Recreational Countdown: Pricing Cannabis for New Market Fraught With Challenges

The first state-licensed recreational marijuana shops in the nation face a difficult task: Set prices for an uncharted market.

All signs point to huge demand and extremely limited supply when retail marijuana sales begin Jan. 1 in Colorado. But no one really knows how many consumers will buy recreational marijuana, how much they’ll pay for it or how the new market will affect medical cannabis sales.

Especially in the beginning. There could be huge lines wrapped around retail cannabis stores in Colorado next month, or demand could build more slowly over time.

Given the multitude of unknowns, pricing strategies are all over the board.

Several dispensary owners planning to tap the new market told Marijuana Business Daily they will increase medical cannabis prices slightly, then use that as the base for recreational products, adding in state and local taxes at the checkout counter. Recreational prices at these stores will be anywhere from 30%-40% more than current medical marijuana prices.

Others are banking on huge demand and are trying to push through even higher prices, while a handful are hoping to absorb some of the new taxes and keep prices lower to gain a competitive edge.

Little Room For Mistakes

A lot is riding on these decisions from a business perspective.

Cultivators and retail stores are currently hamstrung when it comes to inventory, as they are not able to grow for the recreational market yet. Overall supply will therefore remain relatively static until the industry can ramp up production later in the year.

So there’s not a lot of room for pricing mistakes in the first days and weeks of recreational marijuana.

Set prices too high, and retail stores risk driving customers into the arms of competitors or back to the black market – especially if demand doesn’t pan out as expected. Set prices too low, and inventory could dwindle quickly if demand soars, forcing businesses to temporarily close or ration product.

“Businesses will have to be very, very careful to do whatever is necessary to get a realistic assessment of where supply and demand is at all times, and then err on the side of caution when pricing,” said Norton Arbelaez of River Rock Wellness, an MMJ center that plans to begin recreational sales in February. “If you run out of product in a day, then what do you do? It’s going to be a really interesting experiment in economics and supply and demand.”

A Gut Call

By opening in February – a full month after recreational sales begin – River Rock can see how the market develops, examine what competitors are charging and then set prices based on these dynamics.

Others who plans to start retail sales earlier won’t have that same luxury.

“We don’t have a crystal ball,” said Andy Williams, president of Medicine Man Denver, which plans to begin selling cannabis to the recreational market on Jan. 1. “So when it comes to pricing, we’re going with our gut at this point. We don’t have any special algorithm or anything.”

nmbcvideoad2Medicine Man Denver will boost prices for medical cannabis by $20 an ounce, or about $2.50 an eighth. Recreational marijuana will be priced at that level as well, but all of the taxes on retail sales will be passed on to the consumer. Those taxes are hefty: about 36% when it’s all said and done (15% excise, 10% state marijuana sales tax, 3.5% city marijuana sales tax and 7.72% standard state and local taxes).

Williams said he wants to offer customers deals but has to be careful not to set prices too low, as he could run out of inventory.

The other danger: Competitors could purchase his marijuana and then resell it at their own stores, Williams said, even though that practice is likely not allowed under the law.

“We have to raise prices to some degree to stay in business,” he said. “We’re not here to gouge people. That’s not a good business strategy. But there’s a limited supply in Colorado, and if we don’t raise prices we’ll sell out quickly.”

Black Market Base

Another Denver dispensary planning to open for retail sales on Jan. 1 – 3D Cannabis Center – is basing prices off what medical-grade cannabis costs on the black market outside of Colorado. Currently, this is about $50-$55 an eighth.

The dispensary will therefore price recreational cannabis starting at about $40 per eighth at the retail counter (about $5 more than medical cannabis), then tack on taxes.

The dispensary’s owner, Toni Fox, said there’s a good chance she will run out of inventory at these prices and given the expected demand. However, that did not play a role in her pricing decisions. “The main factors were what we felt was a fair price with the sales tax and what the market would bear,” Fox said.

Demand Estimates

A lot of these plans are tentative, and store owners said they could shift gears before – or shortly after – sales begin. Retail shops say they are trying to remain flexible so they can adjust prices on the fly if needed. And that’s important, as the market could fluctuate on a daily basis.

It will all depend on demand. Some observers think the state will see 1 million-plus new cannabis customers next year, including a good chunk in January.

If that’s the case, prices could skyrocket – doubling or even tripling by some estimates.

“If the demand increases as others have forecast, the end result will be a spring shortage that could increase prices,” said industry consultant Matt Cook. “Those prices may remain static until July or August when the first recreational harvests occur.”

12 comments on “Recreational Countdown: Pricing Cannabis for New Market Fraught With Challenges
  1. Gary on

    I`ll make a prediction….They like the folks in WA will be out of business within a year. This was tried in WA with Alcohol. 60% are now out of business. This will only firm up the black market. The people in the Govt. must think this a new business….It is NOT. It will still be there when they throw in the towel. I’ve talked to a considerable amount of people about this and there not going to buy the same product for 50% more. They will just continue on were they normally purchase. You will have an initial “fad” buying and thin it will go away along with all of the store fronts. This is simply “competition” The State has suggested that they will be “cracking down” but that’s been tried for 50 years.

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  2. Shaun on

    My petty $.02 projection: supply is short, the market had a $350-400/oz price for 30 years – no inflation added ever. Most of us in the industry don’t have much more ability to grow just yet given the lack of bank loans to expand – those that did very well (made good $) these last few years were able to increase their supply – or took in capital infusions via new partners – and they’ll last a little bit… Ultimately the price is gonna jump back up to at least the $400/Ix price with quarters going for $120+/-. The medical patients will probably call the dispensaries greedy for us trying to hold the line on keeping our doors open. The businesses might actually be able to cover our IRS tax problem (remember that most of is are giving all of the income, or about 80% of it, back to the Feds so not much to reinvest into the business) and overall people will be happy that the option was there to buy weed so conveniently. A clear “bank run” for Denver from tourists buying bud is gonna happen. There will be lines of out-of-state people and they’ll be looking for the spots without lines, so smaller spots will feel that big-time. Medical patients will still be buying for their friends, especially if they’re given a “deal” for their loyalty which will keep the pricing up. And the reality is that it is worth at least $400/oz. If not, more. We’d all love to have our businesses work for $150/oz, but those days of wholesaling to the customer are going away – it just isn’t gonna work, especially when vertical integration goes away and the grower and seller has to make money (and the retailer doesn’t get he big deductions that the grow provides). At $150 I read reviews all day long about how a place is ripping the patient off. There’s a very common belief that the owners are cashing in big time (not that they risked it all, often their entire life’s savings, family and friends $, freedom, etc) – they deserve to have a business that works. The IRS is also driving prices way up bc of 280E… There’s nothing normal about this model here with all the regulation on it. This isn’t good or bad, just what’s so and it’s going to be an interesting time. None of us know how to price. None of us want to turn customers off. None of us can afford to ever run out of bud – so we’ll all have to adjust for the demand. It’ll even out in the end like it did these last few years. Black market pricing won’t pick up all the slack as they’ll run out also (and be scrutinized by LEOs more than ever) and they’ll come up to the market price – why would someone sell something for $200/oz when the same buyer is coming to them bc the $400 are out of inventory? Or come to them bc $400 is too high but they know the person will pay $350 or go without? Too cheap and that grower is empty in a day which means his phone will stop ringing bc of inconsistent inventory just like the store that runs out?

    It’s going to be interesting. It’s going to be a crazy time. And each of us owners have our own version, our own $.02. Supply/demand is the common denominator. And this is the opportunity that almost every business has to recoup investments thrown in these last three years. And when vertical integration goes away we’ll easily see pricing go back to that of 2008 with the current wholesale market of bud at $2500/lb and retail at $3200/lb. That won’t hold up – until 280E is gone dispensaries have to more than double for the business to make sense (cover our expenses and make a salary & cover the huge 75%+ income taxes). OR, some of those in the industry play side games which we just saw what happens when one does that with the raids.

    Again, only my $.02 – this keeps me, for one, loving the business with all the crazy navigation and challenges. In the end weed is legal and people 21+ can walk into a store and buy what they want. And it’ll never be bough at an unfair price so long as they’re buying it. No transaction is favored in one way or the other.

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  3. Shaun on

    And yea, Gary, I love that you have your thoughts. This is going to be interesting. Who knows… It’ll work – I doubt we’ll go out of business bc of pricing, but maybe some do? Maybe not? Who knows… It’s fun trying to predict, though. The reality will be what it’ll be.

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  4. Gary on

    I wish nothing but good business for everyone….. The last comment made to me was; Why would I buy from you at 50% more? Do you think I`m high?

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  5. Derek on

    There are are lot of ideals that get thrown around. I speak with many dispensary owners and managers on a regular basis and can tell you that almost nobody knows what it will look like. Add testing at $300+/test to get your products cleared for the shelves. I would bet that by February it will be $20-30 per gram plus tax. The marketing won’t handle advertising $60 1/8ths next to a MMJ ad for $25 1/8ths. They will read ($25/g Rec). or something similar.

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  6. Kevin on

    I don’t begrudge ANYONE from making a living. However, $400/oz to ME is outrageous! I literally HATE what they’ve turned these “faux legalization” laws into. The price MAY be that high in the beginning but I definitely see a manipulation of the pricing coming by dispensaries by LIMITING supply. I just don’t understand having to PAY that kinda money for something that grows WILD in the woods in back of my house. Obviously it’s not the same quality, but COULD be if I took care of them correctly, bred them better, gave them nutrients etc… even as a HOBBY… and ALL for a whole helluva lot less than $400/oz. This has turned into an outright “Free For All” with every man for himself in the get rich quick industry. It’s ludicrous that Coloradans VOTED to put 36% taxes onto this product all going to numerous government agencies. Then these agencies turn around and give you a DUI-C if you smoke more than a joint a month. (5ng limit) This product’s not been “legalized”, it’s been “capitalized” upon.

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  7. Ali Jannati on

    Why not price based on varying number of customer showing up in a given time period. Let’s say for the first hundred customers the price is $60/eighth in the morning and in the afternoon is $70 for the next 100 customers.
    The next day depending on the foot traffic the pattern repeats until the price/customer equilibrium has been reached in the first few days.
    Further small price adjustments can be made down the road as necessary.
    Customers will eventually tell the businesses what the fair price will be. After all it was mainly the voting power of the people of CO who made the legalization become reality, not the businesses. Therefore the customers have every right to set the final price/ eighth or oz, however you are going to measure it.

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  8. Regina Nelson on

    My prediction: The lines will be long come January–but the typical person waiting in that line won’t be a “pot-head” wanting to get high, but someone who’s will or who has a ill loved one and is desperate for help. Cannabis Patient Network is receiving dozens of requests each week from people planning to travel here for treatment…I sadly predict most won’t find what they seek, the market can not support medical tourism at the rate we will be seeing it soon.

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