It’s What You Don’t Know That’ll Hurt Your Wine Business.

Brad Post:

Ask most winery owners how much they know about their customers and you’ll likely get the same response I frequently hear: “I know my customers pretty well”. Moreover, most winery owners also claim they know the preferences and kinds of experiences visitors have at their winery.

Or at least they think they do.

Blockbuster, the now defunct video store, once thought the same thing. All it took was one disgruntled customer, who later built another more responsive enterprise (i.e., NetFlix), to run the former video rental business into the ground and out of business.

Paying attention to our customers and understanding their experiences is crucial to keeping a business running effectively. We know our customers – or at least we think we do, but more accurately, we know our “regular” customers.

What do we know about those visitors who never return?

When I was living in Seattle and working at a marketing research company, as research analyst, a challenger to the prominent Seattle coffee giant asked us for help. This new coffee business surely understood the market, just like winery owners do, but they asked us to delve a little deeper and to help identify possible unmet needs.

They understood the business of coffee. They understood they didn’t know everything about their customers. They understood there was a possibility of an untapped market segment they might fill. They asked for research help because they weren’t market research experts.

Ultimately this new business challenger successfully invaded the market space formerly held by the coffee giant and has seized market share. Using qualitative and quantitative research methodologies we were able to uncover dissatisfied customers and key into a new, formerly untapped segment.

It’s what you don’t know that’ll hurt your business.

The danger of believing we know everything about our customers may be our biggest potential pitfall. In the winery business we do everything: we grow and harvest the grapes, run the fermentation operations, do our own bottling, and transport and sell our wines.

Focus on the Fundamentals of Wine.

Wineries should focus on winery related activities not on research. In the computer programming trade there is a maxim that goes like this: garbage in, garbage out. The same adage works for the research business: poorly designed research yields and questionable findings.

Professional researchers understand the complexities of conducting social research. Consumer behavior research requires a comprehensive set of tools that include qualitative methods: interviews, observation, and focus groups; and quantitative methods: survey research (mail or Internet), and even experimental designs (e.g., which communication program is most effective or which label design will sell more wine).

Building a long term research program to assess consumer satisfaction is fundamental to a winery business. Knowing what your customers love and sometimes more importantly, what your visitors do not love, can make the difference between success and failure.

Just ask Blockbuster.

Two Easy-to-Use Financial Analysis Tools for Mid-West Wineries

Terry post:

Over several glasses of Traminette the other evening my brother and I discussed the decision-making process that is used by winemakers: What grape to plant? Should I buy more hardware? Do I host social events in the vineyard?

That conversation got me to thinking about the low-cost tools which are readily available to assist the winemaker in making business decision.

Two powerful tools are Net Present Value (NPV) analysis and Return on Investment (ROI). Both are quite simple to create and evaluate but don't let their relative simplicity stop you from using them.

Net Present Value is a good tool when you need make one choice from a series of options. Let's compare a situation where you have three options: Option 1 provides for a uniform series of increased profits. Option 2 provides for a large immediate profit followed by no additional profits and Option 3 provides for no profits in the near term with a large profit in the out-years.

Net Present Value does not simply add up the values in the cell - it discounts the value of future cash flows by a user-defined discount rate. (Note: I always use 4.25% in any NPV analysis as this rate is a historical average from 1929 to the present.)

Using the NPV workbook function in MS Excel (=NPV(Interest Rate, Value1, Value2, Valuen)) you are able to evaluate the PRESENT VALUE of all three cash flow streams. In this case, Option 1 turns out to be the most profitable choice among the three choices. Option 3 is the least advantageous as its payout is deferred the longest and the impact of the discount is the greatest.

Return on Investment is a way to calculate the profitability of an investment. In order to calculate the ROI you need two pieces of information: 1) Total Return, and 2) Cost of Investment. Let's use the numbers in the NPV calculation and add the following information: the cost of investment for all three choices was $450.

The ROI calculation is as follows: ROI = ((Total Return - Cost of Investment)/ Cost of Investment).

The total return for Option 1 is $552.75 and the cost of investment is $450. Working through the equation we have ROI = (($552.75 - $450)/$450) or 22%. For Option 2 it is ROI = (($525.68-$450)/$450) or 16%. For Option 3 ROI = (($448.60-$450)/$450) or -.03%.

In this example Options 1 and 2 provide a positive rate of return with the ROI with Option 1 having the best return over the 5 year period. Choose Option 1.

Bottom line: Both NPV and ROI provide powerful insights into business decisions with a few simple steps.

~ Terry