Cannabis Pricing Strategies: Wholesale, Retail, and More
By Stu Waters
Find out how common pricing strategies work in the cannabis industry.
Cannabis industry pioneers tend to include a wide variety of people from all walks of life. This degree of diversity offers immeasurable benefits to the industry at large, but it also presents challenges.
The retail landscape is one of the first challenges that first-time dispensary owners face. Surprisingly few dispensary owners come from a retail background. When they open up their first cannabis dispensary, they have to learn how retail works on the fly.
This can be an overwhelming experience. Retail is not easy. It demands patience and excellent planning. The more comprehensive your retail strategy, the better your chances of achieving long-term success.
For instance, pricing is one of the most important parts of the retail equation that inexperienced dispensary owners often get wrong. Pricing is a deeper subject than most first-time retailers realize. It’s one of the prime factors determining whether you earn profits or suffer losses.
Retail Pricing Isn’t as Easy as It Seems
At first glance, pricing seems like simple arithmetic. You purchase a large quantity of wholesale product—in this case, dry marijuana bud and other cannabis products—for a certain sum. You then add a comfortable margin and sell it for a higher price. The margin becomes your profit, and that’s the end of the story.
In reality, however, things are rarely so simple. Here are a few reasons why:
Your dispensary is part of a highly regulated industry. Regulatory costs are supported by consumers through your pricing decisions.
Your dispensary has competitors whose pricing strategies will affect the outcome of your own. Competitors include other legitimate, licensed dispensaries and black-market cannabis dealers.
Many retailers sell popular items at a loss in order to draw in customers. The cannabis industry is no different.
Some cannabis dispensaries have to package products according to specific regulatory rules. Packaging requires labor, which costs money that must be factored into the pricing equation.
Pricing psychology adds a whole new world of complexity to what is already a tricky science.
So how important is pricing? A 1% improvement in price optimization results in an average profit boost of 11.1%. There are few opportunities to earn such large returns from such subtle changes in the world of retail.
There are many retail pricing strategies that take these factors into account in ways that cannabis consumers can benefit from. Many cannabis dispensaries use one of the three following pricing strategies:
1. Price Skimming
Price skimming involves releasing new products at an artificially high price. This is common among prestigious consumer tech manufacturers whose products are also status symbols (you know the one). It can work for cannabis dispensaries in the short term because legal cannabis is still a new concept for many people.
But maintaining high prices requires creating and sustaining a powerful brand. Your dispensary has to mean something to people who can easily obtain products of similar quality for a much lower price.
2. Penetration Pricing
Compared to price skimming, penetration pricing sits on the other side of the spectrum. This strategy encourages retailers to sell their products at low prices. They undercut their competitors to earn a larger share of the market. The brand then focuses on locking in loyal customers so that it can either upsell different products to them or gradually increase the prices of its usual products.
Cannabis dispensaries often use penetration pricing when dealing with high-competition environments. In urbanized areas with multiple competing dispensaries, things can turn into a race to see which dispensary can lose money the longest without going out of business—a race to the bottom in which only the consumer wins until a local monopoly results.
3. Value-Based Pricing
Value-based pricing doesn’t sit easily on the spectrum between price skimming and penetration pricing. This is because it focuses on the customer’s perception of value—trying to determine who is willing to pay (and how much) for any given product on the market.
This requires a great deal of research, especially customer surveys and interviews. In order to tell how much marijuana is worth to a customer, you need to step into your customers’ shoes and ask yourself what they’re looking for.
Discounts can be an effective way of temporarily impacting cannabis pricing to earn the benefits of one of the major pricing strategies listed above. Some experts are rightfully wary of discounting—it can backfire and end up reducing sales for certain products.
Dispensary owners must face other obstacles, as well. In some states, cannabis discounts and promotions are strictly illegal.
But if you can legally discount cannabis products, and you know your customers well enough to see that it would represent value to them, you may be able to use discounts to your advantage.
Effective discounting requires knowing your customers’ expectations. Discounts can harm retailers whose brand messaging relies on luxury products and premium service. This is why most retailers concentrate on discounting low-cost items.
Discounts can have a powerful impact on the perceived value of a product. Many retailers follow what Jonah Berger calls the “Rule of 100”:
If a product costs less than $100, retailers should promote discounts as a percentage (10% off for a limited time only!).
If a product costs more than $100, retailers should promote discounts as an absolute amount (save $25 when you spend $250 or more!).
Berger’s reasoning is simple. Following the rule ensures that the number used to refer to the discounted sum is as high as possible. This leads to greater perceived value on the customers’ part.
Price Your Products According to Your Environment
The most successful cannabis industry entrepreneurs are often the ones who have taken the time to develop the most comprehensive plans. Learn from the experience of others and develop a plan that addresses the specifics of your community to make your dispensary a stable, profitable retail venture for years to come.