How to Tackle Margin Compression Through Pricing
It’s high time [sic] cannabis firms consider price increases to boost their sick margins.
Hear me out.
You CAN raise prices in this hyper-competitive operating environment. Can't stop won't stop.
Simply put, price increases are a powerful margin-enhancing tool that can’t be sloughed off or neglected in CPG or retail-like environments.
My strong case:
📈 Price increases are easy to implement and can instantly boost margins. I have proven it.
✂️ Cost reduction is a tough way to expand margins especially in inflationary times and when the easy savings have already been captured.
⚖️ One’s price should always reflect value delivered. Small margins may be a function of unnecessarily lower prices. Put another way, Ferrari doesn't give up margin to be priced like a Kia.
☠️ Fear, reticence, and passivity is not a way to run a business.
I have heard all the pushback.
➡️ Competition is too intense.
➡️ We can’t take the market share hit and don’t want to get stuck with inventory.
➡️ It is more expensive to regain lost market share than it is to keep in the first place.
These are understandable but myopic reasons. Pricing is simply too powerful to be ignored.
I may be an optimist but I'm not reckless. Before raising prices, you need to do some homework and make sensible choices:
What does this look like?
1️⃣ Be selective
Not every product will pass the price increase ‘smell test’ based on rewards & risks or its ability to meaningfully move the margin needle. For example, you may want to leave the 1/8s pricing alone off while taking increases on more niche, overlooked products like rolling papers.
2️⃣ Analyze
A good financial model is needed to understand the risk/reward trade off. You want to explore your product’s elasticity of demand i.e. how it historically responds to changes in price. Moreover, you want to consider the level of competition and the uniqueness of your value proposition.
3️⃣ Test
Price increases always come with risk. Therefore, start with a pilot program. Raise prices on some products and compare the revenue & margin with a control group. Consider providing the consumer extra (and low-cost) but high perceived value to mitigate the risk.
4️⃣ Strategic revenue management.
These topline focused initiatives can optimize promotional activity, close revenues leakages and develop tailored pricing strategies.
5️⃣ Activate with care
Re-communicate the firm’s value proposition and point of difference to your target consumer. This is about bringing congruence between your price and the value delivered. Also, don’t forget to update & explain to your staff why prices are going up.
Reach out if you want to use pricing to boost margins.
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