'It's Complicated': Deloitte, BDSA's 2021 Report Shows How Cannabis Pricing Differs From Other Consumer Goods

BDSA, a leading market research firm in the cannabis sector, joined Hifyre and Deloitte Canada to look at pricing in the legal cannabis market in both Canada and the United States.

Does cannabis behave like a typical consumer in the packaged goods (CPG) market or are there other dynamics at play? What actions can companies take to stay competitive? These are some of the questions tackled in a new report titled: "Price. It's complicated. How Cannabis Pricing Differs From Other Consumer Goods."

The analysts, led by Kelly Nielsen, vice president of Insights & Analytics at BDSA, examined retail sales data from the first half of 2021 and studied Deloitte and BDSA’s 2021 consumer surveys. They discovered that there are fundamental similarities between cannabis and CPG markets. 

In addition, the report suggests steps cannabis brands can take to maximize their business results in the challenging environment of this young industry.

"As the market continues to expand, understanding the role of pricing will be imperative to maximizing potential for brands and retailers. Market growth brings opportunity, and we continue to see more brands and products entering the market,” Nielsen told Benzinga.

“At the same time, though, consumers, manufacturers, and retailers are getting more sophisticated. In order to be competitive, it is important to understand how pricing plays a role in the decision-making process, and how pricing and product benefits can be leveraged to maximize potential," added the VP.

The Cannabis Market Is In Bloom

According to the report, global legal cannabis sales reached nearly $21.6 billion in 2020, an increase of 50% over 2019 sales of $14.4 billion, due largely to legalization. BDSA forecasts global cannabis sales will continue to grow quickly, to US$62.1 billion in 2026, more than double the 2021 estimated global sales of US$30.6 billion with a compound annual growth rate (CAGR) of more than 15%.

Through dispensaries alone, cannabis sales in the United States reached $18 billion in 2020 and are forecast to top $24.9 billion in 2021. BDSA expects US sales to reach $47.6 billion in 2026. In Canada, legal cannabis sales totaled an estimated $2.6 billion in 2020 and are forecast to grow to nearly $6.7 billion in 2026.

Price Matters

What is similar to other CPG markets? Price is important. In both the United States and Canada, consumers consistently indicate that price is a key factor in decisions about what cannabis products to buy. The most recent BDSA Consumer Insights survey found that in states where cannabis is legal for adult and medical use, low price was consistently identified among the top three drivers of product choice.

More than a quarter (27%) of respondents said price influences their purchase decision, just behind taste/flavor and high THC content.

In Canada, for example, low pricing was the leading influencer of product choice, with 34% of consumers stating it matters the most. In Deloitte’s study of Canadian cannabis consumers, 70% of respondents who shop on the illicit market said that better or lower pricing was a key reason they turned to that market.

Similar to other CPG, in Cannabis discerning consumers will pay a premium for superior products and/or benefits. According to the report, 86% of Gen Z consumers who participated in a survey by Drop Technologies, indicated they are likely or very likely to buy premium cannabis offerings if they see sufficient value.

For example, live resin, generally perceived as being higher quality than other vape cartridge-extraction methods, now represents 33% of total vape sales in California, up from 8% in 2019. Meanwhile, the top quintile price tier contains only 15% of distillate cartridges (with perceived lower quality). These comprise nearly 40% of the total items in the market.

In Canada, craft cannabis flowers have enjoyed significant growth in the past two years, jumping 158% in the past year alone.

What's different from other CPGs?

“Determining fair value is more confusing for consumers since the typical relationships between price and quality are not consistent,” states the report. Consumers are faced with huge ranges.

“Brands will likely need to educate their consumers to appreciate why the higher price might be worth it. 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,” noted the report.

Brands Don't Command Premium Prices Yet

Consumers in the United States and Canada seek a good product, driven by flavor and how a product makes them feel. They are more likely to choose a product that is either a brand they have used before (25%) or one that has been recommended by a friend or family member (20%) or a by budtender (21%). However, “Cannabis branding is relatively weak at present and, therefore, less of a differentiator.”

According to the report, consumers in the US market do not refer to the “reputation of a brand” as a top-10 influencer of their purchasing decision. BDSA's expectation is that, over time, strong branding will create the differentiator that should command a premium price, as we see in other consumer goods categories.

Pricing Cannabis

Just like CPG supply and demand and cost of goods play a role in pricing cannabis. However, wholesale pricing differs significantly by market. A range of factors influence the cost of goods, including the grow environment, cultivars, yield, facility scale, grow medium and trim method.

For example, “In Arizona, where sales for adult-use cannabis began in January 2021 shortly after it was legalized, prices in the long-legal medical cannabis channel increased in response to the increased overall demand."

8 Recommendations For Cannabis Companies Based on These Trends

• Monitor and analyze markets to understand competitive pricing (legal and illicit markets, in each region);
• Understand the brand’s product performance compared to that of the competition;
• Understand the business impact of regulations, taxation and retailer margins by region;
• Set and maintain quality standards that are consistent with the brand promise;
• Maximize efficiencies to enable flexible pricing;
• Know the brand’s target consumers and uncover insights about them to use to create a competitive advantage in product offerings and communications;
• Seek innovations that command a price premium; and,
• Communicate the brand’s benefits to help consumers assess value.
• Image By Ilona Szentivanyi