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.]