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Pricing for Profitability

Operating a retail cannabis store is fraught with challenges. From dealing with a current lack of supply to setting a price to compete with the black market, store owners need to carefully consider their pricing policy.

How an entrepreneur can enter into the market and turn a profit isn’t as simple as buying low and selling high. Competition will increase as more players enter the industry and major retailers are beginning to sell cannabis. Setting the right price and differentiating your product offering to bring in return business will be the key to your success.

Competing with the Black Market

In Canada’s legal market, price points for a single gram of cannabis remain much higher than in the black market. Despite this, for now, consumers seem to have no issue with the higher price points, but as the industry evolves and grows consumers will expect to see more competitive pricing. Ontario is expected to have private brick and mortar stores in the spring, resulting in a consumer landscape with extensive options and competitors.

Depending on the province, the price of legal cannabis supplied through government-run websites has ranged anywhere from $8 to $12 per gram. With the level of interest experienced by stores like the OCS, price points have remained appealing to consumers, despite black market retailers offering significantly cheaper prices.

Longtime recreational consumers are not familiar with the extensive list of strain names and specialty products that legal sources offer.

The black market has gone head to head with legal sources, but the point has been proven that many consumers are willing to spend a few extra dollars per gram, perhaps out of novelty, to purchase through legal sources. Cannabis grown through licensed producers is said to be more consistent and provides a wider selection of products, while offering insights on the cannabinoid profile of a particular strain.

Knowing what is in legal cannabis remains a selling point for many consumers, but it’s typically medical cannabis patients that need specialty cannabis products high in CBD.

However, looking at the bigger picture, the alarmingly high demand for legal cannabis products is set to subside, and the black market will position itself to undercut the legal industry and pull consumers back into an illegal market. Shipping and supply delays also complicate the legal market, and if consumers can’t access product when they want it, they are likely to head back to their dealer.

Longtime recreational consumers are not familiar with the extensive list of strain names and specialty products that legal sources offer, so there’s an opportunity to educate these customers on a wider selection of products. These consumers are accustomed to bulk discounts, purchasing upwards of 14 grams or even an ounce at a time, which is just over 28 grams.

Black market online retailers have been reported to be selling entire ounces for under $150, including free shipping. This translates to an eye-opening $5.30 per gram, far lower than any product offered legally online. The black market can’t offer the extensive selection of multiple licensed producers, but the black market isn’t adhering to any specific guidelines, so they are selling edibles and vape pens and offering incentives to spend more and increase consumer savings by buying in bulk.

Considering shipping times and higher price points in the legal markets, there isn’t much to compel those who have been purchasing from the black market to make their way into the legal market. There remains a need to draw in the long-time cannabis user into the legal market, as the spike in demand experienced on October 17 will eventually subside.

Challenges of An Evolving Legal Market

After the initial rush of cannabis sales and increased legal competition, margins might be slim for retailers trying to make their mark in the industry.

Bill C-45 outlines that any company within the industry cannot promote or glamorize the consumption of cannabis, complicating the practice of promotion and customer retention. With recreational legalization, loyalty programs are now also unavailable, something that did exist within the medical framework in Canada.

Many pundits believe that the industry will evolve over time, and eventually resemble what the alcohol industry looks like. There are many brands and advertisers in the alcohol industry that glamorize drinking in an attempt to speak to different demographics.

In Canada’s legal market, price points for a single gram of cannabis remain much higher than in the black market.

Furthermore, loyalty programs are already available in the US helping dispensaries retain customers, offer deals, and help consumers save money. The laws in Canada will need to evolve or retailers will struggle to remain profitable.

Price points will need to go down as well, as the average per gram price from legal sources is simply too high to be viable in the long run. Prices will need to float around $7 per gram, taking advantage of a consumer’s desire to purchase legally, while not being drawn to the much cheaper black market.

Creativity is Key

Supplying demand has been a challenge thus far, but sustainability will be the big challenge for retailers and the rest of the industry. Customer retention, along with developing your brand will present hurdles that require creative answers and skilled staff.

The companies that survive through the early days of the recreational industry will need to develop an extensive menu of products, and continually analyze consumer data to predict the needs of the industry and plan accordingly.

Those that find the sweet spot between the legal and illegal industries will ultimately thrive.

Wholesale vs. Retail Prices by Province

Alberta
Consumer Prices
$9.00 – $15.50 per gram

Wholesale Prices
Average $9.00 per gram

BC
Consumer Prices
$7.00 – $16.00 per gram

Wholesale Prices
$5.00 – $11.00 per gram with quality improving with higher price points

Manitoba
Consumer Prices
$10.00 – $12.00 per gram

Wholesale Prices
Additional 6% social responsibility markup added to retailers starting January 1, 2019.
Province adds 0.75 plus an additional 9% to the wholesale price as well.

New Brunswick
Consumer Prices
$7.00 – $15.00 per gram

Wholesale Prices
Reported minimum 20% markup from wholesale to retail

Newfoundland & Labrador
Consumer Prices
$7.00+ per gram

Wholesale Prices
Restricted to 8% markup from wholesale prices

NWT
Consumer Prices
$8.00 – $14.50 per gram

Wholesale Prices
No wholesale prices available

Nova Scotia
Consumer Prices
$6.50 – $11.00 per gram

Wholesale Prices
No wholesale prices available

Nunavut
Consumer Prices
$13.00 per gram

Wholesale Prices
No wholesale prices available

Ontario
Consumer Prices
$8.00 – $13.25 per gram

Wholesale Prices
No limit on retail markups

PEI
Consumer Prices
$5.50+ per gram

Wholesale Prices
25% markup from wholesale to retail

Quebec
Consumer Prices
$5.25 – $11.30 per gram

Wholesale Prices
No wholesale prices available

SASK
Consumer Prices
$6.00 – $18.00

Wholesale prices
Retailers can work directly with wholesalers for large purchases

YUKON
Consumer Prices
$6.00 – $20.00 per gram

Wholesale prices
No wholesale prices available

Federal & Provincial Taxes

  • A federal excise duty is applied to recreational cannabis in Canada, paid on behalf of the licensed producer during the packaging stage. This is $1 per gram, or 10% of the final retail price, whichever is higher. Provinces have a 75-25 cut of this excise tax with Ottawa.
  • Consumers of recreational cannabis are responsible for paying any applicable GST/HST, depending on the province. This could range anywhere between 5-15% of the retail price.
  • Alberta does not charge PST on cannabis sales like other provinces, however, the province imposed their own 10% tax on the retail prices of cannabis.

Michael Burton is with CB2 Insights and can be reached at michael.burton@cb2insights.com.