Colorado Provides Laboratory for Marketing Marijuana

Here’s an interesting assignment for a graduate-level strategic marketing course: develop a marketing plan for legalized recreational marijuana.

This is hardly a far-fetched idea.  The states of Colorado and Washington legalized pot in 2012 and in the most recent election Alaska, Oregon and the District of Columbia have followed suit.   So here we have a new growth industry falling into the laps of entrepreneurs.

A good model to begin the marketing plan is Colorado, which seems to have come the furthest in developing its retail marijuana industry.  In the Nov. 19 issue of Harvard Business School’s Working Knowledge (a free on-line newsletter), senior writer Michael Blanding and Harvard marketing professor John Quelch offer some valuable insights on this marketing challenge.

One intriguing starting point is how residents of a state that has legalized recreational marijuana will be able to buy, sell and use something that is still considered illegal by federal law.  However, with the absence of federal enforcement this becomes a moot point.

Let’s now try to analyze the dynamics of the market and the building blocks of a marketing plan:

4 Ps Analyses

The product is “cannabis” and comes from a plant and its intended use is as a psychoactive drug and a medicine.  The principal psychoactive ingredient is tetrahydrocannabinol (THC).  (Worldwide, the United Nations estimate 162 million people used cannabis and 6% (22.5 million people) use it every day.) In addition to smoking marijuana, it can be consumed in food, beverages and even in a vaporized form. There are no standard for quality of potency (THC) of the product.  Just recently the family of the late musician John Marley announced what may become the first global cannabis brand, Marley Natural.

In the Colorado model, Price is all over the board.  In Delta, CO, one can buy an ounce of high-quality marijuana for $20 an ounce and in Denver the price for the same once of high-quality product is $150.  Medium grade product can cost $200 an ounce in Colorado Springs or $20 an ounce in the same place, according to PriceOfWeed.com, a global price index for marijuana.  According the PriceOfWeed.com, nationally the price for high-quality product is $243 an ounce and medium-quality, $195 an ounce.

As for Place (i.e. channels of distribution), the market is in its infancy.  Product originates from a variety of sources. According to the Colorado Department of Revenue report entitled Market Size and Demand for Marijuana in Colorado, the demand for marijuana “is supplied through various channels.  Medical marijuana dispensaries and licensed retail marijuana vendors are the most obvious suppliers.  However, a significant portion of demand is also supplied by medical marijuana caregivers, who are informal producers and vendors of medical marijuana sanctioned by state laws, but are also considered to be ‘gray market’ vendors.  Remaining demand is supplied by home production, unlicensed vendors and individuals who represent the black market.

As for Promotion, Colorado restricts radio and TV advertising of marijuana, promotion’s battleground is the retail store fronts in Denver, Vail and the other ski communities.  These store fronts and the stores themselves feature quality retail space with attractive sales personnel in prime foot traffic locations.

Segmenting the Marijuana Market

Prof. Quelch and co-author David Lane are working on a case study, which soon will be available, entitled Marketing Marijuana in Colorado. In this study, they segment the marijuana market into four user groups:

Medicinal Users. These are frequent customers who care about price but don’t need to buy it at fancy store and care little about variety.  Their goal is to alleviate pain.

Recreational Users. They care about variety and are willing to pay for it.  Many come from out of state and enjoy the shopping experience.

Small to Medium Size Producers. While not a user segment, this part of the market aims at building brand loyalty and, according to Quelch and Lane, market actual brands such as high-THC Grape Stomper and low-THC Critical Mass, which offers a mellower blend.

The Illegal Market consists of buyers and sellers who seek to avert the state’s taxation.  In the first six months of legalized marijuana in Colorado, the state brought in $25 million with 80% coming from the recreational user market.  The state predicts revenues of $134 for the next fiscal year.  Retail licenses have increased from 37 to 200.

The Future of Legalized Marijuana

There is little doubt that the big alcohol and tobacco companies are closely watching the unfolding of the legalized marijuana phenomenon. It is a growth industry with worldwide implications.

Unlike alcoholic products interstate transportation will be relatively inexpensive because of the weight factor.  Growing the product is relatively easy and the profit margins will be extremely high at the beginning but will fall as more supply enters the market.  States thirsting for tax revenues will look at the Colorado model and realize that people are going to use these products illegally; why not let the states obtain revenues.