Fixed costs such as duty, shipping and bottles account for a considerable proportion of the price of a bottle of wine in the UK. There are considerable variable costs too, such as VAT and wholesale and retail margins, not forgetting the cost of actually growing the grapes. A really good question was recently asked at a wine tasting event; “what is the optimum price of a bottle of wine”?

This got us thinking and we have applied the vast resources of the West Mount Research Labs to answer that very question. The answer is £19.99, but read on to see how we reached that conclusion…

If we consider the retail price of a typical bottle of still wine in the UK, the first £1.61 goes straight to HM Treasury in the form of duty. There’s then the broadly fixed costs of shipping, bottles, corks, capsules, labels etc. (we’ve assumed 45p per bottle for all of this), which are not significantly influenced by the ultimate cost of the wine.

On top of that we add wholesale and retail margins (as fixed assumptions) and more money to HMCE in the form of VAT; currently 15%. All of that is before we actually account for anything to the wine maker to actually make the wine.

Using our assumptions, the starting point for a bottle of wine is £3.58. This will give the winemaker £0.01 to grow the grapes, make, mature, market and sell one bottle of wine. We are using this measure as a proxy for the value of wine we’re actually getting in the bottle.

We set about trying to understand the retail price of a bottle that would maximise the proportion of wine making in the bottle against the fixed and variable overhead costs. We were looking for the best level of return, rather than the maximum value.

To get £1.00 worth of wine in the bottle, you’d have to spend £5.62 – and that would mean that roughly 18% of the price you pay would be contributing to the wine in the bottle.

To make the wine value £2.00, you’d be spending £7.67 (c. 26% of the cost is for wine making) and for £3.00, £9.72 (c. 31%) and so on.

The graph shows the ratio of wine making cost to retail price, plotted against the retail price. You can see there’s a distinct change in the graph at about 40%, where the more you spend has less effect on the proportion of that spend which contributes to wine making. That point is at a retail price of £19.99.

Spending £19.99 on a bottle, would buy you £8.00 of wine.

So, for every pound you spend between £3.58 and £19.99 you’re maximising the value in the bottle and offsetting the fixed costs. After that, the returns diminish and the rules of supply and demand pricing and rarity come into play.

The really key point for me would be when those fixed and variable costs become at least equal to the wine making cost. As far as we can see, and we’ve done the analysis up to a retail price of £30,000, because of the variable cost element, we never reach 50%, but tail off at 49%. Surprised? We thought you might be.

Of course, none of this is deeply well thought through statistical analysis and there’s all sorts flaws in the logic. It also doesn’t take account of lower retailer and wholesale margins, UK bottling or fixed cash margins, which would all have an impact on the values. But to optimise the value of the wine in your bottle, spending up to £20, should give you great returns for every £1 extra.

We’ve no doubt that you’ll have some views on this, so please do share them.