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2007 Sonoma Research Associates - All rights reserved.


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Practical Applications of the

Price Elasticity of Demand

Presented by

Dan Karnowsky, PresidentSonoma Research Associates

Presented at

Competitive Forces Affecting the Wine and Wine Grape

Industries: An International Conference on World Wine MarketsUniversity of California, Davis

Davis, CaliforniaAugust 10 2007


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Effective Use of Price Elasticityof Demand Allows Wineries to:


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Increase Revenue


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Increase RevenueStrategic Pricing Regionally


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Strategic Pricing Temporally


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Increase RevenueStrategic Pricing RegionallyStrategic Pricing Temporally

Reduce Costs


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Reduce CostsReduce Inventory Cost by AccuratelyEstimating Demand


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Sonoma Research Associates

Uses Price Elasticity of Demand

to Answer Two Basic Questions


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How Much Can I Sell





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How Much Can I SellHow Much Can I Charge


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How Much Can I Sell

Price Elasticity of Demandhelp firms determine

what quantity will be sold at various prices.


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Price Elasticity of Demandhelp firms determine

what quantity will be sold at various prices.

For example, if a winery is considering a pricechange, price elasticity of demand will tell themwhat will happen to quantity sold and revenue

resulting from the price change.

How Much Can I Sell


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1.68$ 121,222.12631

Price ElasticityAnnual RevenueAnnual Sales (Cases)

EstimatedEstimatedEstimated

Estimated Annual Case Volume, Revenue and

Price Elasticity of Demand at a Price of $16 per750 ML Bottle for a Rosenblum Zinfadel


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Estimated Annual Case Volume, Revenue and


1.68$ 121,222.12631

Price ElasticityAnnual RevenueAnnual Sales (Cases)


More Importantly,

Knowing How Price Elasticity Varies by MonthTells You How Sales Will Vary by Month.


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16$ 121,222.12Annual Revenue

631Annual Cases Sold

0.99$ 15,505.4881December

1.27$ 12,081.5863November

1.30$ 11,803.0361October

1.87$ 8,213.8943September

1.62$ 9,445.4349August

2.15$ 7,129.0837July

1.89$ 8,093.6242June1.64$ 9,359.3549May

2.18$ 7,017.2737April

1.55$ 9,920.7452March

1.13$ 13,508.1570February

1.68$ 9,144.5148January

Price ElasticityMonthly RevenueMonthly Sales (Cases)


Estimated Monthly Case Volume, Revenue and



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Accurately Forecasting Demand

Allows Wineries to: Increase Revenue by Meeting Demand During

Peak Months


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Peak Months

Reduce Inventory Costs by Reducing

Shipments During Low Demand Months


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Peak Months

Reduce Costs by Reducing Inventory During

Low Demand Months

This Same Type of Forecast CanBe Done Regionally As Well As

Temporally


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How Much Can I Charge


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How Much Can I Charge

Price Elasticity of Demand Allows Wineries toPrice Strategically,Both Regionally and Temporally


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When Should I Adjust Price


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Price Elasticity of Demandallows Wineries toeffectively price discriminate Throughout the year



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Price Elasticity of Demandallows Wineries toeffectively price discriminate Throughout the year


For Example, demand changes during the holidaymonths of October, November & December.

Price Elasticity of Demandallows Wineries totake advantage of these demand changesthrough strategic pricing.


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0.486Dec

0.640Nov

0.703Oct

0.759Sep

0.889Aug

0.709Jul

0.571Jun

0.662May

0.827Apr

0.867Mar

0.784Feb

0.653Jan

PriceElasticity

Price Elasticity of

Demand By MonthEstimated for a Seghesio

Zinfandel


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Price Elasticity of Demandallows wineries to

effectively price discriminate geographically

Where Am I Most Competitive


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Price Elasticity of Demandallows wineries to

effectively price discriminate geographically

For example, if demand differs from location tolocation, Price Elasticity of Demandallows

wineries to take advantage of these demandchanges through strategic pricing.

Where Am I Most Competitive


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Price Elasticityof DemandCity

0.96San Francisco

1.03Sacramento

1.00San Diego

0.88Los Angeles

Price Elasticity of

Demand in Californiaby Region,

Estimated for Turning

Leaf Merlot


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How Much Should I Charge

Price Elasticity of Demandallows Wineries to

estimate the maximum price consumers arewilling to pay for your wine


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9.95

AveragePricePer750mlBo

ttle

4,390

Annual Cases Sold

Pacific Rim Sold 4,390 Cases ofDry Riesling for $9.95 Per Bottle.


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10.60


ttle

4,390

Annual Cases Sold

9.95

We Estimated that they couldhave charged a price of

$10.60.


f S C f


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10.60


ttle

4,390

Annual Cases Sold

9.95


We Estimated that they couldhave charged a price of

$10.60.

That 65 cent differenceresults in $34,242.


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Reduce CostsReduce Inventory Cost by AccuratelyEstimating Demand


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Increased Revenue


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Increased Revenue

Decreased Costs


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Increased Revenue

Decreased Costs

= Increased Profit

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