How to Optimize Dispensary Product Assortment with the Inventory Funnel

You know that frustrating feeling when you try to buy something online, but it's "Out Of Stock"? Or when businesses hold clearance sales due to excess inventory?

That's often an indication of poor inventory management.

For dispensaries to avoid these costly headaches and also boost profits, a tool called the "Inventory Funnel" helps set the foundation for inventory efficiency.

This post discusses the Inventory Funnel, what it is, why it’s important, and how it will help your dispensary make smart inventory decisions.

The questions that make up the Inventory Funnel

Instead of taking a guess-first approach to inventory management, cannabis retailers can uncover the inventory strategy that fits their dispensary best.

These questions ensure that you’re offering products with genuine demand, aligning with your store’s vision, avoiding redundancies, and setting optimal prices.

Let’s look at the four questions that make up the cannabis retail Inventory Funnel:

1. "Do customers want the product?"

Goal: Evaluate the potential demand for a particular product.

Execution: Prioritize products that align with your customer preferences and needs. This means having a clear understanding of who they are, what they value, and may mean making sure you are not only buying or producing products based on your personal preferences.

2. "Does the product fit with our store’s vision and mission?"

Goal: Align your dispensary’s products with your store’s values and overall objectives to reinforce brand loyalty and attract like-minded customers.

Execution: If your store's mission is to elevate the cannabis experience to rival that of fine wine – prioritize stocking luxury-feeling products and their corresponding accessories. On the other hand, a brand with a strong focus on environmental responsibility should stock products that minimize excessive packaging and prioritize bringing in brands that align with sustainable practices, resonating with environmentally-conscious local clients.

3. "Do we already have something similar in stock?"

Goal: Identify whether similar products are already in stock to prevent redundancy and overstocking.

Execution: Avoid duplicate products to maintain a diverse assortment that caters to various customer needs, ultimately leading to increased sales and optimized inventory management.

🔗 Learn more about reducing choice overload

4. "What prices are customers willing to pay?"

Goal: Understand how much customers are willing to pay for a product to set the right prices.

Execution: Avoid charging too much or too little through a deep understanding of your customer pricing sensitivity (the way the cost of a product affects consumers' purchasing decisions). We’ll discuss price sensitivity further in the next section.

How to optimize cannabis prices

Once you understand which products best align with your retail shop and consumer demographics, you’ll need to set prices that maximize your return on investment.

You need to be strategic and consider the various factors that influence customer behavior.

Consider factors like:

• customer pricing sensitivity
• product velocity
• margin dollars
• customer’s perception of value

This will be essential for setting optimal prices that resonate with your target audience and maximize profitability

Use the following strategies to optimize prices at your dispensary.

Understand price sensitivity

For dispensaries, price sensitivity is how a product’s price impacts a consumer’s intention to buy it. This is especially important when you’re selling a new, or untested, product.

Price sensitivity is measured by dividing the percentage of change in quantity by the percentage change in price.

Different dispensary customers will have different sensitivities to prices. For example, shoppers just looking for a cheap eighth are more willing to sacrifice quality for a better price.

However, retailers are still able to influence customer price sensitivity. Some ways to do this include:

• Price anchoring: If customers immediately see high prices when they walk in, then they’ll subconsciously consider the rest of the store’s products to be more affordable. Price anchoring lets shoppers evaluate the prices within a store, giving them confidence in their decision-making and a feeling of perceived 'value' — which keeps them loyal.

• Price against competition: If the store across the street has higher (or lower) prices, they can serve as a reference point for customers who shop at both stores. Comparing your prices to competitors is a good way to understand and even avoid more price-sensitive shoppers.

• Perceived value: The way you price products can impact the value customers perceive them to have. For example, high discounts may drive more sales, but they’ll also subconsciously drive lower perceived value and price sensitivity. We’ll discuss perceived value further in the next section.

Look at product velocity, perception, and margins

For every product being sold at your dispensary, there are a series of consideration to be made before setting the price. Some key measurements and factors include product velocity, customer perception, and margins.

Cannabis prices should be optimized to:

1. Support velocity: How quickly will the product sell?

Think of inventory velocity as your retail speedometer – it tells you how fast your products are moving and helps you fine-tune your strategies accordingly.

Pricing products in a way that supports velocity (or how fast a product goes from stocked to sold) means finding the sweet spot where customers perceive the product as valuable and are willing to make a purchase promptly.

Setting the right price helps increase sales turnover, preventing products from stagnating on the shelves and ensuring a steady flow of new inventory.

2. Improve customers’ perception of value: What do they think the product is worth?

Perceived value is a significant driver of cannabis purchasing decisions. Customers want to feel they are getting a fair deal for their money. By offering products that meet or exceed customer expectations, you can build trust and loyalty, leading to repeat business and positive word-of-mouth.

🔗 Learn more about the psychology of discounts and perception

3. Account for margin dollars: What are your profits?

Margin dollars represent the profit you make from each sale after accounting for the cost of goods sold.

By carefully evaluating your margins, you can strike a balance between offering competitive prices and ensuring a healthy bottom line.

🔗 Learn more about gross margins and markups.

Calculating Inventory Turnover Ratio

One metric we teach our clients, and include in the Vetrina Cannabis Retail Management Course, is how to calculate and use your Inventory Turnover Ratio to gauge success and opportunities in your inventory. It’s also a handy tool to use while implementing the Inventory Funnel.

Inventory Turnover Ratio (ITR) measures how many times a dispensary turns over its inventory in a specific period of time.

A high inventory turnover ratio means efficient management, while a low ratio may suggest slow-moving or excess inventory.

To calculate the Inventory Turnover Ratio (ITR), follow this simple formula:

ITR = Units Sold / Average of (Starting units + Ending Units)

Or...

ITR = Units Sold / ((Starting Units + Ending Units)/2)

For example, let's say you sold 500 prerolls in a year. At the beginning of the year, you had 50 prerolls in your inventory and at the end of the year, you had 20 prerolls left.

Using the formula:

ITR = 500 / ((50 + 20) / 2)

ITR = 500 / 35 = 14.29

This means you sold all your prerolls approximately 14 times in a year.

By monitoring ITR, cannabis retailers gain valuable insights into inventory efficiency and can begin to make data-backed choices.

Remember, a high ratio means that products are selling rapidly, and you are correctly replenishing them.

While a low ITR suggests slow-selling products and excess inventory. Which could be a result of poor demand forecasting, ineffective inventory control, or an unsuitable product-market fit.

Unlock the full potential of your cannabis retail business

Using 75+ years of combined retail experience, Vetrina designed a course specifically for cannabis retailers and dispensary management.

Discover the key to unlocking the full potential of your cannabis retail business with the Vetrina Cannabis Retail Management Course!

Join a vibrant community of successful cannabis retailers who have harnessed the transformative power of data-driven decision-making.

Learn more about our course.

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