You can be competitive on wholesale prices for infused products and accessories such as vaporizers without fighting a price war. The key: finding the sweet spot so your products are competitive with those of your rivals – without deep-sixing the bottom line.
Lowering wholesale prices to compete with other manufacturers could do more harm than good. You might have to accept profit margins much lower than you want – if you’re making money at all – or you’ll back yourself into a corner and ultimately must raise wholesale prices, which is bad both for your brand and your relationships with retailers.
“There are times in the market where you have huge amounts of competitors attempting to compete on price,” said Nancy Whiteman, CEO of Wana Brands, a Boulder, Colorado-based edibles maker that sells products in Arizona, Colorado, Nevada and Oregon and has plans to expand to the Florida and Illinois markets this fall. “In my experience, that’s not a successful long-term strategy.”
Whiteman and other edibles and accessories manufacturers doing business in legal cannabis markets throughout the United States shared their strategies for setting wholesale prices that compete and don’t decimate profit margins.
Find Reliable Data Sources
BDS Analytics in Boulder, Colorado, is a useful source for market research, Wana Brands’ Whiteman said. It can be a helpful tool to break down your competitors’ wholesale prices, which aren’t readily available.
BDS partners with dispensaries to aggregate data from point-of-sale systems. Subscribers to BDS services have access to products’ average retail prices, market share data by brand and stock-keeping units (SKUs), as well as other information they can leverage to better understand their particular markets.
Average retail prices are key here; in general, retail prices are approximately double the wholesale price, Whiteman said, but loyalty programs and patient discounts can skew those numbers.
“It’s an imperfect science, but as a rule of thumb, if you consistently see an edible selling for $20, you can surmise the wholesale price is around $10,” Whiteman said.
Organa Brands, a Denver extraction and manufacturing company with operations in 12 states, Canada and Jamaica, also uses BDS Analytics as a “scorecard for the industry,” said Chris Driessen, president of Organa Brands U.S. The company provides vape pens, edibles and other infused products.
“We can all beat our chests, say we’re amazing and that we’re going to take over the world, but BDS tells you what is,” he said. “It’s the only reliable source for market-share information across multiple states.”
Driessen said some retailers accept less than keystone margins – meaning margins less than half of double the wholesale cost – to attract new customers and get an upper hand on the competition. He said it’s a savvy move, and margins can be made up with sales volume.
Before BDS Analytics was available, data was so important to Organa Brands’ strategy for price setting and bundle promotions that the company employed two full-time employees who cold-called dispensaries to aggregate Organa’s own retail sales data, Driessen said.
“You have to be able to do some level of market analysis to have an educated opinion,” he said.
Evergreen Organix – a Nevada cannabis cultivation and production facility that sells edibles, topicals, vape oils and accessories – uses Weedmaps as a resource to compare local retail prices for infused products, vape oils and accessories. Then, it uses those numbers to estimate wholesale prices for competitors’ products and uses the comparative analysis when it looks at its own wholesale price models, said Jillian Nelson, Evergreen’s operations manager.
Nelson said local data has been more helpful to Evergreen Organix than data aggregated from multiple states.
“Comparing pricing and sales trends between Nevada, Colorado and California was not a good basis for us, because the markets and regulations are so different,” she said.
Consult with CPAs
Evergreen Organix also consults with certified public accountants (CPAs) to understand tax liabilities for different wholesale price models and looks at amortization schedules to know what profit margins it needs to maintain to pay business expenses and turn a profit, Nelson said.
The IRS tax code 280E restricts cannabis companies’ write-offs to deductions related to cost of goods sold, so their tax liabilities are higher. Evergreen works with CPAs on wholesale price models that build in the costs of labor, marketing and other operating expenses to lower their tax liabilities.
“Price wars are not going to lead to long-term success, especially when tax season comes around,” Nelson said. “We ran models with CPAs and looked at different pricing structures. With some, it looked like we’d make a profit, but when it came down to tax write-offs, we would have ended up owing more than we would have made off the sale.
“For us, it’s better to take a conservative approach,” she said. “Price adjustments aren’t something we do on a whim. We do our research and see whether what we do is sustainable long term.”
Segment Product Offerings
Segmenting competitive products by price is a better long-term strategy than simply lowering wholesale prices, said Organa Brands’ Driessen. A successful product line includes premium- and value-priced wholesale products made with various raw materials.
“I make competitive products,” Driessen said. “For a lot of companies, the only thing they know how to compete on is price, and that is a fool’s errand. When you have no brand equity, you’re a commodity, and only one company wins that game.”
Generally, Organa Brands’ products can be categorized as terpene-dependent products and non-terpene-dependent products, Driessen said. In those two classifications, three categories of raw materials – flower, trim and shake – can cause the wholesale cost of products to vary.
In its premium products – its Craft Reserve vaporizer cartridge, for example – terpene-rich oils are used, and wholesale prices reflect the quality and cost of the flower or raw material used in the distillate.
Its non-terpene-dependent products are a premium edible at a value price, Driessen said, because the trim or shake used to produce them is a less expensive raw material. District Edibles, for example, come in nine flavors using refined oil made from trim.
A larger distribution footprint makes businesses that manufacture infused products and vape oils and accessories more competitive in the wholesale market.
“When a company doesn’t have a large distribution footprint and their overhead is 40% to 50%, they’re not able to offer a lot more of a margin in terms of wholesale prices,” Driessen said. “It makes a competitor a lot less competitive.”
– Joey Peña
Infused Producers Have Unique Opportunity to Leverage Brands
A strong brand – one with wide-ranging name recognition, a large market share and a reputation for quality and consistency – better positions companies to hold steady on wholesale prices.
“The absolute biggest impact on wholesale price is the strength of your brand,” said Chris Driessen, president of Organa Brands U.S., a Denver extraction and manufacturing company with operations in 12 states, Canada and Jamaica.
Infused product manufacturers are uniquely positioned to differentiate their products, with varied tastes and textures, ingredients, packaging and visual branding, said Nancy Whiteman, CEO of Wana Brands, an edibles maker in Boulder, Colorado, that sells products in Arizona, Colorado, Nevada and Oregon and has plans to expand to the Florida and Illinois markets this fall.
Outside of proprietary genetics, there is relatively little that distinguishes one cultivator’s flower from another, according to Whiteman.
“They can have different levels of quality and potency, but at the end of the day, Blue Dream is Blue Dream, and it’s hard to build a brand around that,” she said.
“Infused products companies have the opportunity to build a brand and differentiate themselves – and therefore hold their prices a bit more than companies that just sell flower, for example,” Whiteman noted. “While we’re sensitive to changes in markets, we’re not as sensitive as flower.”
Driessen agreed, pointing out: You can pay $20 for a pair of tennis shoes at Walmart, or you can pay $180 for a pair of Air Jordans. The same is true for cannabis. In Colorado last year, there were 103 different brands of vape pens, he said, citing data from BDS Analytics.
In theory, all vape pen producers use extracted oil and lithium ion batteries, and consumers all inhale the oil – so why the difference in price? The key is your brand.
If you can deliver a consistent, high-quality product and experience, consumers are willing to pay premium prices for your product. Roughly 55 vape pen brands are active in Colorado’s market, Driessen said, again citing data from BDS Analytics, and the top three brands account for 50% of the market share. That means 52 other brands are fighting for the other half of the market.
“It’s better to make something amazing and build a brand that people trust and will be loyal to,” he said. “That’s the biggest driver for your company: how well you’ve built your brand. The value of your brand shouldn’t be overlooked when you consider your wholesale costs.”
– Joey Peña
State Regulations
Factors that directly impact wholesale prices are the cost of manufacturing – in the case of vaporizers, that often means the product is made in China – freight prices, lead time, the carrying cost of inventory, lab testing, the cost of raw materials, rent and labor, said Chris Driessen, president of Organa Brands U.S., a Denver extraction and manufacturing company with operations in 12 states, Canada and Jamaica.
“If you want to be competitive in today’s cannabis industry, you have to have an eye on all of it, or you’re going to get your lunch money taken from you,” Driessen said.
Another driver? State regulations.
States don’t dictate wholesale prices, but state regulations indirectly influence costs, said Nancy Whiteman, the CEO of Wana Brands, a Boulder, Colorado, edibles maker that sells products in Arizona, Colorado, Nevada and Oregon and has plans to expand to the Florida and Illinois markets this fall.
“I remember when third-party lab testing wasn’t required by the state,” Whiteman said. “We did it anyway, but for companies that hadn’t been doing it, when it became regulated by the state, suddenly there was a brand-new and fairly significant cost to absorb. And, two years ago, when Colorado required us to start individually marking edibles, that pretty much required an overhaul in our processes. That has cost implications.”
Packaging and labeling costs also vary by state, and strict packaging regulations can impact wholesale prices, Whiteman said. For example, Colorado has strict standards for child-resistant packaging, but Arizona’s packaging regulations aren’t as imposing.
Nevada’s packaging laws require opaque, resealable containers and individual wrapping for each serving, thus creating more overhead for infused product makers, said Jillian Nelson, operations manager for Evergreen Organix, a Nevada cannabis cultivation and production facility that sells edibles, topicals, vape oils and accessories. The cost of the state’s packaging regulations is reflected in wholesale prices.
“Every edible or serving has to be individually wrapped, and if you have 10 servings in one container, that’s 10 additional pieces of packaging for the final product,” she said. “Even if it’s a 5-cent cost for each piece of internal packaging, that’s 50 cents per unit. When you’re dealing with wholesale manufacturing, that definitely adds up.”
Between operating in California and Colorado, regulations can send a shockwave through the supply chains of infused product makers. There are times when new regulations – stricter packaging laws, for example – create a significant cost or loss for businesses, Driessen said.
“Compliance comes with a cost, and a lot of people raise costs to cover their added cost,” Driessen said. “That’s never received well by a dispensary owner.”
– Joey Peña
