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.

, Recreational Countdown: Pricing Cannabis for New Market Fraught With ChallengesOthers 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.”