How do you fight price declines in cannabis?
“The price is what you pay but the value is what you get” Warren Buffett
One of the biggest challenges (and opportunities) for cannabis retailers, producers and wholesalers is coping with the relentless decline in prices. Wholesale cannabis prices, for example, have fallen approx. 40% between Oct. 2020 and Dec. 2022. These decreases are the driving force behind margin compression as many costs like compliance, rent and taxes are fixed.
It is not only profit that is taking a big hit. Brand image gets eroded, less funds are available to invest and cash flow management becomes tricky.
It’s easy to bemoan falling prices, but no one should be surprised.
Flower-oriented products today are semi-commodities. The competitive illicit market exerts downward price pressure. Some cannabis firms actively discount to capture market share. And finally, price declines are normal; traditional consumer goods firms and retailers have seen their price levels wane over time after adjusting for inflation.
Many cannabis companies hope pricing salvation will arrive when their competitors go out of business or retailers move away from a deep-discounting strategy. However, hope is not a strategy.
Mitigating price declines is difficult but not impossible. Businesses that can optimize their pricing levels will be more competitive and profitable.
I work with my clients on a framework creatively named, Strategic Price Management. The business objective is to establish price points and guiding principles that ensure brands meet financial goals, address channels needs, and are competitive in the market.
I start with a comprehensive analysis. We consider a variety strategic and tactical factors including: local competition, inventory levels, channel needs, demand elasticity, financial goals, brand power and pricing questions e.g., are you training your customers to buy on sale?
Based on the analysis, we suggest recommendations that match your goals with realities. These could include:
1) Brand building – invest in impactful advertising, packaging and product innovation;
2) Reduce the need to discount – improve your inventory management and demand planning;
3) Better align price to product uniqueness and delivered consumer benefit - your brand positioning could also emphasize other elements of your value proposition such as convenience or exclusivity;
4) Capture revenues elsewhere – for example, charge for expedited service or certain kinds of payments;
5) The Walmart approach – double down to be the lowest priced vendor, at the same time aggressively pruning your cost base.
I have other tricks up my sleeve that can alleviate industry-wide price reductions.
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