogue has always wanted to be a national brand. Deschutes, by contrast, has focused primarly on local markets, spreading only when other states clamored for their beer.

Because I'm a beer geek, Rogue's communication never really worked--I didn't see their higher prices and think, "Hmm, this Younger's Special Bitter must be tastier than Mirror Pond." But if you weren't broadly familiar with the brands--the case with most consumers--this may well be effective communication. I will admit that the reverse is true: when a company consistently low-balls their price, I have the sense that it's a cheaper, cut-rate brand.

[Update: Economist Patrick Emerson expands on the Rogue strategy; turns out it's a theory known as "signalling." I will not summarize it here--go read his explanation.]

20 comments:

dr wort said...

"Premium" is an interesting term in marketing. It's like "new and improved!" What was wrong with the old stuff? It was fine last week, but now it's no good, so we have "New and Improved." ;-}

Premium in regard to Rogue sound like a marketing ploy. Are they using different ingredients that other Oregon breweries are not? Malt, Hops and Yeast...right? There are different hops and malts, but the price is generally the same, unless they are using all imported malts and grains or at least a major chunk. That doesn't sound very realistic from a brewery that seems to pride themselves on local products.....

I can't see any reasoning in their hiked up prices other than price gouging? Of course, I'm willing to here anything to the contrary.... that's not a bunch of business marketing mumbo jumbo... ;-}

Anybody can same their proud of their product, whether it's beer, shoes or an egg Mcmuffin. Pride doesn't always equate to Premium in taste or quality. It may equate into a good sucker bet... :-O

Chris uses the proper descriptor of "...project an image of high quality."

I guess in Rogue's case, they feel if they charge more, people will assume it's better. Are consumers really that gullible?

iggir said...

i know some people out here on the west side that only drink Dead Guy Ale...so maybe it works.

i was buying beer Saturday and saw that Widmer Hefeweizen was $18 for a half-rack. i almost crapped myself...i thought getting in bed with AB (or whatever it is now) would mean lower prices. i guess not.

i should go read your other entry, maybe you answer that.

Patrick Emerson said...

I was writing a comment and it got too long so I made it a blog post post.

DR. WORT said...

Patrick Emerson's article bring us to an understanding of a business and advertising strategy which is interesting, but creates more questions than answers for me.

Are we just repeating the American commercialism and status concept of "You pay for what you get?"

If so, Rogue may sell beer because of it's quality or reputation, but consumers generally look for the best quality at the best price. Being that Rogues quality is at the same level as many other quality breweries, what "SIGNAL" are they truly sending to the knowledgeable beer drinking public?

Does this mean they're focusing more on Joe Public beer drinker, rather than the quality beer drinkers? Just wondering where that thought process will lead in their beer quality and diversity in the future?

For those who truly can be duped by slick advertising, falsely inflated pricing and purchase with the old fashion adage of "You pay for what you get," won't they eventually realize they're being screwed? Is Joe Beer really that stupid? I don't think so...

I know a couple guys who love Dead Guy, but WILL NOT pay an inflated price for that product. Are they just smarter than the average consumer or ARE THEY the average consumer?

Because this marketing/advertising strategy can be used by any business or brewery with quality products: Will this cause the rise of other breweries prices or will they just prefer to be a little more honest with their pricing?

joe said...

This pricing strategy of Rogue's has always tweaked me. As a result I don't buy their beer because there are subsitutes equal or better in quality and less in price. I know I'm not alone on this.

When I read the interview with Mr. Joyce that was published in Oregon Business Magazine, things became clearer. In this interview he states the company distributes in all 50 states and internationally and that Oregon only accounts for 15% of its total business. According the article total Rogue production for the give time period was 60k barrels, so 15% is 9k. Compare this to Deschutes which produced 130k barrels and sells 65k barrels (or half) in Oregon.

This suggests, at least to me, that the signaling strategy is more effective when you're dealing with fewer choices or less educated consumers (I suppose one follows the other). Oregonians are making decisions based on quality and price, not just price and I think that is reflected in Rogue's sales numbers.

I bet if Rogue were to lower their prices to match those of the other big Oregon brewers they'd at least quadruple the amount of beer they sold in Oregon.

Of course they'd probably respond that they don't care about high production and making money and only care about creativity and other such nonsense. Although if that were true they sure wouldn't know their annual growth rates right off the top of their heads...

DR. WORT said...

Rogue seems to have a nice "brewery of the people" facade to hide behind. It appears we're beginning to see what's truly behind the curtain..... and it's not the Wizard of Oz. ;-}

It's more like a sheep in Budweiser clothing. Maybe they're working towards a foreign buyout too.. :-O

For the record, I don't buy any Rogue products either. They seemed to have jumped the corporate shark awhile back.... I don't believe in throwing money at breweries with more dedication in filling their pockets, rather than producing beer for a more artisan ideology.

Jeff Alworth said...

Joe, I've wondered about that, too. I get why the brewery decided to "signal" its quality in other markets, but in Oregon it just seems like that signal would be more easily discounted. Seems like they could lower prices here a bit--maybe not all the way, but so it's only a buck more for a sixer. But hey, I'm a blogger and don't know my arse from a hole in the ground when it comes to business.

Anonymous said...

I think it is funny that the Belmont Station factor was overlooked. The same six pack of great beer can be found at other local retailers for a significantly less amount.

joe said...

anon - that could be due to a volume discount at the distribution level if you're referring to grocery stores (this is just a guess). But you're right, it is not the best place to buy a sixer of commonly available beer.

Chris said...

@Anon - If you've been a long time customer of the Station I'm sure you've noticed that prices have come down over the years. It's true that our prices used to be considerably higher than everyone else, but we've brought our margins down considerabely in the last 2 years since moving to the new location. In fact, we've shaved another 4-5% off the prices of many items just in the last few months to become even more competitive and provide more options for people who are feeling the pinch of the current economic climate.

If you tend to buy whatever 6pk is on sale this week at Freddies then you'll definitely save a little money by shopping there, but if you compare the "regular" price we're really no more expensive than most other stores. In fact, I was shopping at Freddies yesterday and noticed that our regular price on numerous items was lower than theirs. Just a couple of examples:

~Full Sail Slipknot 22oz was $4.29 at FM, we have it on the shelf @ $3.99

~Roots Woody 22oz was $5.49 @ FM, we charge $4.99

~Terminal Gravity 6pks are $9.49 at FM, we charge $8.99/6pk

The reality of the situation (which consumers generally don't realize) is that beer is treated as a "loss leader" for most grocery stores and sold at close to wholesale because they can make up the lost profits on chips, frozen pizza, and other foodstuffs with higher margins. I'm not even going to get into the economies of scale and other benefits/discounts that Joe mentioned, but they also play a large role in keeping the grocery store prices down. Since 90+% of our sales come from beer we can't offer as many things "on sale" as they can, but the upshot is that we actually take care of the beer and offer a much wider variety than they could ever hope to carry. Best of all, we can actually tell you what the beer is like so that you don't waste money on something that isn't your cup of tea.

It's a tough balancing act for both consumers and retailers. As a consumer I don't think an extra $.25-.50/6pk is horrible considering I'm getting properly treated and rotated brew, but at the same time I wouldn't drive across town to buy a sixer of Widmer at the Station if I could get it at the Plaid Pantry down the street from my house.

Trust me, no one here is getting rich by working at the Station, and we'd love to lower prices even further (we buy our beer here too), but there's just no way we can compete on pricing "across the board" with the big chains...

Anonymous said...

Dear Chris from Belmont Station-

The majority of these comments regarding Rogue are ridiculous and misinformed.

At Rogue, we have never used pricing as a marketing or branding strategy.

Our 21 year mission has been to provide World Class Products, put them in World Class Packages, market our products uniquely, and be active and generous members of the communities where we have breweries, distilleries, farms, and pubs. In order to do these four things, we must remain in business. To remain in business, we must have profit. To have profit, we must have margin. To have margin, we must price our products based on both the cost of goods and the costs of operating a small business.

John Maier, our brewmaster of 21 years, decides which ingredients and (more importantly) the quantities of ingredients that go into our Ales, Porters, Stouts, and Lagers. John likes to use a lot of hops and a lot of barley. We do not apologize for using large quantities of ingredients. We do not apologize for allowing John to practice his craft without interference from the bean counters.

Our packaging is expensive. We serigraph all of our 22oz bottles, which costs significantly more than using paper lables. Our XS Ales are sold in ceramic bottles imported from Europe. We sell Double Dead Guy Ale in 750ml bottles that are imported from Italy, glazed in Canada, shipped to the U.S., serigraphed in Tualatin, and finally shipped to Newport for filling. We do not view our products as commodities and therefore enjoy placing our products into packages that tell stories, provide information, are great gifts, and can be enjoyed and shared with friends. This is clearly not the strategy for every brewery, just the one that we have used for 21 years.

There are several comments that were made which are cleary inacccurate and require accuracy:

-we do not price our beer to "project an image of high quality, expensive beer", we price our beer based on tne ingredient costs and so that we can remain a viable business
-we have never done any market research, so we're not sure what the socioeconomists say (we’re not even sure what a “socioeconomist” is)
-we never set out to be a national brand, we began distributing Rogue outside of Oregon 15 years ago because retailers from across the country came to Newport, liked our beer, and want to sell it in their home markets.
-it was suggested Rogue is corporate. Nothing could be further from the truth, we have no offices, employees create their own job titles, we have no HR department, don't tuck our shirts in, and all employees wear aloha shirts on Tuesdays
-it was suggested we are working towards a buyout. Again wrong. We are privately held by a group of long time Oregonians and will sell Rogue only when we are forced to hire a human resources manager.
-it was suggested that Rogue believes that the consumer is gullible. Again, not true. We believe that the consumer wants quality, creativity, and variety and we strive to provide this. It is true that offering 35 different flavors is economically inefficient, but Rogue Nation consumers have made it clear that they both enjoy and demand variety.

Rogue is a Revolution. We have always said that Rogue is not for everyone and everyone is not for Rogue- we accept this as fact and welcome fellow revolutionaries to join our cause.

The Truth Will Set You Free.

Brett Joyce
President
Rogue Ales

Anonymous said...

Where did all this misinformed venom for Rogue come from? The last time I checked, Rogue was a loyal and upstanding member of our little Oregon Beervanna, even brewing the official Oregon Sesquicentennial Ale. Delicious I might add!

Pricing in every industry, from automotive to house paint, shall for ever be a reliant on what the market will bear. Period. If a product is over priced it will sit on the shelves. If it is under priced, the producer will go broke. Somewhere in the middle is where the consumer and producer meet. Not all product is for all people. If it costs too much, you don't like the taste or the way it looks in the bottle, don't buy it. That is your right. But don't disseminate this bullsh*t about a "premium pricing strategy." That is just ignorant.

If people were willing to pay more just because it was priced higher wouldn't everyone raise their prices? People pay more because they believe in the value of that product.

Rogue drinkers believe in the Rogue revolution. They believe Rogue makes the very best beer possible in as many varieties possible. They are willing to pay for Rogue because they have bought into everything Rogue stands for, especially the really good beer part. If you don't buy into it, don't buy it. Easy enough.

I have been to the brewery. I know Rogue is a true Oregon Microbrewery, unlike some of the behemoth Oregon Mini-macros out there. When you are truly crafting artisan ales, without limits on ingredients, in dozens of varieties, and distributing them in artisan worthy bottles, it is going to cost more. Plain and simple.

Now can we get back to something that really matters... how to stop the diabolical beer tax?!?! Let's have a pint and discuss...

D. Moore
Beer drinking Oregonian and
Proud Member of Rogue Nation.

squeaks said...

Rogue there is a lot of hating on you guys because your philosophies don't really go with your actions. To say that John uses a lot of malt and a lot of hops isn't really a good reason to have higher prices if you ask me, for instance you can't tell me that Jamie from Ninkasi doesn't use a butt load of hops in his beers yet somehow Ninkasi's prices are cheaper even though their production is much lower and likely their profit margin is much less. The other thing that irritates me is that Rogue is all about being local but they buy ceramic bottles from Europe have them glazed in Canada and then labeled in Oregon. How is that being local and sustainable?? Don't get me wrong Rogue you make good beers but better than anyone else in the state?? No, I don't think so and ultimately when all I want to do is drink the beer I could care less about your packaging. All I'm saying is that your not living up to your motto of being Rogue in my mind. I commend you for having the reputation you have throughout the world but here in Oregon we'd like to see some of the love that the rest of the brewing community gives us here.

Scott S said...

I agree, Rogue's beers seem to be higher priced when compared to other local Oregon beers, and this is a big reason I don't buy them. I think we can assume that they aren't using a larger amount of hops and barley when compared to other local breweries, so it seems that the increased cost comes from packaging. Although I don't think this explains the higher prices on draft.

I'll pay more for a better beer, I won't pay more for a "serigraphed" label vs a paper label. Or more for a ceramic bottle vs a glass bottle.

Y said...

Blogs are fun.

I enjoy blogs.

Blogs make me happy.

I think we should all have blogs.

Sometimes, blogs make me angry, but then I remember that... blogs are fun, and I calm down again.

Beer is also delicious.

-Y

Its your business...its my money said...

Dear Mr. Joyce,
In your post you state, “We sell Double Dead Guy Ale in 750ml bottles that are imported from Italy, glazed in Canada, shipped to the U.S., serigraphed in Tualatin, and finally shipped to Newport for filling.” My God, what is the carbon footprint on that operation? Stop it. You are killing the earth!
Also, “don't tuck our shirts in, and all employees wear aloha shirts on Tuesdays.” What the hell do aloha shirts have to do with anything. Asinine.
There are much better choices on the west coast then Rogue. It is just that simple.

Mike said...

In Rogue's defense, when they designed their unique, smaller, kegs, it likely was expensive. They had to pass on the costs to the consumers who they fooled by selling them a "keg" that was 2 gallons shy of what they were likely expecting.

I really don't like you Rogue, which is a shame, because 8 years ago you were my all time favorite. I was young and stupid. Hey, also, thanks for not giving any of us sample of beer on the brewery tour. I don't know why I expected a sample, but you saved me from whetting my whistle and getting a craving for beer and heading upstairs and paying a ton for pint. Jerks.

I think your bottles are cute and they make great gifts. I buy one a year and give it as a gift with the following advice - don't bother opening it; the bottle is the best part.

Anonymous said...

Well said Mike, you are my hero and agree with your comment. I would like to meet you and have your children.

- Angelina Jolie

Patrick Emerson said...

Brett,

I am not a socioeconomist, I am an economist, and you misunderstood my point too, though I doubt you bothered to read what I wrote before you declared my analysis misinformed.

People don't decide to get an education because they want to signal that they are smart, the point is that the education itself becomes a relaible signal in market equilibrium. I don't doubt that you do not view price as a branding or marketing device, but nevertheless it becomes useful information for consumers in equilibrium.

Other low-quality beers cannot charge high prices because they are not as good as Rogue. The point is that in the long run equilibrium, beer price DOES contain meaningful information about a beer's quality. Rogue can sustain a high price because its beer is, based on the judgement of its comsumers, good enought to warrant it.

Economics is not business, and economists study markets and behavior and uncover forces even business people don't understand. I stand by my analysis of the economics of beer prices.

TKS said...

Dear Mr. Joyce (and D. Moore),

Your defense of Rogue's product and pricing is elegantly written and makes some excellent points.

I started reading this thread expecting more good reasons not to buy Rogue beer. Instead, I am confirmed in my love of your products, and I have a newfound admiration for the way you do business. (Sounds like a great place to work!)

I still think your beer is way expensive -- but I'm going to buy it anyway.

P.S. Mike -- what do you mean you didn't get a sample on the tour? I did! Maybe you just weren't very nice to them. =)

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