When setting cannabis retail prices, covering expense is priority No. 1

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cannabis retail prices, When setting cannabis retail prices, covering expense is priority No. 1

Calyx + Trichomes, a licensed retailer in Kingston, Ontario, relies on a high-volume strategy to make up for limited margins in a competitive market. (Photo courtesy of Calyx + Trichomes)

(This story appears in the July issue of MJBizMagazine.)

Whether they’re shopping in a newly legal market and comparing prices against illicit-market marijuana or weighing prices between a variety of regulated stores in a more mature market, cannabis consumers can be highly sensitive to pricing.

Retailers don’t always have much leeway to set their own prices, which might be heavily influenced by supply and demand as well as other external factors.

Even so, using a variety of overlapping price strategies can help a marijuana store win customers by appealing to their wallets while keeping the balance sheet in the black.

Cost approach and market approach 

One common method for pricing products involves finding a balance between the “cost approach” to pricing and the “market approach,” explained Daniel Sabet, an accounting and finance manager with Los Angeles-based cannabis industry accounting firm GreenGrowth CPAs.

Starting with the cost approach, a retailer tallies up the non-fixed costs of obtaining and selling a given product—taking into consideration things such as wholesale prices and transport costs—then marks up the product to establish a profit.

As a starting point, Sabet suggested a 100% retail markup.

“Let’s say you’re buying flower from a distributor or from some other wholesaler, and that product’s cost to you is $50. You’d want to sell that in the store for at least $100,” he said. “If you can’t price it at that point, then it’s just not a good buy at all.”

After determining that initial markup, Sabet said, retailers can move on to the market approach to see if there’s room to increase the price. That process involves finding prices for the same product from multiple competitors, then averaging that price across the group to determine what consumers are willing to pay.

Sabet said he has encountered marijuana retailers who can afford to have lower markups and slimmer profit margins, but those stores tend to be high-volume businesses. “The store was always packed, and the average ticket price was fairly high,” he said.

Compensating for limited margins 

Calyx + Trichomes, an independent Canadian retailer with one location in Kingston, Ontario, is an example of how a high-volume strategy can work in a limited-margin environment.

Like all regulated cannabis stores in Ontario, Calyx + Trichomes can source its products only from a single wholesaler, the government-operated Ontario Cannabis Store (OCS). The OCS is also the sole online seller of legal recreational marijuana in Ontario, meaning it competes directly against the stores it supplies. (However, most legal cannabis sales still take place at private-sector stores.)

The OCS wholesale operation sells products to private-sector stores at a 25% markdown from what its online retail division sells to the public, before taxes. That means Ontario retail stores such as Calyx + Trichomes can’t mark up prices very far before getting beaten by OCS pricing.

“It doesn’t leave us a lot of room to have promotions or sales,” Calyx + Trichomes founder and CEO Jennawae McLean explained. “We can really only have sales if there’s something we absolutely need to get rid of.”

Calyx + Trichomes relies on a heavy sales volume to make up for its limited markups.

“We’re just a very high-volume store; we sell about four times more than the average store in Ontario,” she said. McLean’s store also includes taxes in its prices.

“Our price, after tax, beats what other stores are pricing after tax. The price out the door is always beating (competitors) by usually around 10%.”

McLean believes it’s easy for cannabis consumers to comparison shop online. When prices change, she said, customers notice quickly.

Calyx + Trichomes offers customers a price-matching guarantee. For one week, a rounding error in the retailer’s internal pricing spreadsheet resulted in all the store’s prices being 20 cents (25 Canadian cents) lower than they should have been.

“When we caught the error that we made, we bumped it back up to the original price that it was supposed to be,” McLean said. “I swear, I fielded six or seven different emails and phone calls (from) people complaining about our prices shifting all the time, and it was a quarter!”

Considering illicit-market dynamics, supply and demand 

When comparing your store’s prices to your competitors’, don’t forget that your competition goes beyond other licensed, regulated establishments. The illicit market also counts, advised Kris Krane, president at Phoenix-based 4Front Ventures and its Mission Dispensary retail stores in Illinois, Massachusetts and Michigan.

“You’re trying to pull in customers—whatever customers you can get—and the whole name of the game in these early, adult-use markets is getting people to convert from the illicit market to the legal market,” he said.

The price dynamics of unregulated cannabis vary widely across the United States, Krane added.

“If you’re trying to set pricing strategy in a lot of the East Coast, or even in Midwest markets, (illicit-market pricing is) going to be a bit less of a factor, in part because the illicit-market pricing in the eastern part of the country tends to be a lot higher.”

Cannabis pricing strategy might also need to change as a given legal market matures over time. In jurisdictions with limited cannabis business licenses, Krane said, producers and retailers have more room to keep prices high as the regulated market launches, when legal production is outweighed by demand.

“But as production ramps up, as more licenses are granted, as more stores come online, then that pricing will start coming down and you’ll start capturing the rest of that market,”
he said.

In Massachusetts, Krane said that efficient, vertically integrated production has allowed 4Front to reduce its retail prices.

“Right now, we routinely have $30 and $35 eighths on the shelves in Massachusetts, where most of our competitors are still selling
$50 eighths,” he said.

Even retailers who can’t control the costs of their own production via vertical integration can pursue favorable contracts with third-party producers, Krane said. That could include exclusive relationships with producers to bring in high-margin products or forming a “symbiotic relationship” with a new cultivator who agrees to offer favorable prices in exchange for guaranteed bulk sales while they ramp up their business.

“That way, they don’t have to go out and do all the work of finding wholesale buyers right when they first open, and you can then get product (for less) that you can sell a little cheaper on the shelves,” Krane said.

Tiered pricing gives options to consumers 

Modern consumers expect a range of pricing options. In many consumer packaged goods categories, tiered pricing takes the form of good-better-best.

“By companies offering a ‘good,’ a ‘better’ and a ‘best’ product, it means that they can appeal to all types of customers looking for all types of products,” said Liz Connors, director of analytics with Seattle-based cannabis data-analytics firm Headset, who has researched the use of good-better-best price models by marijuana retailers.

“It allows us to extract that value from the consumer,” she said. “You pay for the thing that’s worthwhile to you.”

The good-better-best pricing model isn’t necessarily limited to three tiers. In a December 2020 report, Connors found evidence of a five-tier price hierarchy among 3.5-gram cannabis flower offerings in Canada’s competitive Alberta retail market. The report categorized these tiers as ultra-value, value, core, premium and ultra-premium.

Going above five pricing tiers may be counterproductive, warned Connors. “I think five is common; seven is relatively uncommon,” she said.

“When we start to get that many tiers, we start to run into a paradox of choice on one end,” she said. “We have too many things to choose from, and we have trouble deciding when we’re given too many choices.”

Regardless of the exact number of price tiers a store offers, Connors highlighted the importance of offering customers a range of prices as a market matures. “When a market’s very young, there’s so much demand and so little supply that it doesn’t matter what you’re offering, everybody’s going to buy it,” she said. “But when you start to get to a point where things are becoming saturated, that’s where you need to have a way to stand out to attract the right consumers.”

Tiered pricing can also help offset declining prices as a market gets more competitive and price competition gets more intense.

“Adding a premium or a core product means that you don’t have to compete in that price war,” Connors said. “Usually, the only person that wins in a price war is the consumer. It’s never the business.”