Modeling Value: Introducing the wwpQPR

Monday, May 11, 2009

Photo by wburris

You hear a lot in the wine space about Quality Price Ratio or "QPR" for short. QPR is a way of defining value: A great wine for a low price equals a great QPR. But how does this really work in practice? Today I've put forth a new way of defining QPR- the wwpQPR (Wellesley Wine Press QPR). You can try it out in a little Javascript widget on the right side of the page.

Before we get too far, I'd like to acknowledge that some people really dislike rating wines with numbers. While I respect that view, numerical ratings are (for me) a convenient way of summarizing an opinion of a wine that allows me to quickly scan a piece of writing in order to determine if I'd like to read the accompanying tasting note for further information. Even if you don't like points, I hope you'll find this analysis interesting as a way of understanding consumer behavior in the wine space.

Simple QPR

Quality is most commonly rated in terms a 100-point scale. Here are some guidelines on what numerical scores from Wine Spectator represent in terms of quality:

Wine Spectator's 100-Point Scale
  • 95-100 Classic: a great wine
  • 90-94 Outstanding: a wine of superior character and style
  • 85-89 Very good: a wine with special qualities
  • 80-84 Good: a solid, well-made wine
  • 75-79 Mediocre: a drinkable wine that may have minor flaws
  • 50-74 Not recommended
It's worth mentioning explicitly that when a wine is rated on the 100-point scale, the price of the wine does *not* factor into the rating. When someone says, for example, that they feel that a Charles Shaw Cabernet Sauvignon is an 82-point wine, they're saying that it is a good wine irrespective of price. It is up to us as consumers to determine whether a given wine, with a given rating is a good value depending on the price.

The Problem With a Simple Quality Divided by Price Ratio

Let's take a look at how things look if we simply divide Quality by Price for a couple of wines of the same variety:
  • Wine "A" was rated 93 points and costs $17.
  • Wine "B" was rated 85 points and costs $11.
If we simply divide Q by P we get:
  • 93/$17=5.47
  • 85/$11=7.72
A simple Quality Price ratio for these two wines indicates that Wine "B" is the better buy. But is it? Ask any retailer who has both of these wines on their shelves and they'll tell you: The 93 point wine will fly off the shelves while the 85 point wine is a tough sell.

Why? Because each incremental point north of 90 is exponentially harder to attain, whereas each point south of 90 is exponentially more detrimental to sales.

Let's examine this at the extreme. The 2003 Charles Shaw Cabernet Sauvignon was rated 82 points by Wine Spectator. 82/$2 is 41. Charles shaw is a good value, but it's not *that* good. It's nearly impossible to top that from a simple QPR perspective because a simple Q/P doesn't appropriately weight quality and price.

Stated another way: A 93 point wine isn't merely 9.4% better than an 85 point wine. It's more like 8 times better than an 85 point wine.

Further, regarding price- the price of a wine isn't evaluated at as a raw number. In reality, it's weighted relative to the cost required to attain the desired quality within the wine's peer group.

More on both of these points in a moment.

A Better Way: Introducing the wwpQPR

After thinking about this for a period of time, I sought to quantify the way I react to wine offers, and discussions about certain wines.

First, let's discuss the notion of a value baseline. Frequently, I see ads from wine retailers offering "90 Point Wines for $20 or Less". I think that's a fair point at which to discuss relative value.

Now that we've established this baseline, let's talk about how we react to wines that are better or worse than 90 points. Say for example I told you a wine was rated 93 points. Would you consider that to be ~3% better than 90 points? I wouldn't. I'd consider it to be twice as good as a 90 point wine, and my buying patterns would reflect that. So that's the first principle in the wwpQPR:

For every 3 points north of the baseline quality, effective quality doubles. For every 3 points south of the baseline, quality is cut in half.

Regarding price, my feeling is that we view price relative to the cost of a baseline wine in the peer group of the wine being rated, and that deviations from that baseline are looked at in terms of percentages rather than raw dollars.

What I sought to do was come up with a way to normalize the overall equation such that the wwpQPR rated a wine that was on par with the baseline as "1.0". Any wine scoring better than 1.0 from a value perspective was above average, less than 1.0 was below average. Therefore, we divide the price of the wine being evaluated by the price of the baseline wine. For example, if a wine costs $30 vs. a baseline of $20, the denominator will be $30/$20=1.5 and will serve to diminish the wwpQPR as a result. If the wine costs less than the baseline, the denominator will be less than 1, which will increase the wwpQRP.

Rolling all of this into an equation, we have the following:

This equation is implemented in Javascript in the form at the right of this page.

In Excel:

How to use it:

For now, let's leave the Baseline Quality set at 90 and the Baseline Price set at $20. Let's calculate the wwpQPR for wines "A" and "B" we discussed previously.

Wine "A" was rated 93 points, and costs $17. In the wwpQPR Calculator, enter 93 in the "Quality" field, and enter 17 into the "Price" field. Then click the "Calculate" button. You should see "2.35: Very good" reported.

Wine "B" was rated 85 points and costs $11. Entering these numbers into the calculator should yield a "0.57: Below avg" reported.

I think these assessments of the relative value of these wines align more accurately with the way consumers would react to these wines on a retailer's shelf than a simple Q divided by P.

Interpreting the wwpQPR's Normalized Scale:

  • >8.0 Incredible value
  • 4.0-7.99 Outstanding value
  • 2.0-3.99 Very good value
  • 1.5-1.99 Good value
  • 1.01-1.49 Above average value
  • 0.5-0.99 Below average value
  • 0-0.49 Poor value
Objection Handling

First, you don't have to buy into the notion of professional ratings to get behind the wwpQPR. The numbers you enter for "Q" can/should be *your* assessment of how much you like a given wine. In fact I often do this. Take for example the 96-point Sauvignon Blanc/$29 we discussed a couple of months ago. The wwpQPR of this wine is 2.76: "Very good". However, when I had to pay $35 for the wine, and when I tried it I only thought it was about a 92 for me. That gives us a wwpQPR of 0.91: "Below avg". I probably won't be buying it again.

Next, it's a fact that certain wine categories are more expensive than others. Famous regions like Burgundy, Bordeaux, and Napa command a price premium that doesn't automatically result in improved quality in terms of ratings. Other categories, like Australian Shiraz, New Zealand Sauvignon Blanc, and Malbec from Argentina are great for value. It is relatively easy to find a 90 point Aussie Shiraz for around $10.

This doesn't mean that as wine consumers we fill our stashes up with these value categories. We buy some of each, the prestigious and the value, to round out a collection of wine. But how do we compare value across these regions? The answer lies in altering the baseline quality and price for each wine relative to its peer group.

The average price of a 90 point bottle should be used as the Baseline price for the peer group. For Napa Cab, if I look up the wines that were rated 90 points by Wine Spectator for the 2005 vintage it appears that somewhere around $40-$50, 90 point ratings become commonplace. For Australian Shiraz, the price is probably closer to $15. We could then compare a Napa Cab to an Australian Shiraz to assess relative value.

For example, take a 90 point, $27 Napa Cab. If we use 90/$45 for the baseline, this yields a wwpQPR of 1.67 or "Very good". If we look at a 90 point, $11 Aussie Shiraz with a 90/$15 baseline, we get a wwpQPR of 1.36 or "Good". This explains why I was more excited about the 2005 Buehler Napa Cab than the 2005 Yellow Tail Reserve Shiraz. The Buehler rated higher according to the wwpQPR because it is so hard to find value in Napa Cab, and so easy to find value in Australia (even though both wines were rated 90 points, and the Yellow Tail cost less than half of the Buehler).

Another scenario where you might want to tweak the baseline values is to tweak how much of a value hunter you are. If you only consider wine a good value if it's 90 points and $10 you can change the baseline values to reflect that, and the number generated by the wwpQPR will model a your more stringent value criteria.

I'll go deeper into advanced uses of the wwpQPR calculator in future blog entries.

Other Applications

With this equation, I believe we can have interesting discussions around questions like these:
Closing Thoughts

This might seem like a strange exercise to perform on something like wine. I truly do consider some wines to be works of art- handcrafted, personal expressions of winemaker and place. In the right context, wine can transport us to another place and time. But other times, we're faced with an ocean of wine at a warehouse club, each competing to find a place in our over sized shopping cart. It's in this second scenario where I feel the wwpQPR is intended to be used.

This type of analysis is the kind of thing I tend to perform for any consumer purchase or financial decision. When I worked at IBM, I wrote a Black-Scholes Stock Option price calculator in an electronic design automation scripting language (Cadence Skill code for all of my EDA friends out there). It was useful for helping engineers assess the present value of the stock options they were receiving at the time (and traditional stock option values weren't reliable because the term of those sold on the open market weren't as long as the ones employees received). I re-wrote it in Javascript as a class assignment for an Investment Analysis class while pursuing my MBA at Marist College. I mention all of this to explain a little bit how I operate- creating and applying an equation to determine wine value is just an extension of that tendency.

Finally, I know there will be some that glance at this and consider anyone who considers points and dollars in such a "scientific" manner to be a point-chasing "score wh*re". I find that most people who want to apply labels like this are people on the sell side of the wine trade who use name calling as a tactic to shame people into spending more on mediocre wine than they need to. Remember, the "Q" in the equation is what *you* think of a wine. It is a relative statement of how much you like one wine compared to another, just as the "P" is how much you can buy the wine for.

I hope you do find the wwpQPR useful, or at least thought provoking. I look forward to your feedback, and I hope to leverage it as part of a game scenario in the coming months.

Do you like this kind of consumerist mathematical wine mash-up? You know what would make my day? If you subscribed to the WWP in your favorite feed reader.

Related reading:
Question of the Day: What do you think of the wwpQPR? Have you ever thought about this stuff before? Any suggestions for improvement?


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