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As the cannabis industry enters what is shaping up to be its biggest year of growth, understanding the competitive landscape is more important than ever. For many industry operators, that means taking a more in-depth look at some of the critical factors to success, such as market saturation, category popularity, and pricing.
Pricing is arguably the most critical driver of a company’s profitability and can be a differentiator among cannabis brands. Is your product premium, and if so, does your price convey that? How do your prices compare to the competition? Is there an ideal price point to reach the greatest number of customers? These are the kinds of questions leading brands to ask themselves when determining their pricing strategy.
LeafLink first introduced the annual Wholesale Cannabis Pricing Guide to help answer these questions while giving businesses additional insight into pricing trends across the industry. LeafLink powers 35 percent of all wholesale cannabis transactions in the United States between 7,700+ companies, providing us with the country’s most extensive wholesale cannabis data set. This year’s report was compiled using pricing data for over 109,000 unique SKUs and focuses on the marketplace’s top five categories by market share (Cartridges, Concentrates, Edibles & Ingestibles, Flower, and Pre-rolls). The guide, meant to empower cannabis businesses to make more intelligent and strategic pricing and purchasing decisions, provides a national analysis and a state-specific dive into 10 U.S. cannabis markets.
In the highly fragmented U.S. cannabis industry, pricing can be used as a lens to evaluate the market dynamics and overall health of the cannabis economy within a given state. These dynamics are frequently set in motion by regulatory policies, with lasting effects many years after their adoption. Here are a few important takeaways from our guide.
Related: How Much Is The Price Of An Eighth Where You Live?
Pricing is the distillation of multiple, and sometimes opposing, state factors
In California, the 2020 wildfires had a significant impact on cannabis supply throughout the state, which affected pricing. During “Croptober,” Bulk Flower in the state typically experiences a seasonal price decline from September to December as more supply enters the market; this year, Bulk Flower’s average price decreased 10% in 2020 compared to a 15% drop during the same period in 2019. We believe wildfires were responsible for the lower decline during the Croptober season, combined with continued strong consumer demand for Flower in the state.
In other states, high pricing can be attributed to specific in-market factors. Alaska, which had the most expensive Flower in the study, is known for high pricing across all product categories due to high tax rates and high distribution costs. Maryland, another state that ranks on the expensive end, is known for having relatively few products and brands available than other markets due to license caps on cultivators and processors.
In Michigan, the introduction of adult-use cannabis led to interesting pricing dynamics. After adult-use sales began in December 2019, the state saw significant product shortages as suppliers attempted to keep up with a new influx of consumer demand while facing operational challenges due to social distancing. While the number of sellers increased 184 percent during 2020, Michigan remained relatively expensive across most categories. Most notably, Cartridge prices soared by 44% YoY statewide to $30 per gram.
Similarly, Arizona experienced higher demand for Flower during the pandemic. Newly implemented lab testing requirements in anticipation of adult-use caused a production bottleneck which led to supply shortages. This caused the average Flower price to increase by 32 percent YoY or to $2,212 per pound. As Arizona transitions from medical-only to adult-use, though the testing backlog has eased, demand for cannabis remains at record highs and Flower is in short supply. Pricing there will be determined primarily by how quickly cultivators can bring more Flower to market. As other states, particularly on the East Coast, consider opening adult-use markets, they can look at pricing trends in more established markets as a guide to define their licensing structure and build healthy cannabis markets. Arizona is generally considered to have a thriving medical market, and the state is now poised to experience one of the fastest recreational ramp-ups in the U.S. with increased diversity and liquidity.
Healthy markets tend to have lower wholesale prices, inevitably flowing through to lower consumer prices
What does a healthy cannabis market look like? In cannabis, regulations around license caps, license fees, and vertical integration can prevent a state from natural supply and demand dynamics. In states with more open cannabis economies, rather than those dominated by a few participants due to licensing structures, we tend to see lower wholesale pricing and higher tax revenue per capita and smaller black markets.
Colorado, where adult-use cannabis has been legal since 2014, can be viewed as an example of a healthy cannabis market in the U.S. Thanks to brand diversity across the state, prices remain relatively low. Out of all of the states in our study, Colorado had some of the lowest-priced products across all categories except for Edibles & Ingestibles. For this category, Colorado was priced at the mean ($0.09 per milligram compared to the national average of $0.08).
Given relatively attractive wholesale pricing, which translates into competitive consumer pricing, Colorado reported a record $2.1 billion in cannabis sales in 2020. Combined with a moderate effective tax rate of 17 percent, Colorado reported $60 per capita in tax revenue from legal cannabis in 2020, based on our analysis of reports from the Colorado Department of Revenue. In contrast, Illinois, an example of a market dominated by restrictive license structures and consequently relatively few players, generates less tax revenue on a per capita basis, based on an analysis of data from the Illinois Department of Revenue. Colorado also has one of the highest rates of dispensaries per capita in the country at 14.1 dispensaries per 100,000 residents, providing potential consumers with broad access to products. The combination of attractive pricing and broad consumer access to products has kept the illicit market from flourishing in Colorado.
Newly legalized states should view pricing trends as important indicators of market health
As several newly-legalized states begin adult-use sales, studying the underlying factors behind pricing differences across markets is essential. A restrictive licensing structure with caps and high barriers to entry may result in lower than forecast tax revenues, a larger than expected illicit market, and push consumers to neighboring states, defeating many of the purposes of expanding adult-use. Governments should look to establish a vibrant infrastructure of cultivators, processors, and distributors through regulation. Looking forward, newly-legalized states can use the Wholesale Cannabis Pricing Guide as a resource to understand market-specific and nationwide dynamics. We trust this report is one important input that states and businesses can use collaboratively to build fair and thriving cannabis industries.
For a deeper look at the data behind the report, please contact me at: [email protected].
