Dispensary Pricing Strategy: How to Combat Price Compression

This is post 2 of a series on dispensary pricing strategies. Here you can find post 1 on cannabis price anchoring.

In this dispensary pricing strategy post, you'll learn about price perception and its ability to help cannabis retailers combat price compression.

These days cannabis price compression, soaring inflation, and increased competition are making it hard for cannabis retailers to turn a profit.

To combat price compression, cannabis retailers can use psychology and consumer behavior tendencies to guide them toward certain products or shopping patterns. One important tactic to do this is through the lens of price perception.

Price perception relates to how cannabis customers understand the associated value of a product related to its price tag.

Using the strategies outlined below, retailers can nudge their customers toward certain products, associate higher value to items, or generally sell more per transaction. Thus, driving revenue and maximizing profits in a compressed pricing market.

Visualization of pricing

A study from the Journal of Horticulture explains that the way your prices are displayed (as in the physical look, font, and placement of price tags) impacts how customers perceive the value of that item.

Consider your pricing font. The physical size of the numbers on a price tag have a subconscious impact on a buyer’s perceived value of that product.

High-priced items with a smaller font price tag will seem more affordable in the mind of the consumer. This is because the brain confuses physical size with numerical value.

Takeaway for retailers:

• Strategically adjust the font of your price tags depending on the relative cost associated to your products.
• If you have high price point items, reduce the font size and place them at the beginning of your customer journey. These cannabis displays with serve as a reference point for all future purchasing decisions in your store (aka your highest-priced items won’t feel as expensive).

A second visual aid is price placement. Understanding how we as humans read and process information allows us to strategically display our prices so they are perceived positively by customers.

When a shopper is looking at a price tag, a price on the bottom right will tend to “pull down” in the sense that there is a greater perception of weight. Think about the number on the tag like a diver on a board – the farther to the right they get, the more the board tilts down and the heavier (or more expensive) the price feels.

You can also look at your price tags like a ruler with smaller numbers on the left. As the eye moves right, the numbers get (or feel) larger.

Takeaway for retailers:

• Based on the science of the mind, your prices should always be placed toward the top and on the left of all price cards.
• If you're displaying multiple prices on one card, always price from low to high.

In-store signage

One of the most important purposes of your in-store signs is to explain why a product is worth the price point it’s listed at.

Think about it this way. If you’re shopping at a grocery store and see two identical bins of apples but one is more expensive, then you’re going to choose the less expensive option. Shoppers need context and differentiation to rationalize a difference in prices.

Flower strains are a common example in the cannabis retail setting because many dispensaries sell products with similar genetic makeup, THC content, packaging, etc. But each batch is set at different a price point. Why should a customer pay more for what they assume is the same thing?

Takeaway for retailers:

• Include a description of the products you’re selling on some form of signage.
• Make a note if one strain has won an award or was grown indoors instead of outdoors.
• Highlight whether the product is organic, rare, or contains high levels of CBD.
• Your budtenders can also provide this necessary context, but it’s best to let your signs answer any questions from the start as customers won't always ask.

Insignificant numbers

Subconsciously, numbers that don’t relate to the price of cannabis products can still affect how shoppers calculate value.

When consumers don't know anything about a product, they estimate the value. This estimation is subconsciously impacted by all of the numbers and prices we see every day.

In cannabis, prices are being compressed, but customers are simultaneously seeing a rise in the price of everyday commodities like gas and food. The more consumers pay attention to high prices around them, the more those prices play a part in shopping behavior in your store.

Similarly, your own prices can affect shopping patterns. If a customer sees a sign for $2 pre-rolls, they'll feel like all other joints are overpriced in comparison. The same happens when customers see a high-priced item as they walk in the door – their mind immediately assumes all other products are relatively more affordable.

Takeaway for retailers:

• Test and learn what works in your local area.
• If cheaper flower is the only thing that's selling for you right now, consider minimizing any advertisements for those items.
• Group your products by tier – like top shelf, middle shelf, and bottom shelf.

Take it one step at a time

Making your way in modern cannabis isn’t always easy. However, an understanding of price and the psychology of shoppers will give any dispensary an advantage.

But you don't have to change everything overnight. Implement a few tactics at a time, measure the results, and move forward with what works for your shop.

On top of this, make sure you're working with outstanding cannabis technology solution companies to optimize and automate your retail operations.

This article was inspired by Vetrina Group's Price Compression series. For more pricing tips, follow me or get in touch with my consulting agency, Vetrina Group. We love digging through cannabis data for insights that are actionable.