Mastering the Art of Cannabis Retail Pricing

Have you ever stared at a competitor's price and sighed, "Our price should probably be somewhere around there"? Or maybe you've meticulously calculated your production costs and added a markup. 

These are logical tactics for any cannabis retailer, but they have the potential to leave profit on the table. 

What’s missing? The customer. 

Neither a competitor analysis nor a ‘COGS and markup strategy’ considers the customer, and that’s a problem. 

Finding the right price can be challenging for any retailer, but with the right approach, you can attract customers, maximize profits, and differentiate yourself from the competition. Take a deep dive with the Vetrinas and equip yourself with the knowledge to optimize your pricing strategy.

Where do you start?

First, you must understand that cost is a consideration, not a dictator of your pricing strategy. 

Relying solely on competitor pricing as a data point might seem logical, but it's an unreliable indicator. Why?

Because you can only see the listed price, not: 

• What (if any) promotional support vendors might be contributing 
• What their pricing strategy and tactics are? Is a specific product a loss leader or a price anchor?
• Sales volume they generate at that price. 

Those are some pretty big assumptions. It's like navigating a boat based on a single star; you have no clue about the currents or hidden icebergs beneath the surface. 

When cannabis retailers similarly focus solely on the cost of goods sold (COGS),  a standard category or price-point markup is like picking a price in the dark. It may cover your costs and create a margin, but it's completely blind to the outside world. 

Customers don't care about your production costs; they care about the value your product delivers relative to their needs and budget. 

Pricing this way means you miss opportunities to capture more profit or, worse, alienate customers with prices that don't reflect their perception of value.

Imagine two customers walking into your store. One might see a novelty item, which is good for a treat-yourself moment. The other might recognize a meticulously crafted product that solves a long-standing want.  They're looking at the same 3.5g, but the value they perceive is vastly different. 

Value and Pricing

Value is tough to define because it’s a subjective concept shaped by an individual's experiences, needs, and desires. To deliver value to your customers, it is crucial to focus on what matters most to them and not just rely on numbers on a spreadsheet.

Before we dive into the nitty-gritty of building a customer-centric pricing model, let's address the elephant in the room: what exactly is value in cannabis?  It's not just about the price tag. In this context, value is the measurable worth, expressed in dollars and cents, of all the benefits your product brings to the customer.  These benefits go beyond the technical features and include advantages, and emotional benefits for the customer.  By understanding this broader definition of value, you can create pricing models that reflect the true worth of what you offer.

Value is what a customer gets in exchange for the price they pay.

Understanding this helps you create pricing models that reflect a closer 'worth' of your products. Think of a price tag as a dial that controls the flow of customers and their perception of your product's benefits and features. 

If you increase the price, you might lose some customers, but others will see it as a mark of exclusivity. Conversely, if you lower the price, you may attract more customers who perceive your product as a great bargain.

Before you can develop a pricing structure for your dispensary, you have to understand how customers calculate the value of your features and benefits and what factors influence this valuation. 

Decoding the Value Equation: What Shapes Your Customer's Perception?

Several key elements influence perception, and understanding them is the first step to a customer-centric pricing strategy.

1. The Shadow of Substitutes: Customers are constantly comparing your product to alternatives.  What do they define as a substitution? 

These are products that are direct alternatives that fulfill a similar outcome. In cannabis, this could be a product from a different category: an oil versus an edible.  

Your product's perception of value will be anchored to the lowest price of the product the customer perceives as attaining the same outcome.  If similar options exist at a fraction of the cost, you'll need a rock-solid way to communicate the value proposition to justify your price.

2. The Competitive Landscape: How does your product stack up against the competition? What are competitive products? 

Competitive products are products where the customer perceives the features and benefits to be the same. 

Products in the same category in a similar package size. 3.5 g versus 3.5 g. Brand recognition, quality, or style can all influence or justify a price.  Conversely, if competitors offer comparable features at a lower price point, you must differentiate your features and benefits.

3. Customer Pricing Sensitivity: Customers tend to compare your product to other products in their lives to help contextualize the price and its perceived value. How do they do it? Usually, by comparing an anchor product.

These anchor products are often things customers purchase on the same frequency or hold the same value in their lived experience. In cannabis, this could be a product like coffee, a canned beverage or a fancy restaurant meal. 

The perceived value of your product is compared to these other experiences with price points and value. The customer's pricing sensitivity does not exist in a vacuum. It is relative to the other price points in their life. Want to learn more about Anchor pricing? 

4. The Demand Dance: Fluctuations in demand for related products can influence their value.  

The phenomenon in which related products' values fluctuate in response to changes in demand can significantly impact their perceived value. 

For instance, consider a gas-guzzling car during a fuel shortage. In such a scenario, the demand for fuel-efficient vehicles increases while the demand for gas-guzzling cars decreases, leading to a significant drop in their perceived value, making fuel-efficient cars more valuable than gas-guzzling cars. 

Staying tuned to market trends can help you adjust your pricing to remain competitive.

5. Shifting Market Trends: Fads, new information, and external events can all impact how your product is valued. 

For example, disposable vapes might skyrocket in popularity because of their convenience and technological improvements. By staying aware of the market environment, you can adapt your pricing strategy to changing conditions.

What can Cannabis Retailers do?

When pricing, you need to consider all five factors to connect with your customers' perception of value. This knowledge empowers you to create a pricing strategy that resonates with your target audience and maximizes your profitability. 

The secret sauce is to create pricing strategies that reflect the true worth of what you offer. 

The final step to a great pricing strategy is optimizing how the price is presented and positioned to the customer.