By Miles Stover
In Washington, where demand for legal marijuana currently exceeds supply by a great margin, pricing models do not have to be so scientific and the old adage “price items at what the market will bear” isn’t far off from being appropriate. After all, if Johnny doesn’t buy a gram of this or that, Barry will.
It also helps that retail stores are few and far between. If you are pricing a certain strain of cannabis $3 a gram higher than a competitor 15 miles away, potential customers are not likely to drive 15 miles to save $3. Despite the current situation, you should still have a pricing strategy ready for when ample product is available and more locations are open.
In previous articles we talked about knowing your costs. That subject will continue to need constant scrutiny, and will generally be the topic of focus for this author. But with the current imbalance between retail outlets wanting to sell products and the amount of available products, we need to do an immediate review of pricing strategy.
There are certain relationships to consider when the market and your organization are at different stages. If you know when there are changes from one position to another in the market, your organization can quickly change its pricing strategy if you know how. The real secret is to know what market changes are occurring and what direction your pricing changes should take with these changes.
Let us identify many of the basic market conditions possible and what you should do with your pricing to be successful under those conditions. Note: You will have some products in different stages at any one time; therefore you can and should have different strategies for each category. Do not have one strategy for the entire operation and all products if you want to maximize your return on sales.
To make price changes to any of your product groups/categories, it could be as simple as taking every product you have available and grouping them in a computer spreadsheet and noting what the pricing strategy is from the inset table. Then, in this example when the edibles market changes from a low-advertised product group to a highly-advertised product group – immediately consider changing the price to a higher-profit margin level (see No. 4 at right). Although you will have to determine what percentage the gross margin change will be when a product’s characteristics change, being organized in this manner will give you a quick and consistent approach to changes.
You should definitely not say, “Let’s mark up everything in the store 15 percent over cost.” Multiple studies have shown there is usually a 20-25 percent increase to bottom-line profits by assigning every product to a product group and pricing them accordingly, in comparison to establishing a single gross margin factor over cost to all items.
A nice thing about applying/organizing around a pre-defined strategy is it can be tested empirically. You are not stuck with a pricing strategy and can change it if you find the following:
Indicators of overpricing:
- Your gross profit percentage is growing – but your sales are not.
- Your dollar sales volume is declining.
- Your competitors’ share of the market is increasing (you are using “ghost shoppers” aren’t you? We’ll address that later).
- You are receiving many price complaints (watch yourself for causing or inviting complaints).
Overpricing can be a serious problem, but it is much less serious than underpricing.
Indicators of underpricing:
- Your gross profit percentage is getting smaller on the same or rising sales volume.
- Your net profit margin dollars are fewer on the same or rising sales volume.
- Your prices are below your competitors (remember to do “ghost shopping”).
- There is a general absence of complaints about price.
- Parties who are known price buyers are buying from you.
- Your customers are buying more than they need and you know it.
- Customers who quit buying from you have come back.
- You don’t feel your prices are too high.
- You are getting a big backlog of demand and you know it exceeds the average of your competition.
Guidelines on pricing in the retail marijuana market
As alluded to earlier in the article, today’s market is not in balance. There is not enough product available for the demand. There are not enough retail locations to support the demand.
Ever wonder why there are so many grocery stores? Because buyers will not drive 25 miles to get a gallon of milk cheaper or save 10 percent on a pound of hamburger. In fact, research indicates that the average person will not go more than seven miles from the store they currently shop at to see if they can get better prices elsewhere. In the current retail marijuana market, if you are lucky enough to actually have an open location and can get a good mix of products, you have the luxury of being able to have prices 15-20 percent higher now than you could if there was competition in your marketing area. Take advantage of this, but don’t take advantage of your customers — yes, it’s a fine line.
Ghost shopping is an excellent way to gather data, do market research and maximize gross margin dollars. You need to ghost shop for a couple of reasons. First and foremost, your competition is ghost shopping you. And second, because we recognize that each category of goods fits differently into pricing strategies. Dried flowers are different than edibles, which are different than infused drinks, paraphernalia, etc.
Be smart about the ghost shopping (even though it is not illegal). Use several friends of the company to shop specific product groups and get actual prices. Go to shops that are direct competitors and ones that are outside your marketing area. Finds shops that are not competitors and have discussions on pricing (not price fixing) to see if trends are happening — not just in retail sales, but acquisition costs as well. Find out what strains are most popular and what an “average sale” is. Find out where the more popular strains are being procured. If possible, find out what demographic group is buying the various strains. God gave you two ears and one mouth – use them in that ratio. Ask lots of questions – listen to the answers.
In the next article, we will get back to costs of doing business so we will focus on advertising, and how to measure the effectiveness of advertising. This author has not been impressed with the statistical accuracy the advertisers provide on effectiveness and increased market share obtained via increased advertising. (Ever wonder why you cannot stop a subscription even if you are not paying for the magazine? Because magazines establish their adverting rates on circulation, and not necessarily how many people read the publication.)
Knowing where potential new customers are getting their information is going to be very important when new locations are opened. You should expect location loyalty if you can provide customers a comfortable atmosphere and an educating environment.
These potential patrons have lots to learn and you should be the source of that education. Price sensitivity will be minimized by the comfort/education factor. In fact, during the last four months that I have been researching advertising effectiveness in the marijuana market, I have found that advertising expenditures need to be two to three times higher than we find in the Risk Management Association guidelines due to the newness of the market and the undefined user description. Therefore, advertising needs to be addressed early in the introduction stage.
Watching market changes in the areas identified in the section on pricing will make you more sensitive to pricing issues and better prepared to capture additional margins. Getting set up for instant changes by grouping your products by category makes you a leader and not a follower when it comes to pricing.
Interesting times are here. But with the lower number of retail establishments hitting the market on the timetable expected, the intelligent retailer, armed with a pricing strategy that can quickly react to the changes taking place, will have the best chance of success. Having a pricing strategy ready that reflects changes in the market will have value, no matter what stages the market is in. Be prepared.
Miles Stover is the founder and president of Turnaround, Inc. and TurnRight, Inc. For more than three decades, he has worked hands-on with organizations from start-ups to Fortune 100 companies in a variety of roles.