Cannabis in Colorado
A year ago, I was in Colorado and stopped by a cannabis dispensary to see how it operated. I approached the counter and was greeted by a nice young woman who would guide me through the store’s offerings. I noticed a grouping of edible gummies and asked about them. She informed me that there were two kinds.
“Those are your typical gummies, made with high fructose corn syrup, food coloring, all of that stuff,” she said, pointing to one product.
“But these,” pointing to the other, “These are organic. They don’t have any nasty chemicals, you know, better for you.”
Given the industry, I’m not sure her clients would be overly opposed to putting chemicals in their bodies, but the real kicker? The organic and nonorganic gummies were the exact same price.
As a pricing strategist, this offended me. Can you tell why?
Before we get to the answer, let’s take a quick step back to see where the country is in terms of cannabis.
The State of the Nation
While over 21% of Americans live in the states and District of Columbia that have legalized recreational use, according to a recent poll a full 61% of Americans favor some form of cannabis legalization. Simple math suggests that the trend will continue.
Significantly, one can see that medicinal and recreational use is no longer confined to liberal and coastal states. Arizona, Montana, North Dakota, Michigan, Arkansas, Florida, Ohio, and Pennsylvania all allowed the Republican presidential nominee to win while also legalizing medical marijuana use in 2016.
Even our neighbor down south, Mexico, is moving in this direction, having voted to legalize medical marijuana in what many see as a first step toward decriminalization, or even full legalization.
What all of this means is that prospects for the legal cannabis industry are higher than ever:
“Revenue from California’s cannabis industry—with recreational weed now added to its 20-year-old medical marijuana market—is projected to reach $6.5 billion annually by 2020, from $2.8 billion in 2015, the Cannabist reports. The national market could generate $20 billion in sales by 2020, according to Arcview Group, a marijuana industry incubator. Another report, from analysts at Cowen & Co., estimated that the national cannabis industry could reach $50 billion by 2026.”
The industry has been attracting investors, entrepreneurs, and, in more mature state markets, mergers and acquisitions already—all of this surrounding a substance that is still illegal at the federal level.
Back to Colorado
So, what did the Colorado dispensary miss? An opportunity for market segmentation and value-based pricing!
Different consumers care about different things. Some will care that their THC-laced gummies have fewer other chemicals, some won’t. But the ones that do are probably willing to pay a premium for those products. We certainly see that in the organics aisle at a grocery store. Why would cannabis products be any different?
Value-based pricing means pricing a product based on the value that it provides to the customer. If a customer believes that the organic gummy is better, that should be reflected in the price. The beliefs of the company are expressed via price as well. Since the dispensary wasn’t charging more for them, I was less inclined to believe the organic gummies were any better than the other.
Growing the Industry
Cannabis is little different from other industries at an early point in their emergence. The same factors will be important in diagnosing the health of a company and the industry as a whole.
The existential purpose of a firm is to serve customer needs profitably. Competitive companies must be proactive and strategic in defining their value proposition, delivering that value, and earning a fair price for their hard work.
Part of that means thinking hard about what kind of products to offer and how. Value-added, cannabis-derived organic products, such as gummies, are a good way to offer higher margin products and differentiate from the competition. But without a carefully planned and executed pricing strategy, companies will flounder. In a marketplace, simply showing up isn’t enough.