Pricing Strategy Is My Business

The Pricing Newsletter

November 2020

Hello Pricers,

Did you know that the 16th of November is Oklahoma's Statehood Day? Oklahoma, abbreviated OK, became the 46th state in the year 1907.

This celebration should be a great reminder to ask yourselves if your pricing is just OK. Is OK really good enough when it comes to your bottom line?

Pricing Question from a Reader

My friends and I brought a bottle of wine to a restaurant. When the bill came, we were charged a corkage fee. What's the logic behind it, and how come no other industry appears to do anything similar?

What's a corkage fee?

A corkage fee is a surcharge that restaurants apply to the bills of patrons who bring and consume their own wines. Although the charge is often based upon the number of bottles opened, some establishments calculate corkage fees by the book values of each bottle or the number of diners who have been seated.

Because calculation methods for corkage vary from establishment to establishment, one should always inquire about specifics prior to arrival. This isn't just a matter of avoiding a faux pas - it's serious business. One diner is facing five years in prison after a dispute involving corkage fees in Thailand.

Why do restaurants apply corkage fees?

The short answer is that establishments apply these charges because they can. As long as the practice doesn't dissuade too many diners from making reservations, a restaurant has little reason to avoid their use.

When pressed, restaurateurs would likely list the following reasons as justification for corkage fees:

  • Loss of revenue - A restaurant's markup on alcohol can be quite large. In many cases, the margins for wines can far exceed those of the foods with which they are paired. Customers who elect to bring their own wines reduce an establishment's per-seat margins significantly.
  • Increases of incurred costs - In addition to the act of opening customer-supplied bottles, restaurateurs often provide complementary goods such as wine glasses, buckets, decanters, ice, and other products that must be purchased, stored, and maintained.
  • Increased consumer surplus - Many believe that the consumption of wine improves the value diners receive. Whether this is due to lowered inhibitions to ease conversations or an increase in flavors for their palates is immaterial. Considering the extra value received by customers, it would seem only fair that restaurateurs are allowed to capture a portion of this additional utility in the form of increased revenues.
  • Deterrence for undesirable behavior - Many restaurateurs will argue that they maintain well-provisioned wine cellars. A customer who brings his own wine to a restaurant necessarily suggests an inferiority with respect to the establishment's inventory and pairing skills. A corkage fee, in this respect, acts both as a salve for the vendor's injured reputation and as an incentive for diners to place their trust in the establishment's selections. It also acts as a damper on behavior that might convince others to emulate the practice of supplying their own wines.

Why do customers pay corkage fees?

As is the case with all voluntary transactions, vendors cannot impose fees without risking the alienation of their customers. There are several reasons why customers accept corkage fees:

  • Cost savings - Given the high markups on alcohol, diners can often pay corkage fees and still save a significant sum of money by bringing their own bottles.
  • Increased selection - Those with large collections of wines, unusual preferences, or access to rare vintages are able to consume wines that cannot be found within a given restaurant's cellars.
  • Circumvention of legal restrictions - Depending upon the legal jurisdiction, some restaurants are unable to sell wines to their customers but are able to allow diners to provide their own.
  • Control over authenticity - Some diners may wish to partake in a bit of wine fraud and convince fellow diners that they are consuming a far more desirable vintage than they are. It's also possible that some diners may prefer to bring their own bottles to prevent establishments from performing wine fraud (inadvertently or not) on them.

Where else are analogous charges used?

When I examined the use of shadow work at gas stations, I was able to provide a number of examples of similar practices in the marketplace. Analogs to corkage fees appear far more rare.

This is likely due to the fact that corkage fees require an unusual twist on what would otherwise prove to be a straightforward business relationship. When patrons furnish their own wines, they act as both consumer of and competitor to a supplier. Such interactions are quite rare for many reasons, including legal liability for the vendor, signaling of cheapness by the consumer, and an increased movement toward standardization and mass production of offerings by vendors.

One practice similar to corkage fees is well-known to shooting enthusiasts. Pistol ranges typically provide discounts on range time to those who buy ammunition directly from their ranges instead of supplying their own. Although ranges typically describe this pricing strategy in terms of price concessions rather than as additional fees, the difference is one of semantics. Despite the fact that discounts tend to be an easier sell than surcharges, the two are mathematically equivalent.

Another variation on the theme is occasionally offered by independent automobile and equipment repair shops. Some have historically allowed customers to provide their own replacement parts when purchasing a service offering. While the transaction typically doesn't result in surcharge, it is often associated with a reduction of attached warranties. In many ways, a reduction in value at a given price bears a striking resemblance to an increase in cost for the same level of service.

What are the rules for implementing something like a corkage fee?

With corkage fees rare outside of the restaurant world, it is essential to understand what types of offering characteristics support their use. Oddly few, if any, have ever taken the time to consider the matter.

A business should ensure the following prior to considering the addition of a surcharge like a corkage fee:

  • Low monitoring costs - The more conspicuous the display of non-vendor-supplied items, the less effort will be required to apply a fee for their use.
  • High margin, non-forcibly bundled items - Vendors would have little reason to risk alienating a customer over an item that imparts minimal financial return. Additionally, a customer-supplied replacement for a bundled item would incur no loss of income, as forcefully-bundled items have been paid for by customers already.
  • Significant vendor market power - Firms making use of corkage fees are essentially putting forth a take it or leave it demand. Those with minimal strength may find that customers are willing to select the leave it option.
  • Strong customer incentives to buy elsewhere - Whether due to cost, availability, or other reasons, the lesser a customer's desire to utilize products from external sources, the lower the benefit from the implementation of a corkage fee.
  • In situ consumption or usage - Few restaurant owners would dream of adding corkage fees to takeout orders. Without control over the place of consumption, a vendor loses claim for the overall experience.

How can vendors prevent customers from bringing their own substitutes?

There are several means by which vendors can prevent customers from competing with them:

  • Increased fees to eliminate the benefit of selecting externally-sourced goods
  • Social pressure to dissuade the usage of outside products
  • Forced bundling to require the purchase of a given item, whether desired or not
  • Outright refusal via rules that deny the use of externally-purchased items

Of course, there's another option. Business owners can allow and even encourage patrons to bring their own goods. Some brave restaurateurs are happy to advertise $0 corkage fees to drum up additional business on off-nights. As I discussed in my highly relevant article on flamethrowers, reductions of fees that are highly visible and strongly disliked will often attract new customers. Many business owners may find that allowing customers to bring their own supplies will not only lead to increased profits but also improve their cash flow by eliminating the need to invest in slow-moving inventory.

Do corkage fees have a future?

With fears of Covid-19 running rampant, and dining-in losing its luster, are we moving to a post-corkage fee world?

I don't think so. In fact, I think there are a few industries that would be well-served to consider adding variations on the theme. I suspect that the software industry will be the next great frontier for these types of fees.

Many of the largest software firms provide large all-in-one solutions to their customers. Few of their modules, however, can be described as best in class for each and every customer segment. As a result, many users feel a strong desire to use external software applications to manipulate, analyze, and visualize data from these systems.

I have no doubt that corkage fees in the software field won't be described as such. Support for integrations with other systems will likely be listed as prominent features within higher pricing tiers, but make no mistake: corkage fees are coming to the software world - at least in spirit.

Conclusion

Corkage fees appear to be something of an anachronism in the pricing space. They require a very peculiar relationship between buyer and seller that simply does not exist within most types of business transactions.

That said, if your business fits the model I've provided, by all means, consider making use of a corkage fee. If applied with great care, it might prove quite profitable for you, and I'd certainly be thrilled to hear about it.

Questions come from readers like you. If you'd like your questions answered, send them my way.

Pricing in the News

From the Blog Archives

Notable Pricing Quote

"There was a time when a fool and his money were soon parted, but now it happens to everybody." -- Adlai Stevenson

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