Pricing Compression: Strategic Discounting – How to Avoid A Promotional Spiral

In our price compression series, we’re taking a look at strategic discounting and how to avoid a promotional spiral. Headset released a report last November; Examining cannabis pricing trends & discount strategies, where they note a lot of retail discounting can be chalked up to the maturing market and increased competition.

Are this supply and demand? If we historically look at the category of flower in Canada, excess inventory across licensed producers resulted in the product becoming less valuable per gram at wholesale. Accessibility and excess supply translated to cheaper products arriving in retail environments.

But how has supply and demand played out on the retail front? There are two big factors…

1. The increase in retail environments 
2. An increase in the on hand inventory at retail doors 

Take a look at this discount percentage comparison to the total market in Canada. You can see how the percentage of discounts increases throughout 2021.  Headset notes discount strategies appear to stabilize over time in more mature markets, but there will always be outlying operators who are more or less discount-averse than the average retailer.

The increase in the supply of retail doors, with limited product depth and a mix of poor buying decisions, has resulted in a lot of low slow-moving inventory sitting in retail stores. What’s one of the fastest ways to get it out? Discount to influence velocity. 

In fact, some major retail players have leveraged this as a retail strategy.  By creating a discount brand, they are attempting to pull the velocity lever to get product and sales moving. 

However, there can be limitations to this strategy when there are changes to supply and demand. In the short term, heavy discounting can be difficult to sustain because of shrinking gross margins, and the ability to retain the customer. 

In retail, discounting can be addictive because of the quick hits of cash infusion and additional revenue. But it is really hard when you do not control the supply chain. Next thing you know, discounting is a program you deploy across the majority of your SKUs, and now we have a high-velocity retail environment with very little if not no profits.

So what can retailers and brands do to avoid the discount spiral?

Retailers

1. Prepare and train budtenders to manage pricing questions from customers by delving into their needs vs. focusing on the lowest price/highest THC thematic
2. Stay on top of your total on-hand inventor by ensuring your weeks on stock are not outpacing sales
3. Your inventory can include a healthy amount of tiered pricing which should be replicated in the visual merchandising 
4. Promotions should focus on basket-building tactics like adding specific products, brands, or categories to the overall purchase
5. Create the perception of value in other ways; cross merchandising, focusing discounting on a few key products (loss leader or take advantage to move some dead stock)

Brands

1. Simplicity remains key. Build your brand story with quick-hitting points about your quality and reasons for inventory buyers and budtenders to sell it 
2. When building your product roadmap consider where your product sits in pricing bands, and how disruptive different retail models could be 
3. Be aware of where you might have slow-moving inventory at retail, and the risk this plays in the MSRP price being undercut to get it moving.

Discounts remain a critical tactic in the cannabis industry but promotions should focus on basket-building tactics like adding a specific product, brand, or category to the overall purchase wherever necessary.