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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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Effective Use of Price Elasticityof Demand Allows Wineries to:
Increase Revenue
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Effective Use of Price Elasticityof Demand Allows Wineries to:
Increase RevenueStrategic Pricing Regionally
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Effective Use of Price Elasticityof Demand Allows Wineries to:
Increase RevenueStrategic Pricing Regionally
Strategic Pricing Temporally
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Effective Use of Price Elasticityof Demand Allows Wineries to:
Increase RevenueStrategic Pricing RegionallyStrategic Pricing Temporally
Reduce Costs
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Effective Use of Price Elasticityof Demand Allows Wineries to:
Increase RevenueStrategic Pricing RegionallyStrategic Pricing Temporally
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
Sonoma Research Associates
Uses Price Elasticity of Demand
to Answer Two Basic Questions
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Sonoma Research Associates
Uses Price Elasticity of Demand
to Answer Two Basic Questions
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
Price Elasticity of Demand at a Price of $16 per750 ML Bottle for a Rosenblum Zinfadel
1.68$ 121,222.12631
Price ElasticityAnnual RevenueAnnual Sales (Cases)
EstimatedEstimatedEstimated
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)
EstimatedEstimatedEstimated
Estimated Monthly Case Volume, Revenue and
Price Elasticity of Demand at a Price of $16 per750 ML Bottle for a Rosenblum Zinfadel
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Accurately Forecasting Demand
Allows Wineries to: Increase Revenue by Meeting Demand During
Peak Months
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Accurately Forecasting Demand
Allows Wineries to: Increase Revenue by Meeting Demand During
Peak Months
Reduce Inventory Costs by Reducing
Shipments During Low Demand Months
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Accurately Forecasting Demand
Allows Wineries to: Increase Revenue by Meeting Demand During
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
When Should I Adjust Price
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Price Elasticity of Demandallows Wineries toeffectively price discriminate Throughout the year
When Should I Adjust Price
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
AveragePricePer750mlBo
ttle
4,390
Annual Cases Sold
9.95
We Estimated that they couldhave charged a price of
$10.60.
Pacific Rim Sold 4,390 Cases ofDry Riesling for $9.95 Per Bottle.
f S C f
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10.60
AveragePricePer750mlBo
ttle
4,390
Annual Cases Sold
9.95
Pacific Rim Sold 4,390 Cases ofDry Riesling for $9.95 Per Bottle.
We Estimated that they couldhave charged a price of
$10.60.
That 65 cent differenceresults in $34,242.
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Effective Use of Price Elasticityof Demand Allows Wineries to:
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Effective Use of Price Elasticityof Demand Allows Wineries to:
Increase RevenueStrategic Pricing Regionally
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Effective Use of Price Elasticityof Demand Allows Wineries to:
Increase RevenueStrategic Pricing RegionallyStrategic Pricing Temporally
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Effective Use of Price Elasticityof Demand Allows Wineries to:
Increase RevenueStrategic Pricing RegionallyStrategic Pricing Temporally
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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2007 Sonoma Research Associates - All rights reserved.
Glen Ellen, California(707) 935-1210
www.sonoma-research.com