Examining cannabis pricing trends & discount strategies

Introduction

Pricing and discounting can be some of the most challenging aspects of running a cannabis retail operation, or any retail business for that matter. Price can be one of the largest motivating factors in consumer purchase decisions, and for good reason. Everyone wants the best value for their dollar, it's human nature. Therefore, pricing products correctly and then deploying discounts effectively can be some of the most important business decisions retail operators make. In this report we evaluate current pricing trends in emerging and established cannabis markets to help you stay ahead of the curve. We also analyze patterns in discounting across markets to help you know where you stand. Finally, we will provide suggestions for promotional strategies that will help you work towards specific sales goals and will avoid unnecessarily sacrificing your margins. There's a lot to cover so let's dive in!

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Executive summary

When we look at pricing trends in new and mature markets, we see some patterns emerge. In markets that are in early stages of development, we usually see total sales and product assortment grow together. We see this reflected in the Michigan cannabis market, where sales have grown from $32M to $171M from December 2019 to July 2021 and product assortment has grown by 25 times in the same time period, from 348 products to nearly 9000. Prices can start out high in new markets, but as supply catches up to demand and competition builds, prices begin to decline. In Michigan, for example, the average item price of cannabis products has fallen by 40% from October 2020 to October 2021. Prices can fall in more established markets too. For example, the average price of a gram of Flower in California decreased by 30% from September 2020 to September 2021. We also see patterns in discount strategies in more mature markets and newer markets. In California, discount strategies seem relatively stable with a few retail outliers. In Michigan, however, we see discount strategies shift more significantly since the market is young and in flux. This is one of many examples of why monitoring the market is essential to ensuring your discount strategies are effective and dialed into consumer trends.

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Methodology

Most data for this report is sourced directly from Headset Insights. Graphs titled "Distribution of California stores by % of items sold on discount" and "Distribution of Michigan stores by % of items sold on discount" are from custom analyses of Headset-connected retailers in California and Michigan.

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Sales and assortment grow together

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Michigan's cannabis market provides an excellent example of common trends among newly opened markets. In this graph we see that cannabis sales in Michigan have grown tremendously over the last two years, rising from about $32M when adult-use sales began in December 2019 to more than $171M in July 2021.

The total market product assortment has grown at an even greater magnitude, increasing more than 25 times from 348 products during the first month of sales to nearly 9000 in July 2021. Growth in product assortment is beginning to slow, but it almost certainly won't stop, as assortment continues to grow over time even in more mature cannabis markets.

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Cannabis prices fall as new markets grow

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In this graph, we can see that unit volume is inversely correlated with average item pricing in Michigan. This is common across emerging cannabis markets. Early in new market development, demand greatly outpaces supply as producers often struggle to get product on store shelves, and in many cases, there are simply very few stores for customers to shop. Over time, those challenges are overcome, and supply is able to meet demand, which causes prices to fall over time, often drastically.

In Michigan, we can see this play out with the average item price falling by 40% from October 2020 to October 2021. Total unit volume increased by about 159% over this same time period.

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Decreasing prices aren't only found in new markets

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While decreasing prices are common within new cannabis markets, they are not unique to them. More established markets continue to experience price compression over time as assortment and competition, as well as supply, continue to increase. This is most apparent in the Flower category, which is the most commoditized of all product categories.

For example, in the chart above we can see that the average price of a gram of Flower in California decreased by 30% from September 2020 to September 2021. The EQ price of Flower in Alberta decreased by 21% over the same time period. Neither of these markets should be considered 'young' relative to the rest of the cannabis industry.

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Cannabis pricing diversifies as markets mature

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As we have seen above, pricing tends to compress over time. However, this does not mean that the only products that are being sold are at the lowest possible price. As markets mature, pricing diversity can increase as competition motivates brands to fill unique pricing niches to satisfy all cannabis customers. We can see that happening in this graph of unit volume by price bucket for Flower eighths in California over the previous 30 days. If customers in this important market were only motivated to purchase eighths at the lowest possible price, we would see a very narrow distribution concentrated entirely to the left of the graph. Instead we see a much more diverse pricing landscape. There is a distinctive peak right around the $20 mark, indicating that this is the highest volume price point in the category, but there also is a strong and fairly even distribution of unit volume from the low $30s to the mid $50s.

This should indicate to operators in markets of any level of maturity that there is going to be a customer for a product at any (reasonable) price point. Producers should be ready to fill those niches and retailers should make sure they have an adequate selection of products for customers to choose from.

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Discounts on cannabis products emerge over time

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As we move our analysis to the subject of discounting, it is important to clarify our price methodology at Headset. In all of our analyses, including industry reports, we use the term 'price' to refer to the price the customer paid, after any discounting, less any taxes applied at the moment of purchase. That means that the average item prices in this report and in Headset Insights are affected by retail discounting.

This graph shows that the true average item price (in light purple), as well as the amount that the average product was discounted (in orange). By comparing these values with the average discount over time, we are able to see that at the end of the first year of sales in Michigan, pricing decreases were primarily caused by a sudden uptick in discounting. Through 2021, however, we can see a clear drop in the actual retail price, before discounting, as well as a continued upward trend in total market average discounts.

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How common are discounts on cannabis?

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Promotional discounts are a powerful tool to drive sales for any cannabis retailer, or for retailers of any kind for that matter. For any given retailer, it can be difficult to know if you are discounting too much, too little, or an amount that is comparable with your competitors.

This graph shows the distribution of stores in California by the proportion of total items they sold at any discount. It also compares the previous 180 days ("This Year") with the same time period in 2020 ("Last Year").

First, we see that there is very little difference between the two time periods. It seems that in this relatively mature market, discounting strategy has remained fairly stable over the last year and a half. In both years, there is a fairly even distribution centering around the 50-60% bucket, meaning that it is most common for a given store to discount slightly more than half of individual units that leave their shelves. Conversely, the 'average' store sells somewhere between 40%-50% of items at full price. However, we do see that there are a fair amount of outliers on both tails of the distribution. For example, about 8% of California stores discounted fewer than 20% of total items over the previous six months, and another 9% of promotion-loving stores discounted greater than 80% of all items sold!

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Michigan store discount distribution

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In this graph we are viewing the same analysis for Michigan, a much younger cannabis market than California. What immediately stands out is the significant differences between the distributions of the two time periods. We can see that Michigan retailers a year ago tended to discount more than California retailers do today, but Michigan has shifted towards even more frequent discounting in 2021.

For example, in 2020 about 45% of Michigan retailers discounted 60% or more of the products they sold. This year, nearly two thirds of retailers offered discounts that frequently! At the other end of the graph we see an even greater shift, with 17% of stores discounting less than 30% of products last year, and only 3% of stores falling into that bucket in 2021.

This all goes to show that discounting strategies shift more in young markets before they have stabilized. Additionally, we can see that there can be significant differences in discounts between markets, potentially influenced by state-level regulations, tax structures, or simple competitive pressure.

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How to achieve retail goals with discount strategy

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So far we've analyzed a lot of pricing and discounting trends. Now let's provide some concrete, actionable advice. Discounts are powerful tools to motivate your customers and boost sales, but not all discounts are created equal. It can be tempting to slap a broad discount on many or all of your products and call it good, but that strategy (or lack thereof) is likely to depress margins and not drive the specific results you're looking for. Instead, set an explicit goal for your discounts then design your promotional strategy to achieve that goal. Here are three broad goals with some specific examples of poorly and well designed discounts to achieve them.

Change consumer behavior: These type of promotions should focus on adding a specific product, brand, or category to a customer's purchase, or encouraging customers to come in for a purchase in the first place.

• A promotion often used in the cannabis industry is 'Munchie Monday' with discounts on the entire Edible category on Mondays. Instead of offering an across-the-board 25% discount on the category, instead run a "Buy 3 Get 1 Free" promotion, which will incentivize customers to purchase more Edibles, rather than simply cutting your margins on any purchase within the category.

Achieve a retail revenue objective: Here's where you can set some extremely specific goals. Think about which sales metric you'd like to improve and target it specifically: e.g. larger basket sizes, encouraging trial of higher margin brands, expanding the basket penetration of a neglected category, etc.

• For example, if you're trying to expand basket size and your average basket size was $30 over the last several months, consider a "Free Pre-Roll when you spend $50 or more" promotion. This will be much more effective at driving up basket sizes - and therefore your total revenue - than a simpler "Free Pre-Roll" promotion.

Protect retailer margins: Thoughtless promotions can simply give away margin without producing meaningful results. Strategic promotions can accomplish multiple goals that protect your margins in addition to driving additional sales.

• Rather than run a promotion on all eighths in your shop, run a 50% promotion on some eighths. Great candidates would be a new high priced brand that you can leverage for greater margin, or a batch of eighths that are about to expire.

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Conclusion

As we saw above, there's a lot we can learn about pricing trends from emerging and mature markets. It is also important to monitor the market in order to make sure your pricing and discounting strategy is competitive and effective. Headset tools allow you to keep track of the market landscape as well as measure and identify your own retail opportunities. Sign up for a demo today to see how you can stay ahead of the competition.

Key Takeaways

• In early stage markets, total sales and product assortment grow together.
• As early stage markets begin to stabilize, supply catches up with demand and prices drop.
• Even in more mature markets, competition continues to drive prices down over time, especially in more commoditized categories such as Flower.
• As markets mature, pricing diversifies as brands fill niches at all reasonable price points. Not all customers are looking for the cheapest possible product.
• In early stage markets, increased discounting can lead to lower prices even before increased supply drives down pre-discount prices.
• Discount strategies appear to stabilize over time in more mature markets, but there will always be outlying operators who are more or less discount-averse than the average retailer.
• Market-level discounting strategies can shift significantly when markets are young and in flux. It is critical to frequently monitor the overall situation in your market in order to stay competitive.
• Thoughtless discounts often give away retail margin for little reward. Set a specific goal and craft your promotions to meet that goal.

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