Determining the price of products at a dispensary requires careful planning to achieve the highest possible profits. Prices need to cover costs and drive revenue, but not be so high that they turn customers away.
For entrepreneurs to decide the best possible price, many cannabis business owners lean on concepts like gross margins and markups.
These terms are both useful for cannabis industry pricing, but each has different meanings and implications – even though they’re sometimes used interchangeably.
We’ll walk through the difference, plus simple formulas cannabis retailers can use to incorporate gross margins and markups into their pricing strategy.
What is gross margin?
Gross margin, also known as gross profit percentage, is a key financial metric that reveals how much profit you're making on the products you sell, relative to your total cannabis sales revenue.
Gross margin is the percent difference between a product’s selling price and the profit when it’s sold.
The importance of this metric is it’s a critical indicator of your legal cannabis business's health. A higher gross margin means you're retaining more money after covering the operating expenses related to your products.
How to calculate gross margin
Gross margin helps you see the bigger picture and understand how much is left after all the costs are covered. To calculate gross margin, we’ll use the following formula:
Gross Margin = (Net Sales - Cost of Goods Sold) / Total Net Sales
Let’s use an example to help visualize and understand what gross margin is.👇
A single unit of inventory for an edible product has a Wholesale Suggest Price (WSP) of $45, meaning it’s going to cost you $45 to acquire and sell that product.
To offset the costs, you’re planning to sell the product for a Sales Price of $58.50.
- Sale Price (net sales) = $58.50
- Wholesale Price (cost of goods sold) = $45
So using our formula:
- Gross margin = [($58.50 - $45) / $58.50] * 100
- Gross margin = ($13.50 / $58.50) * 100
- Gross margin = 23%
This means that out of the $58.50 sales price, you are going to keep 23% as profit.
What is markup?
Imagine you’re sitting in the back room of your retail store. You just received inventory, and you’re excited to list the fresh product on your menu. How do you decide what to charge the customer?
This is when markup matters.
Markup is the percentage difference between the actual cost of a product and what you decide to sell it for.
Note: Markup is not your overall profit. Your profit is the money you make after covering all your costs.
How to calculate markup
Let’s use the same example from the gross margin section to show the calculation around markup. The goal here is to determine the markup percentage based on what the product cost vs. what it sold for.
Here's the formula:
Markup = ((Sales Price - Cost) / Cost) * 100
And here's an example.👇
A single unit of inventory for an edible product has a Wholesale Suggest Price (WSP) of $45, meaning it’s going to cost you $45 to acquire and sell that product.
To offset the costs, you’re planning to sell the product for a Sales Price of $58.50.
- Wholesale Price (cost) = $45
- Sales Price = $58.50
So using our formula:
- Markup = (($58.50 - $45)/$45)* 100
- Markup = ($13.50/$45)* 100
- Markup = 0.3* 100
- Markup = 30%
There you have it! If you set your sales price to $58.50, you’re creating a 30% markup.
Other factors influencing average dispensary prices
While gross margin and markup are useful tools on their own to determine how much money you can make from various sale prices, they should be infused into other pricing strategies. Consider adjusting margins and markups in the following pricing scenarios.
More on pricing
How dispensaries can use price anchoring
Cannabis product availability
Pricing strategies must be flexible enough to adapt to the availability of cannabis products. If a certain item is in high demand and short supply, markups and gross margins must adjust accordingly to maximize profit during a window of opportunity.
On the other hand, if you have excess inventory that is not moving, a temporary price reduction with a narrower margin might be a smart move to clear it out quickly.
Seasonality
Every retailer and brand knows the power of seasons and holidays. Green Wednesday, 420, and other cannabis holidays allow cannabis retailers to raise markups on certain products while discounting others based on the assumption that higher demand leads to greater foot traffic and spending.
Conversely, off-peak periods might require special promotions or discounts to keep sales steady and attract customers during slower times.
Location and market trends
Location, location, location – it isn’t just important for real estate! Different markets have varying levels of competition, consumer spending habits, and overall economic conditions.
Retailers need to assess each market and location individually to determine the best pricing strategy. In some areas, customers might be more price-sensitive, and offering competitive prices with narrower margins could be the key to winning their business. In contrast, in high-end markets, a higher markup will be more acceptable.
Even trying something like out-the-door pricing may help stand out locally and boost sales.
Retail identity
Your brand identity and position also play a significant role in pricing decisions. Are you positioned as a luxury boutique, offering exclusive and high-end products? Or are you targeting budget-conscious customers with affordable options?
Your pricing and margins should align with your retail identity to maintain consistency and attract your target audience.
Takeaways for cannabis retailers and brands
Retailers:
When crafting your pricing strategies, make sure to consider your markup values. They directly impact your profitability, so finding the right balance is essential.
Projected or gross margin goals can help you calculate the ideal markup percentage, ensuring your prices align with your financial objectives.
Leverage margin percentage as a powerful tool to evaluate and forecast your overall profitability. Understanding your gross margin helps you gauge how much profit you're making after accounting for the cost of goods sold. This insight enables you to set realistic merchandise budgets and make informed dispensary business decisions.
One-size-fits-all pricing doesn't exist in cannabis. You need to be agile and data-driven, continuously monitoring market trends, inventory levels, and customer behavior to make informed pricing decisions. Don't hesitate to experiment and fine-tune your markups and gross margins based on real-time insights.
Brands:
Support merchandising teams by providing additional assistance during seasonal fluctuations. Offering ideal pricing bands and identifying similar products that can replace seasonal SKUs on the buy sheet will streamline their efforts and improve overall efficiency.
If you have access to local pricing information, share it with buyers to strengthen your collaboration. This valuable data helps clarify how your products are positioned in the market - whether you're perceived as a traffic driver, a loss leader, or an anchor price. Understanding your role in the market can guide your pricing strategies and foster successful partnerships with retailers.
Collaborating closely with retailers is essential. Share relevant information like product performance in different markets, seasonal fluctuations, and competitive analysis. Work together to develop pricing strategies that benefit both parties and create a win-win situation.
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