Pricing Compression: Complicated Promotions
Jul 19, 2022Walking into a store, how many times is your attention immediately grabbed by discount signage promising 10% or 15% off?
How do those discounts make you feel? Confused? Overwhelmed by making calculations on the spot, while you’re also evaluating multiple products simultaneously?
You’re not alone. This is a major issue facing the cannabis retail industry. More than that, retailers aren’t taking into account the full impact of these types of discount strategies.
When you offer customers a 20% discount off the regular price, you also need to be taking the product velocity required in order to maintain profitability.
You may need to sell more than 20% more products just to break even on these types of promotions, and it can quickly become a losing battle with pricing compression.
To try and measure the impact of these strategies on customers, we recently ran a promotion at a store located in Michigan.
On one product, we ran a 50% discount. On a comparable product, we ran a BOGO (Buy-One, Get-One) campaign. Despite being framed differently, these two offers provide customers with the same value.
However, we were surprised to see that the BOGO promotion was far more successful than the steep discount. This is because customers understand the value of a BOGO campaign more than discounted pricing.
In fact, the BOGO promotion became the number one product to drive traffic, as well as sales velocity. It allowed the store to run the promotion much more profitably than the discounted product.
So, what does this mean for brands and retailers?
Retailers:
- Avoid overusing discount pricing signage in your visual merchandising
- Communicate with distributors about the products that aren’t selling. Give them the opportunity to share promotional ideas that may have worked for the same products with other retailers
Brands:
- Arrange training sessions at retail locations to educate in-store teams on how to best value position your products
- Talk to purchasers about which products aren’t moving efficiently. Work with them to create value-based promotions that focus on increasing product velocity on items with reduced margins
When cannabis retailers are designing future promotions, it’s essential that product velocity be taken into consideration. Otherwise, it’s impossible to maintain profitability.
Finding alternatives to discount price models that can offer value in ways customers actually understand, is essential for both combating pricing compression, as well as maintaining long-term scalability.
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