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Friday, January 30, 2009

Variable Pricing?

So I had this thought. Why is it that beer isn't priced based on the cost to the brewery except in a very blunt way? If you go to a pub or grocery store, you'll find sixers or pints priced at roughly the same price. There might be a second category for specialty beers on which you pay a premium, but everything else is standardized.

To pull one case at not-quite random: Widmer Hef v. Widmer Brrr. In this corner, WidmerHefeweizen, weighing in 11.75P, 4.9% abv, and 30 IBUs. In the other corner, Widmer Brrr, 17 P, 7.2% abv, and 50 IBUs. For the sake of argument, let's imagine that the Plato and IBU values correspond to ingredients.* The ingredients alone would make Brrr the cost of 1.5 Hefs--if there were additional aging or other methodological complexities, the cost could be twice as expensive. Yet a sixer or a pint of these beers would cost you the same in a grocery store or pub.

I don't know that this is unique to the beer world, but it's odd. Tillamook doesn't charge the same price for its medium and sharp cheddar--it sets prices proportional to costs. So why is it that beer isn't priced proportionally?

I asked Rob Widmer, and he explained their method this way:
"For the beers that we focus on (our bottled beers) we spread the cost of more expensive beers over our entire portfolio rather than charging more for some beers and less for others. Our retail customers appreciate this consistency. An example might be a restaurateur who spreads a cost increase in beef over his entire menu instead of just charging more for a burger. However, at the Gasthaus we do charge a differential for more expensive beers."
(He also pointed out--delicately, after a boneheaded question on my part--that the brewery doesn't set the price at the grocery store, the grocer does.)

Which begs a point Rob already identified: what about brewpubs? They set their own prices and could sell beer at a variety of different points. Why don't they? Is this by convention or because of a business decision? Imagine walking into a brewpub and seeing a chalkboard with the following beer menu:
Best Bitter $3.50
Pale Ale $4.00
Pilsner $4.00
IPA $4.50
Imperial Stout $5.00
Would this offend you? Excite you? Assuming all were well-made beers, which would you order, and would price be a factor? Hmmm....

*Brewing techies will point out that we can't know the correspondence without identifying the grains and hops, and I grant this. We're running a thought experiment here, though. Bear with me.


  1. if you really want to sound fancy, you can use the economist's term: non-linear pricing.

    I think it has a lot more to do with the demand side in this case than the supply side. Remember price is determined by both, not just marginal cost. If the market demand for IPA is a little lower than for pale ale, you would get just this pricing out of market equilibrium.

    My sense is that consumers think of beer by brand still, not by type, so a Widmer is a Widmer and a Deschutes is a Deschutes and expect, so price appears to be by brand in the store.

  2. And, by the way, I think there is more variable pricing on 22oz bottles, another conundrum...

  3. Jeff -

    Many of the brewpubs in NM already have that sort of variable pricing.

    Makes sense. Works fine.

    You could even argue that it has educational value. Why does this beer cost more than that one?

  4. Here's a Dutch Brewery's price board, obviously big beers are more. BTW if you're in Amsterdam be sure to try Zatte on tap, much better than in the bottle! Very nice little brewery!

  5. I think breweries try to stay within a Linear pricing of bottled beer to be competitive.

    The cost of bottles, packaging and the like goes up at a steady rate. I'm not 100% sure, but I might bet the bottle, label and six pack holders cost more than the beer does to make. 22 oz bottles cost even more. Unlike home brewers, the breweries are not reusing the bottles that go out the door.

    That said, I still wonder why Rogue charges SO MUCH for their six packs??

    The cost for brewing the average beers can easily be spread out over the entire catalog. The speciality beer can be a wild card in price.

    Even though the cost of hops have more than doubled and grains have increased in price too, the profit for a pint a beer poured "AT" the brewery or Brew Pub in extreme. The draft markup is huge. $5 a pint is rape when it might cost 35 cents for that beer in the glass.. ;-}

    Bottling adds cost to the brewery. Kegging lowers the profit margin unless you have a large distribution. The cost of a keg of Micro is approx $100-$200 for a 15.5 gallon keg. That's about 110 pints with spillage. That's $1.10 - $1.80 a pint which is a far cry from an in house brewery pint at $3.50 to $4.00. Of course, there has to be at least a keystone profit of the kegs going out the door, so even at $1.10 a pint there's more than likely a 100% markup. SO, we're looking at the cost of brewing a pint at about 50 cents or less?

    Just babbling...does this make any sense???

  6. 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.

    I guess this doesn't really have anything to do with the non-linear pricing you're discussing, but I thought I could shed a little light on the subject of pricing in general.

    On the topic of of non-linear pricing, I don't see it working very well in the package realm for many of the reasons Rob mentioned, but I'd love to see this philosophy embraced by brewpubs. If my choices were $3 pints of ESB and $5 pints of IPA I would probably have 2 pints of the ESB (or maybe 1 pint of each), and the brewery would end up making more off of me then they would have if I only bought an IPA.

  7. Jeff,

    I have wondered the same thing and had the particular style of pricing in my ever evolving business plan.

  8. This is a fascinating topic and one that I have mentally complained about for quite some time. Widmer's explanation of spreading the cost over the entire portfolio makes sense and I guess I can't blame them for doing that. But at the same time it means I am paying more for a hefeweizen which should be a very cheap beer to brew while getting a deal on an IPA which has more expensive ingredients. So you get a bit of a conundrum. You go into a store wanting something on the lighter side like a hefe, and wind up buying an IPA because you know you are getting more value for your dollar.

    Personally I would rather beer be priced at what it's worth and force the average consumer out there to learn a little about what they are purchasing. I homebrew and I have some idea of the cost difference between a hefe and an IPA or Imp. stout. I don't have a problem with seeing those marked at a higher price. I think the average mentality in the US that if a beer consistently costs less then it's competition means it must be somehow inferior is pretty pathetic.

    Here is an example. I bought a 6pack of Stone Pale Ale and had a few bottle from a mixed 12pack of JW Dundee's craft pack. The Stone 6-pack cost more then Dundee's craft by about $3. I did a blind tasting of Dundee's Pale Ale vs. the Stone with my dad and he guessed the Dundee's was Stone. In the end, after the beers had about 30 minutes or more to warm up, you could finally tell the Stone was a bit better, but definitely not enough to justify that much of a price difference. Yet many people would see those prices and just grab the Stone. To each their own, eh?