Second-Cheapest Syndrome

Ever order the second-cheapest wine on the menu while dining out? You don't want to spend very much, but you also don't want to look like a cheapskate ordering the cheapest bottle on the whole menu. Well, one in four diners do (in the UK, at least). In the marketing world, we can define this as a choice set effect with respect to reference pricing—using the cheapest bottle of wine as a standard of comparison against which the other wines are compared.

But did you know that the second-cheapest bottle is usually the worst value?

From the Harvard Law Record: "Restaurant owners will often price the wine they buy cheapest at wholesale as the second-cheapest wine on the menu. Why? Because people generally don't order the cheapest wine and thus often turn to the second cheapest. Price that one higher, and you get a bigger marginal profit. Presto—restauranteur as microeconomist!"

The Wall Street Journal recently took it a step further and cracked the code of wine pricing. They found that the standard markup at a restaurant is about three times the wholesale cost, or twice the retail cost. However, restaurants employ what's called "progressive markup"—a cheap bottle could be priced three to four times wholesale, while an expensive wine may be marked up only 1.5 times.

Wine by the glass is even more of a rip off, as it carries the biggest markup. Typically, the first glass of wine sold pays for the cost of the entire bottle to the restaurant! But wine isn't the only thing with a high markup. Liquor and beer often carry a 500% markup.

So if you're looking for the biggest bang for your buck, consider a more expensive bottle, whose restaurant retail price is more closely aligned with its actual price. But if you can't go that high, then order the cheapest bottle. Be sure to tell your date about the "second-cheapest syndrome," though. That way you appear smart and savvy, instead of cheap. [Image courtesy of The Inn & Spa at Cedar Falls.]

Be sure to read more of what Diana learned today here.