The short answer is “supply and demand”.

But it’s worth exploring this further to gain a better perspective than the traditional marketing thoughts/stories on high prices.

Marketers like high prices (even if in practice they are so keen on discounting). It’s rare to read a student assignment or consultant report that recommends a low price. High prices are supposed to be a symbol of marketing success. And thought to be due to brand equity, differentiation, and advertising. The idea being that consumers are supposed to value the brand more highly, perhaps because they think it is higher quality than it really is.

This logic is popular with critics of marketing too, who claim that marketing rips consumers off.

But how much truth is there in this? Why are some wines so much more expensive? Why are there many bottles of wine that sell at prices that the typical wine buyer finds ludicrous?

Well, first of all there are costs. Expensive wines cost more to make. Great locations, meticulous care, low cropping, qualified staff, R&D, and so on, all raise costs. And no one wants to sell a wine that cost $20 to make for only $19. So quite simply if there isn’t demand for wines of this quality selling at more than $20 a bottle then little will get made. In the long run “wines are made by their market” (Hugh Johnson).

OK, but there are wines that sell at far higher prices than their cost of production. Penfold’s Grange possibly doesn’t cost much more than double to make than their Bin 389 (“poor man’s Grange”) yet it sells for 10 times as much. And there are many other such examples (although altogether they constitute a mere fraction of 1% of the wine sold in the world).

Now, thinking about supply and demand why don’t Penfold’s make more Grange? Sure, it would lower the price they could charge but overall you’d think they would still make more money. The answer must be that making more would actually be very difficult. In this case while there are other vineyards that can produce grapes of sufficient quality (eg old vines in the best locations) in many cases this fruit simply is not for sale – it already goes into another wine. The owners might get more by selling to Penfold’s but they have their own pride and ambitions. Now everyone might have their price but my point is that increasing the quantity of Grange would be vastly more expensive for Penfolds. Combined with the lower selling price that more supply would cause it just isn’t worth it. Plus the high selling price of Grange (and its high quality) gives Penfolds lots of free publicity that helps sell their many other brands.

So, supply and demand are at work.

Other expensive wines like Cru Classé Bordeaux and Grand Cru Burgundy have the same issue where increasing supply would be very expensive or impossible, at least to do so in a way that didn’t compromise quality. Increasing supply and decreasing quality hits the price of a brand in two ways, the price comes down because of increased supply and because of decreased demand.

OK, but why is there demand for $600 bottles (the current retail price for Grange in Australia)? Many people simply can’t fathom why someone would pay so much for a bottle of wine. But they forget that different people have different values. Personally, I find it odd that anyone would spend more than $30,000 on a car, but that’s just me. I also wouldn’t buy a luxury watch, and I find it odd that people spend vast sums on boats that spend most of life moored in (costly) marina. It’s perfectly understandable that some people are happy to pay hundreds of dollars for a bottle of wine, and a tiny few will even pay thousands, sometimes. There are people who are earning money so fast that they couldn’t drink it away as fast as they were earning it even if they drank $1000+ bottles. And there are also even impoverished Uni students who are willing to club together to buy a $600 bottle to see what it’s like. So it’s not really hard to understand why a few people, or people a few times, will buy very expensive wines.

Or is it? Why will people buy a wine for $100 when there are many other wines half the price that they would find difficult to tell apart in a tasting? Why buy the expensive wine when there others that would give similar pleasure?

This seems irrational, and it’s why marketers (and their critics), economists and psychologists like to talk about irrational demand, false perceptions of quality, market failure, and buying to impress others and signal status. No doubt there is a little truth in this but there are other better explanations.

I notice that mainly the wines that sell for very high prices have proven that they can age well, transforming themselves into something special. Most wines do not age well. Even some very good, very expensive-to-make wines either don’t gain a lot from age (eg most Chardonnay) or are a very risky, unproven ageing proposition. For those of us seeking age-worthy wines the available wine universe shrinks substantially.

So, while the demand for expensive age-worthy wines may not be large (tiny compared to the demand for cheap wine with no ageing potential) this demand is still large enough to bid up prices.

Now, potential for ageing is difficult to assess. Most wines don’t last. Some that do don’t really improve. And this is something you can only prove over a long period of time. The wines that have proven this potential for ageing and improvement over that time sell for high prices because supply is small compared to the demand. This is the big story not one of symbolic values (that’s a small story) or fooling consumers (that’s an even smaller story).