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CANNABIS ANALYSTS

The authority when it comes to analyzing the cannabis industry

Elasticity of Marijuana Demand

The elasticity of a product gauges how likely people are to keep on buying as its price changes. If the price of soda increases by 10% but its demand decreases by less than 10%, it’s inelastic— the increase in price isn’t completely offset  by the loss in demand. Conversely, if demand decreases by more than 10%, demand is elastic.

Many studies have been carried out since the 70s, and for the most part, they find marijuana demand is inelastic. These studies make various assumptions and their results should be taken with a grain of salt, but as more marijuana is sold in approved dispensaries and reliable data becomes available, credence should be given to these relatively consistent results. One of the most recent studies claims that, with an elasticity demand between -0.3 and -0.6, “the demand for marijuana appears relatively insensitive to price changes.” This is equivalent to saying that with a 10% increase in general prices, demand would drop between 3% and 6%.

60% of the cannabis examined in the previous study was reported as being of high quality, 33% of medium quality, and 7% of low quality. What this implies is that quality matters extensively, and people are willing to pay a premium for high quality (or the perception of quality, given that classification may be fairly subjective). If the product you are selling is remarkable, market it as such and let people try it for themselves. After it an initial successful “try out” period, it might not be a bad idea to experiment with pricing increases— a single $1 increase on a $15 gram is a 7% revenue increase. Low and medium quality cannabis is more elastic than high quality one (low quality is a bit more inelastic than medium, interestingly), so raising their prices may bit more dangerous to your bottom line. It’s a better strategy to keep these varieties at “safer,” more stable prices and attempting to sell them in large quantities. For reference, Medicine Man charges 20% more for a gram of high quality cannabis than low quality ($17 vs $14; many dispensaries have 2 kinds of quality instead of 3 as the study.)

However, at the end of the day, you need to realize how closely these dynamics apply to your customer base. If your customers tend to be on the younger side, pricing might be more important to them as their income might be more restrictive, so you might want to focus on making special deals with low and medium quality cannabis. In CO you have dispensaries in the same geography charging significantly different prices, likely because they cater to different customers ($17/g  vs. $12/g). If your customers generally fall below poverty levels, perhaps offer them additional discounts. Several Massachusetts dispensaries have detailed “hardship” pricing programs in place especially if you have a medical condition. At the end of the day, medical dispensaries have to allow patients to affordably purchase medicine.

Knowing your customer base should always be a top priority, you are running a business to help them fulfill their needs, and knowing how to best cater to them will give you the necessary edge to bring back the clientele over and over.

Comments

Windy City says:

…I also liken the “quality” of marijuana to the choice of the individual’s preference toward their selection.

Like the alcohol family of beer, wine, hard liquor, etc., in which different levels of alcohol content exist for whatever range the customer desires, the marijuana industry has provided the consumer with an ever-widening variety of choices..

If by higher quality marijuana you mean higher THC content, that may be true, but there probably exists a growing number of aficionados who prefer the “lower” quality not only because of the lower price but also they may just prefer, for whatever reason, the nature of the effect it provides.

A hike in price would more than likely not shake this core group of customers…

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