Discounting dispensary products is a popular strategy for retailers trying to increase sales and stand out from competitors. In fact, Headset found recreational cannabis discounts have doubled in the past 5 years.
But not all discounts are created equal!
Dispensary owners need to determine if they’re giving customers an incentive, or simply reducing profits. One strategy boosts sales, while the other is a race to the bottom.
This post explains how to level up your dispensary discounting strategy to ensure you’re offering the right discount types, on the right products, at the right times.
The three dispensary discounting buckets
We often use the term “discount” interchangeably to describe very different price-lowering strategies. That generalization actually creates confusion in many marketing strategies and draws away from the value each discount type can offer depending on the scenario.
In cannabis retail, there are three types of discounts:
- Markdowns
- Discounts
- Promotions
Markdowns
Markdowns are a lowering in price caused by a decrease in product value. They are perfect for cannabis business inventory that is performing poorly. If you do not plan on carrying the product again, you can drop the price and sell through it.
A markdown basically means you are enticing your customers entirely through price point, which in turn erodes the perceived value of that product.
Example: If a batch of edibles isn’t selling and existing customers don’t seem interested, you can drop the price to get rid of current inventory, knowing you won't stock that cannabis brand again.
Discounts
Discounts are used strategically to temporarily change the price of a product but they don’t change the valuation of a product. Strategically offering discounts builds loyalty and strengthens relationships with select groups or segments of your customers.
Example: Bundling similar products for a lower price – like an eighth of flower, a lighter, and rolling papers – maintains the value of the products while still offering an enticing deal.
Promotions
Retail promotions create a feeling of value that isn’t necessarily tied to dropping prices. You are moving the focus away from price by adding value in a non-monetary way.
Example: When a cannabis dispensary offers free delivery, free stickers, or other unique non-price ways to drive customer loyalty. These enhance the value of your store, without dropping prices.
How discounting impacts pricing compression
One of the biggest threats to cannabis retailers is pricing compression.
Price compression in the cannabis industry refers to the decreasing prices of products being sold. This trend results in lower profit margins for retailers as they are forced to lower their prices to remain competitive. It can feel like a race to the bottom.
While improper discounting can cause price compression, markdowns and promotions are often worse in this regard.
Here's how each of the three types of discounts can cause price compression when retailers lack strategy.
Markdowns can become unsustainable
Overuse or improper use of markdowns runs the risk of causing a pricing compression trap by:
Creating ‘consumer addiction’ to discounts on planned purchases. If you know a retailer offers monthly cannabis sales on all products, you are more likely to wait to purchase, even though you would buy at full price.
Reducing sustainable profitability through a thousand cuts to your bottom line.
Discounts can affect price sensitivity
A price sensitivity campaign from Paddle showed discounts lower a customer's perceived value of a product, and by extension the willingness to pay, by 12% or more.
By not having a plan for your discounting budgets, you are not only driving down your profits, but you are also missing out on the opportunity to use them in a way that aligns with your buyers' perception of price.
Promotions can reverse the damage
Promotions are unique because they offer dispensaries a chance to shift focus away from price and offer more unique forms of value. For example, you may not have to offer as many discounts to stay competitive if your store offers an in-store DJ. Another option would be offering gift cards during the holidays to drive sales and delight shoppers.
How to create sustainable dispensary discounts
Almost every dispensary offers some form of discount because it’s a beneficial practice when done properly.
Smart dispensary specials start with a rational approach, instead of discounting at all costs.
Identify the right promotions
To determine which promotions will be most effective, you’ll need to understand your customer demographics. To do this, use these strategies:
Analyze customer data to understand which discounts worked well in the past, for which products, and for which customer demographics.
Find the right timing for different discounts. When time limitations are in play, you’re taking advantage of scarcity marketing which uses the psychological condition called fear of missing out (FOMO). We see sales spike significantly on cannabis holidays like 420, 710, Green Wednesday, or really any blanket holiday like Valentine's Day.
Regularly review your specials to check their impact on margins. While discounts may lead to more sales, they will eat away at your bottom line – finding the right balance is key.
Emphasize value over discounting
Instead of marking down slow-moving cannabis products, consider running value-based promotions (i.e. BOGO offers) with other products. Sometimes it's just a suggestive sales strategy of 2 for $14 and you do not need to adjust the price at all.
Another value-add to get new customers to return is a loyalty program.
Rewarding repeat dispensary customers will improve retention rates and ensure shoppers return to your store. A solid cannabis point of sale (POS) offers a built in loyalty program that dispensaries can leverage.
Create focus areas with your merchandise
Stage a ‘focus’ in your store by offering complementary cannabis products alongside poor-performing inventory and creating promotions that work strategically for your margins.
In-store focus areas are designed to address underlying needs of shoppers that they may not realize they have until they see the products presented together.
By combining products that create a cohesive experience and complement each other instead of competing, you can boost sales and have an opportunity to showcase slower-selling items with higher margins.
To create a focus area:
- Use the Rule of Three to avoid clutter and create compelling product stories.
- Pair cross-category products that work together rather than compete.
- Example: Place raw flower, a bong, and a grinder next to each other.
Fully evaluate your discounts
Retailers and brands should carefully evaluate the potential impact of any discounts before implementing them.
This evaluation should include understanding:
- Customer purchase behaviors
- Market penetration
- Loyalty and persistence
- Incremental turnover and sustained loyalty resulting from the promotion
By fully evaluating promotions, retailers and brands can make informed decisions that maximize the promotion's value while reducing the dreaded race to the bottom (aka pricing compression).
This approach ensures pricing strategies are sustainable, profitable, and beneficial for both the business and its customers.
Questions about dispensary discounts?
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