Pricing Optimization Tactics in Competitive Cannabis Markets

June 24, 2024

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As competition intensifies, strategic pricing is essential for cannabis brands to maintain profitability and margins, capture market share, and drive sustainable growth.

The cannabis market is crowded, competitive, and constantly changing. To stay ahead of the pack, maintain margins, and achieve real profitability, cannabis brands need to be savvy in the art of pricing. 

This guide explores pricing optimization tactics explicitly designed for cannabis brands. It explores everything from market trend analysis and competitor pricing models to new technologies and advanced strategies to help your brand thrive in an industry that rewards a thoughtful approach to retail. 

Market Analysis and Pricing Foundations

To set a strong pricing strategy, start with a thorough cannabis market analysis. Examine current market trends and analyze your competition’s pricing models. This will help you develop a strategy that aligns with cannabis consumers’ expectations for real value with their purchases.

Current Market Trends 

Understanding current cannabis market trends is the first step to crafting a solid pricing strategy for your brand. As more states legalize cannabis, new products and shifting consumer preferences will shape the market in ways you can capitalize on. 

For example, disposable vape products have caught on in recent years thanks to their ease of use and incredible convenience. When your cannabis brand tracks trends such as disposable vapes, infused pre-rolls, or solventless products, you can align your pricing with that hot demand. 

The other essential market considerations are maturity (how long the market has been active) and regulation (whether it has a limited or unlimited licensing structure). Both of these dynamics lend themselves to common trends that provide visibility into the pricing dynamics of today and what’s to come in the future. 

Competitor Pricing Models 

Analyzing competitor pricing models helps you see where your products stand in the market. 

But it’s not just about knowing their price points—it’s about understanding the strategies behind those prices. For example, many brands use psychological pricing techniques, setting prices just below a round number (e.g., $19.99 instead of $20). By examining the competition, particularly as it relates to your price tier target, you can identify gaps in the market and uncover opportunities to differentiate your pricing strategy.

Pricing Approach

When developing your brand’s pricing strategy for cannabis products, you must decide between a cost-based or market-based approach. Each has distinct considerations that can significantly influence your pricing decisions.

Market Approach

A market-based approach ensures you are competitive with the existing landscape in highly competitive markets. This strategy requires a thorough understanding of various external factors that influence pricing. Key considerations include:

  • Competitor Pricing: Look at what other brands are charging for similar products. Be sure to consider the product attributes, pack sizes, and brand positioning of these competitors. This will provide you with a price benchmark and help you position your pricing competitively. 
  • Product Differentiation: Identify what makes your products unique or superior. Special features, tie-in products, or higher quality can justify an increased price point. Similarly, there is a place for value products designed for the more price-conscious consumer. 
  • Price Tiers: After evaluating the competitive landscape and your products’ attributes and value proposition, identify which price tier your brand and products should fall into: Premium, Mid-Tier, or Value. Identifying your target price tier will allow you to adjust pricing if your market sees prices changing holistically. 
  • Market Maturity, Regulation, and Demand: By understanding how different market landscapes impact general pricing and promotion trends, you can anticipate how prices will change as the market evolves. Sometimes, this happens quickly! For example, open markets with more competition lead to lower posted prices; however, limited licensed markets sometimes see promotions and discounts drive the prices even lower than those open markets.
  • Target Market: Understand the demographics and preferences of your target customers. Uncover the product attributes they’re searching for, their need states, and price sensitivity to meet the expectations of your target market and improve sales and customer satisfaction.
  • Promotional Strategy: Align pricing with your promotional and marketing efforts. Discounts on individual products, bundled products, or loyalty rewards can attract and retain customers. Customers have come to expect promotions from brands and dispensaries, so getting the balance of menu-listed pricing and promotions just right can be all the difference in how shoppers make their purchasing decisions at dispensaries. Understanding how consumers purchase products and brands together and what products are trip drivers versus basket builders can be vital to getting those promotions right. Effective promotional strategies can also enhance perceived value and drive sales.
  • Seasonality and Trends: Be mindful of seasonal changes and industry trends that might impact your pricing. National holidays, as well as specific industry holidays, such as 4/20 and 7/10, often lead to hot sales days. The industry sees a lot of discounting at these times, but demand can naturally be higher as well. Be sure you’re not over-discounting to a point where your sales don’t make up for the price decrease. Dialed-in seasonal, holiday, and trend-based pricing adjustments and promotions can keep your products appealing throughout the year. 
  • Economic Conditions: Consider the broader economic environment and remain adaptable. Customers will likely be more price-sensitive during economic downturns, so you may need to adjust your prices accordingly.

Cost Approach 

If your brand operates in a market with limited competition, you might opt for a cost-based pricing approach. This involves setting prices based on the total production costs and profit margin. Here’s what to consider:

  • Production Costs: Include all expenses associated with growing, harvesting, processing, and packaging your products. Don’t forget overhead costs like rent, utilities, and labor. Accurate cost calculation sets a sustainable price.
  • Taxes and Regulations: Understand your area’s taxes and regulatory fees. These can add significant costs that need to be factored into your pricing.
  • Profit Margin: Decide on the profit margin you want to achieve. This will depend on your business goals and financial needs. A clear understanding of your desired profit margin helps set a realistic and profitable price.
  • Product Quality: Evaluate how your product quality compares to competitors. Higher-quality products can command higher prices, so you’ll want your pricing to reflect the value you offer.

Targeting and Positioning for Optimal Pricing

Crafting an effective pricing strategy in the cannabis industry requires a clear understanding of your market and your products’ strategic positioning.

Identifying Your Target Market

The foundation of a successful pricing strategy lies in a deep understanding of your cannabis customers, which is only possible through detailed analysis. Understanding who they are, what they need, and what they expect from cannabis brands helps you create an identity that resonates with them.

Determine whether your cannabis brand should appeal to budget-conscious customers or position itself as a premium brand. Your target market’s demographics, preferences, and purchasing behaviors will guide this decision. For example, younger customers prioritize affordability and convenience, while older, more affluent customers may value quality and exclusivity. On the other hand, cannabis connoisseurs who skew younger may prioritize quality, so though they may be highly price-conscious, they may be willing to pay for premium product characteristics if they really deliver. 

Price Anchoring

Let’s paraphrase a common adage in the retail world: ” How do you sell a $2,000 watch?” The answer is, “Place it next to a $10,000 watch.” That’s the spirit of price anchoring, which leverages the buyer’s tendency to use the first price they see as a reference point for evaluating other prices.

Here are some effective price anchoring techniques:

  • Strike-Through Pricing: Display the original price with a line through it next to the discounted price to emphasize the savings while maintaining the perception that the value is aligned with the original price.
  • High Price Anchor: Introduce a high-priced item to make other products seem more affordable by comparison.
  • Low Price Anchor: Feature a low-priced item to enhance the perceived value of higher-priced options.
  • Tiered Pricing: Products at various price points cater to different budget levels.
  • Competitor Pricing: Set your prices based on competitor rates to remain competitive.
  • Comparative Package Pricing: Present multiple package options where the mid-range option appears to offer the best value.

A cannabis brand might mention its premium product line in the same breath as its ultra-premium product. Customers see the high price of the ultra-premium product and perceive the premium product as a better deal. This strategy subtly guides customers to the premium product, boosting its sales.

Advanced Pricing Strategies

Now, we move on to the next level of pricing strategies, where psychological, bundle, and dynamic pricing offer more options for cannabis brands.

Bundle Pricing and Promotions

Offering multiple products together at a discounted rate or including a complimentary item with the purchase can significantly enhance the perceived value, encouraging consumers to spend more overall and helping you move cannabis products more quickly. For instance, your cannabis brand could offer a bundle where a vaporizer battery is included for free with the purchase of a vape cartridge. This strategy is often applied to accessories and lower-priced items but doesn’t stop there. You can also bundle a newer product line with a more established or popular product line to encourage trial and increase the basket size simultaneously. Special purchase occasions, like Valentine’s Day, present a perfect opportunity for unique bundle offers—think of a package that includes chocolate, a topical, and a beverage for a thoughtful gift.

Psychological Pricing

Also called charm pricing, this strategy taps into the emotional and cognitive responses that specific prices trigger. For example, setting a price at $19.99 instead of $20 makes the product seem significantly cheaper, even though the difference is marginal. 

Dynamic Pricing

This strategy adjusts prices in real time based on demand, competition, and other market factors. For example, prices can be increased during peak times or high-demand periods to maximize revenue. Conversely, prices can be lowered during slower periods to attract more customers. Here, real-time data analytics and market monitoring tools come in clutch. This strategy isn’t commonly used in cannabis…yet, but there are growing conversations around its utilization and how shoppers would perceive it. 

Technology and Innovation in Pricing

Speaking of tech that comes in clutch, today’s cannabis brands have an ace up their sleeve with innovations in pricing. 

Analytics Tools

To set a confident pricing strategy, it is important to track key product and category metrics for your market, such as sales dollars and units, pre- and post-discounted pricing, margin, and velocity. Monitoring your own trending data around product costs and customer acquisition costs is equally as important as it relates to pricing. By integrating these insights with price tiers, basket analytics, and seasonality patterns, you can optimize the price points and maintain agility in a rapidly evolving market. 

In addition to trended data, predictive analytics can forecast future trends, helping cannabis brands anticipate market shifts and adjust prices proactively. 

AI and Machine Learning

AI and machine learning are game-changers in pricing strategy. These technologies analyze large datasets, including the product and category metrics mentioned above, to uncover patterns and predict trends, enabling brands to set prices more strategically. For example, AI can track consumer behavior, assess market demand, and monitor competitor prices to recommend optimal pricing adjustments. Machine learning algorithms continuously improve by learning from new data for more precise pricing analysis over time.

Regulatory Considerations and Compliance

Even with expanding legalization, several regulatory and compliance factors must be considered when pricing.

Understand State and Local Regulations

Each state has specific cannabis regulations that affect pricing strategies, including labeling and taxes. For example, you must consider state-imposed cannabis taxes when setting your prices to maintain compliance and profitability.

Federal Compliance

While cannabis remains federally illegal, federal regulations impact banking and advertising. Adhering to these guidelines can mitigate financial risks. 

Transparent Pricing and Labeling

Clear and accurate labeling builds customer trust and ensures compliance. Provide detailed information on THC content, ingredients, and health risks, and display all included taxes and fees to prevent misunderstandings. Clearly labeling all factors that impact the value of your product also helps to communicate the value proposition to your customers. 

Record-Keeping and Reporting

Implement robust inventory management systems, supply chain performance tracking, demand forecasting, and compliance reporting to optimize operations and inform strategy.

Adapting to Regulatory Changes

Stay adaptable to regulatory changes by regularly training staff and engaging with industry groups. This helps you quickly respond to new regulations, keeping your business compliant and competitive.

Strategic Pricing for Leading Cannabis Brands

The cannabis market’s competitive landscape demands more than just setting prices—your cannabis brand must craft a strategy that works in your favor. By keeping an eye on market trends, understanding your competition, and using the latest technologies, you can fine-tune your pricing to boost profits and enhance your brand’s presence. Stay flexible, stay informed, and keep tweaking your approach to stay ahead in this dynamic industry. 

Optimize your pricing strategy with BDSA’s actionable pricing insights and tools. Request a demo today to see how we can help you maximize profitability.

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Tags: Business, Cannabis, Data Based Decision Making

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