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Discounts add excitement and value to your customers. The problem occurs when you start to be dependable on a ridiculous 20% off to keep up with your competitors or to barely make it to the next month.
The obsession with generating sales plus not having a good pricing strategy is the perfect formula for the common retail marketing mistake of over-discounting.
Sadly, higher sales don’t necessarily mean business is blooming.
In this article, you’ll learn the major consequences of over-discounting in your cannabis dispensary and the actionable steps to fix them.
What Does It Mean to Over-Discount Products in Cannabis Retail?
In cannabis retail, over-discounting occurs when you reduce the price or value of a product to the point you can barely cover the cost, resulting in little profit, or loss.
You may think this is enough to warn dispensaries to stop over-discounting. But over-discounting is both an industry problem and strategy.
The average discount on recreational cannabis products in nine US states more than doubled in the last five years. Going from 7% in 2017 to 15% in 2022 might not look like a lot considering inflation. But some states like Nevada offer discounts of more than 20%.
So, where is the strategy in that?
Well, the three main reasons for over-discounting are:
- Focusing too much on market trends to determine discounts.
- Having poor-selling products that sit for too long on the shelf.
- Creating overly competitive discounts without optimizing against consumer demand.
As the number of cannabis brands and products has been on the rise, dispensaries have many options to choose from. And not only did this cause dispensaries to rely on excessive inventory to offer variety. It has also prompted them to create unreasonable discounts to clear out that same inventory.
3 Major Problems That Come with Over-Discounting in Cannabis Retail
When you hear the words over-discounting and problem in the same sentence, your mind unconsciously drifts to money. And yes, over-discounting can raise the stakes of your financial situation, but that’s just the tip of the iceberg.
Here are the major problems that come with over-discounting:
#1. Reduction or Loss in Profit-Margin & Revenue
The profit margin is a metric that measures the percentage of profit a company keeps from the revenue. There are three types of profit margins: net profit-margin, operational profit-margin, and gross profit-margin.
Your net profit-margin is a good metric to sum up the financial health of your dispensary.
Net profit-margin: The percentage of the revenue that corresponds to profit after extracting expenses. These expenses are COGS (cost of goods sold), taxes, interest, and operational and administrative expenses.
Here’s how to calculate the net profit-margin:
Net Profits = Revenue - COGS - Tax - Interest - Operational Expenses - Administrative Expenses
Net Profit Margin = (Net Profits / Revenue)*100
Many retailers use discounts to ramp up sales and popularity of a new product or brand. The difficult part is you have to increase this popularity enough to stop discounting after a reasonable period and still make a profit.
Otherwise, you don’t need to be a genius to look at the net profits formula and see that revenue is your only positive number. While expenses and costs keep being the same, discounts make your revenue smaller. And this, of course, means little profit or, in the worst case… loss.
Here are three tips to balance your profit-margin with consumer demand:
- Plan your markdown percentage: Think of it as the highest discount you can offer when you need to reduce the excess of new products that didn’t sell well. Planning your markdown percentage is essential to know how many units of a new product you can order without incurring in loss. You can see the formula to calculate the markdown percentage below.
Markdown % = [(Original price - Discounted price) / Discounted price]*100
- Offer discounts that involve products, not money: You could incentivize customers to spend more money by offering a free product when they spend a certain amount. For example, a free cookie when you spend more than $50.
- Have a reasonable amount of SKUs: Yes, variety is nice, but too many SKUs can lead to headaches that aren’t worth the “competitive advantage”. Try to follow the general effects of cannabis (Sativa, Hybrid, and Indica). Then buy each product category with them in mind (about two to three options per category).
#2. Risk Fostering Bad Consumer Ordering Behaviors
The general idea of discounts is to offer a product at a lower price for a limited time. This creates a sense of urgency and kicks in your customer’s FOMO (Fear Of Missing Out) encouraging them to buy.
Or that was the idea before discounting became the norm.
Nowadays, consumers don’t worry about immediately buying products they see on sale. And the reason is: they’re not afraid of missing out. On the contrary, 60% of consumers expect to get a discount when they shop at an online store. And if they don’t get it, 30% of consumers are willing to sign up for a price tracking service to get notified when the price goes down.
Aside from the clear negative effect on revenue, this discounting culture is influencing your customer's loyalty. Customers pursue discounts, which means dispensaries with the best discounts get the sale. But even when these dispensaries “win”, their revenue numbers don’t look good.
Here are some tips to handle these new consumer ordering behaviors:
- Use customer retention strategies: Companies generate most of their revenue from loyal customers. That’s why most of the advice you find online is about retaining the customers you already have. Great strategies to increase your customer retention is to have a customer loyalty program in place or to boost loyalty through segmentation.
- Work on the perceived value of your products: Perception of value is the reason customers prefer to buy expensive sustainable products over regular ones. With your dispensary, it’s a good idea to work on the design of your packages, support humanitarian causes, or emphasize the quality of your products. Think about reasons for which you can add more value to your products that your customers will pay for.
#3. Negative Effects on Brand Relationships
Another major problem of over-discounting in the cannabis industry is that it affects not only your dispensary but all the businesses involved in its supply chain.
Many brands pay a slotting fee, so their products can appear on dispensary shelves. This helps new brands get visibility for their products. And dispensaries reduce the risk of offering products that might not sell.
But with the cannabis industry still young. Industry knowledge is limited, causing dispensaries to make costly mistakes like over-discounting. When this happens, dispensaries might have already taken payment for slotting. But are barely covering expenses or generating loss.
This means dispensaries don’t have money available to pay brands, which originates a chain reaction in which brands can’t pay their distributors, and distributors can’t pay producers. Experts estimate the figure of unpaid invoices that dispensaries owe brands could easily surpass $100 million.
Aside from ruining relationships with brands (and losing access to sellable SKUs), this billing problem has prompted a group of cannabis distributors called the Cannabis Distribution Association (CDA) to work on a credit rating system. With this system, companies that can’t be trusted to pay their bills will be blacklisted.
In summary: Paying your bills is important to keep good relationships with brands and to avoid being blacklisted.
The tip for this section is to make informed decisions, so you can decide whether or not you should stock a product or brand. And to make informed decisions around SKUs it’s important to define data points that can help you avoid mistakes or costly decisions.
Key Takeaways
- Balance your margins with consumer demand by allocating a portion of revenue to discounts (markdown percentage).
- Use discounts strategies that involve products you already paid for. Not money you’ll be needing later.
- Increase the perceived value of your products so customers will pay more for them.
- Pay your invoices! You don’t want to get blacklisted.
- Before bringing in a new SKU, use data to evaluate if it’s actually a good idea.
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