Unveiling the Truth: The Impact of "Buy 1 Get 2" Promotions on Cannabis Brands and RetailersJul 17, 2023
At Vetrina, our clients often inquire about the effectiveness of "buy 1 get 2" promotions for cannabis brands and retailers. However, it's important to acknowledge that promotions in the cannabis industry are a double-edged sword.
In our industry, promotions and discounts are being utilized more than ever, with many retailers relying heavily on them for their profit and loss statements. Despite this, numerous brands overlook the importance of data analysis and instead rely on intuition or repeat past promotions, resulting in missed sales opportunities, reduced profits, and potentially falling into the trap of pricing compression and brand devaluation.
In this post, we will delve into the viability of the "buy 1 get 2" promotion strategy, shedding light on the true costs associated with such promotions. But we won't leave you hanging there—we will also provide actionable insights to help you find the delicate balance between driving sales and safeguarding your margins.
Brand Devaluation and Erosion of Profit
Let's start by discussing the impact of promotions on brands and the potential erosion of profit. When crafting your promotions, it's tempting to rely on past successes or copy ideas from competitors. However, it's crucial to remember that every promotion you run sends a message to your customers.
If you're not strategic about the type of promotion, timing, and brands being promoted, you run the risk of devaluing those brands, and your retail location, through excessive promotion. This is what we refer to as brand devaluation. When a brand is devalued, customers may lose trust, and loyalty, and may be less willing to pay a premium for its products or services. In the context of this blog, over-promoting a product can devalue your brand, or the brands you are selling, and reduce customers' willingness to pay full price.
Think about it from a consumer's perspective, not just in the cannabis industry but in general. We've been conditioned to wait for seasonal sales or expect our many brands to eventually offer discounts. Over-promoting can create an association between your brand and low prices, which might not be the message you want to convey.
To dive deeper into this topic, we explore the concept of pricing compression through discounting our blog "Is Your Discounting Putting You in a Price Compression Trap?" .
Does ‘Free’ work? The Strange Reality of Consumer Perception
There must be a reason stores and brands like to offer these promotions, so why? Carlson School of Management at the University of Minnesota conducted a study on using discounts versus giveaways and found that people rather get an extra item for free rather than a discounted price.
This shows that people really believe that BOGO style deals and free items are better.
This is thanks to a phenomenon known as the zero price effect. In a paper titled “Zero as a special price: The true value of free products”, Dan Ariely shows that “people appear to act as if zero pricing of a good not only decreases its cost but also adds to its benefits.”
💡 What is the zero price effect?
The zero price effect is a phenomenon that shows how our perception of value changes when something is given to us for free. Traditional cost-benefit models assume that the value of a product remains the same regardless of the price. However, the zero price effect suggests that when the price is reduced to zero, the item becomes more appealing and valuable to us.
In simpler terms, getting something for free makes us see it as more valuable than if we had to pay even a small amount for it. This effect is especially strong for things that bring us pleasure or enjoyment. For example, when a product's price goes from $1 to zero, it has a greater impact on our perception than if it had gone from $2 to $1.
The main reason behind this effect is our tendency to associate positive emotions with options that have no cost or downside. In other words, when we don't have to pay anything for something, it triggers a more positive emotional response in us.
So does ‘free’ work? Yes, when it comes to driving consumer behaviour.
But does it make sense for your bottom line?
Evaluating the True Costs: A Closer Look
Considering the already tight margins in the cannabis industry, promotions like "buy 1 get 2" can have unintended consequences that outweigh the benefits.
While it may seem like a quick way to boost sales in the short term, you need to carefully consider the true costs involved. Let's take a closer look at an example to understand the potential impact:
Imagine you decide to promote a vape cart with a retail value of $15 as a "buy 1 get 2" deal. Sounds enticing, right? However, you need to take into account the cost of goods, which amounts to $7 for each cart.
Now, when a customer takes advantage of this promotion and purchases one vape cart, you are obligated to provide them with two additional carts for free. This means your cost of goods for that transaction becomes $21, resulting in a loss of $6.
It's important to be aware of the potential negative financial impact such promotions can have on your bottom line. While they may attract customers and drive traffic to your retail location, you need to carefully evaluate the profitability of each transaction to ensure you're not losing money in the process.
Defining the Intention: Aligning Promotional Structure with Desired Outcomes
So, what's a cannabis company to do? Striking a careful balance is essential to protect your brand and preserve margins. To achieve this, it's crucial to take a step back and consider the intention behind each promotion.
Promotions should not be approached with a one-size-fits-all mentality. Instead, wise retailers and brands align their desired outcomes with the appropriate style of promotion. Crafting effective promotions requires finding the delicate balance between attracting new customers and rewarding repeat business.
Before embarking on your next promotion, here are some questions worth asking:
- Are you aiming to generate more gross margin?
- Do you want to increase sales velocity?
- Is your goal to get your products into the hands of consumers to build relationships?
- Are you looking to boost the average basket size?
If you're an established business, you likely have access to valuable data from past promotions. Take advantage of this information to evaluate the success of previous campaigns before launching a new one.
Once you have clarity on your promotional objectives, it's crucial to tailor your tactics to meet the specific needs of each store.
Develop a well-thought-out marketing plan that prioritizes driving traffic, increasing repeat visits, or boosting average basket size. By customizing your approach, you can maximize the impact of your promotions and achieve your business goals more effectively.
Planning Successful Promotions for Retailers and Brands
Now, let's discuss actionable steps and strategic approaches for both retailers and brands:
- Identify your business goals: Before launching any promotion, it's crucial to define your objectives. Are you aiming to increase sales, attract new customers, or create awareness for a new product? This step serves as the foundation for effective promotions. Remember, achieving velocity gains versus gross margin gains requires thoughtful planning.
- Be mindful of your discount percentage: Plan the discount percentage you'll offer and ensure it aligns with your budgetary constraints. By setting a clear limit on markdowns and promotions, you can maintain control over your costs and protect your profitability.
- Foster retailer loyalty: Don't overlook the power of follow-up emails and insightful communication with retailers. Share success stories from other environments, providing them with valuable insights and suggestions. This consistent practice is often missed but presents an excellent opportunity to strengthen your relationships with retailers.
- Create exclusivity and urgency: Introduce limited edition products, such as unique strains or flavours, for a short period. This strategy creates a sense of urgency and exclusivity among customers, encouraging them to engage with your brand and experience something new.
While pricing compression remains a challenge in the market, there are effective ways to navigate it. By strategically approaching your promotions, you can stay ahead of the competition and ensure that your brand remains at the forefront of consumers' minds.
If this blog has you revisiting your next promotion plan, be sure to sign up for our newsletter. We help our subscribers tap into industry insights and recognize the signs of success to drive their business into higher profitability.
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