Keystone Pricing: WHAT IT MEANS IN RETAIL & THE UPSIDE AND DOWNSIDE
Cannabis retailers, just like other business owners, share a common concern: inventory pricing. You may be struggling to determine how to price your products given your competition or the newness of your business. To simplify this complex subject, we’ve done some of the legwork for you.
What Keystone Pricing Means
In the simplest terms, keystone pricing means marking your saleable items for double the price they cost you. If the wholesale price (i.e. what you paid) is $10, then its retail price (i.e. what your customer pays you) is $20.
As a small business owner, you probably have other tasks that require your attention, so streamlining your initial pricing approach makes good sense. For the sake of avoiding cumbersome arithmetic, keystone pricing makes it simple to calculate your profit. Just double the price and you’re done. While rent, utilities, supplies, insurance premiums, taxes, and employee wages will always take a bite out of those juicy profits, keystone pricing works to your advantage if you’re a one-store owner. Volume sales may not always be on your side, and offering enticing discounts will likely increase your risk of losing money, so keystone pricing can be the difference between keeping your doors open and finding a new line of work.
You may be thinking, “How could there be a downside to selling with a 50 percent profit margin?” Good question! The answers (yep, plural) will probably surprise you.
- One price does not fit all. Pricing every item the same way means you may end up holding onto some products beyond their optimum sales window, which can impact your bottom line and your store traffic. And marking down inventory to make room for new products generally means selling at a loss. Think of it like this: the best way to keep customers coming back is to offer reasonable prices and an ever-changing inventory. We all like a deal, but we also like to try new things. Keep your markup approach flexible, and you’ll keep customers coming through the door.
- Heavy competition equals lower profit margins. While a 50 percent markup was popular when retail businesses first began, it’s not without its drawbacks today. If you’re the only marijuana retailer within a 25-mile radius, keystone pricing will probably work because you won’t have local competitors fighting for your sales. But … if you’re the new shop on the block and have to woo customers away from existing businesses, you’ll need to lower your expectations and reduce your markup to get a piece of that heavenly pie.
- Products in demand mean more money in the till. You’re probably familiar with this one already, but it bears repeating: if a product is in high demand and short supply, then the price inevitably goes up. This explains why rare or difficult-to-source products are always coveted … and expensive! If you’re stocking products of this nature, be sure to keep your pricing in mind.
- Movement means money. Products are meant to move … not sit, and after you spend cold hard cash stocking your store, you need to keep those products moving or else they’ll cut into your bottom line. Keystone pricing, while simple, may prevent your inventory from selling in a timely manner. And products that don’t move are counted as losses (in both the investment and profit categories).
Much like the apparel industry, many marijuana retailers adopt the keystone markup pricing approach because it’s the simplest … but you should always take your store’s needs into consideration. As a member of a budding industry, you’re the best suited to determine if you can exploit a lack of competition or supply a product that customers will drive long distances to purchase. Whatever the situation, it’s best to strategize your approach and prioritize what’s best for your store.
Need More Guidance?
If you’re interested in learning about other pricing strategies and how to further set yourself apart from the competition, download “How to Price Your Products: A Guide for Marijuana Retailers.”