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Is Cannabis Like Other CPG Markets?

A new report from Deloitte Canada, with cannabis market analytics firm BDSA and sales data analysis platform Hifyre, reveals that the cannabis market is just as similar to other consumer packaged goods (CPG) markets as it is different. The factor at the heart of it all? Price.

“We discovered there are fundamental similarities between cannabis and CPG markets,” reads the report. “For example, consumers are willing to pay a premium price for quality, and the laws of economics do apply to cannabis, but in other instances, price-related factors suggest there are several key differences.”

Price vs. Value

Most consumer data reports find that price is the number one consumer consideration when it comes to buying cannabis, and this report is no different, finding that 34% of respondents said that price was the first thing they checked and in a previous study from Deloitte, 70% of customers who shop on the illicit market said that a lower price was one of the main reasons. Aside from price, 32% said that taste was a factor, and 31% said THC content.

At the same time, the report found that consumers are confused about how to determine the value of a product, which, it stands to reason, could be why they may think that getting the most potent product for the lowest price is the way to go. “Determining fair value is more confusing for consumers since the typical relationships between price and quality are not consistent,” reads the report. “It’s challenging for consumers to assess value because product quality itself is difficult to evaluate.”

According to the study, THC or CBD content is the number one (57%) determinant of value in the eyes of the consumer, with quality of high (48%), taste (36%) and smell (35%), and duration of high (34%) rounding out the top five. Other qualifications cited were how well it smokes or vapes (25%) and bud density (20%), so it’s fairly obvious that consumers are dearly lacking in the finer points of cannabis knowledge.

“Brands will likely need to educate their consumers to appreciate why the higher price might be worth it,” the report says. “This example is similar to the journey of a consumer in the alcohol market who begins with entry-level blended whiskies and evolves to premium single-malt whiskies.”

Price vs Perceived Quality

Once consumers perceive that a product is of good quality and has a good value, they are more than willing to pay top dollar for it. In a previous study, Deloitte found that 86% of Millennial and Gen Z customers are likely to “buy premium cannabis offerings if they see sufficient value.”

This could be why, in Canada, craft-grown cannabis has seen a 158% increase since 2018, despite the price of craft products being consistently higher (16 to 41% price premium, depending on THC content) than other products. Sales of craft products equated to just under $40 million in January 2021 compared to just under $15 million during the same time in 2020, even when, between January and June 2021, 3.5 grams of 20% THC craft cannabis was worth around $39 compared to around $18 for the non-craft equivalent.

The report concludes that craft cannabis may be the entry point for brand awareness in the Canadian cannabis industry since prices vary wildly across the country and typical promotional techniques are prohibited—brands may have to rely on the quality of their product to speak for itself, which isn’t hard for craft growers. Around 25% of customers said that it was their previous experience with a brand that made them choose it again or a recommendation from friends and family (20%) or their budtender (21%).

Price vs Supply

Like other CPG, supply and demand and the cost of goods play a role in pricing. The difference for cannabis, however, is that federal regulations, provincial regulations and wholesalers, and a myriad of other expenses can push the cost of goods much higher. For example, at the start of legalization, when supply was low and demand was high, the price per gram of cannabis, on average, was $11.78, but once the market matured and farmers brought in their crops, the supply bloated and the price per gram fell to $7.50 by early 2021.

Flower wasn’t the only category affected either—according to the report, the price of vape cartridges dropped by 41%, from just over $32 per gram in 2019 to $19 per gram this year, as the market settled.

This fascinating report reveals a few of the levers driving consumer choices that may be confusing to us in the industry. It’s clear that brand transparency and consumer education will be key players going forward if we want to make the industry the best it can be.

“Pricing in cannabis markets is highly dynamic, sometimes behaving the way we expect in other industries—and sometimes not,” the report says. “There is no room for complacency in cannabis. Pricing, similar to other business levers in cannabis, will continue to change rapidly. The most successful companies will need to be agile, using data and best practices to meet the challenges of a complex retail pricing environment.”