It is important for cannabis retailers to know how to build successful discount strategies throughout the year, but even more so during the busy holiday season. Below, we explore the basics of discounting, important metrics you need to keep in mind when measuring success, how to make sure your discount strategies drive more profit during the holidays, and how data can be used to make the process of discounting easier and more profitable. You can also skip all of the calculations and simplify the process with Retailer Premium. Sign up for a demo today to see how every promotion can successfully increase your store's profit.
The goal of cannabis discounts
Discounting is an important part of running a retail business, but to be successful it is critical to keep the goal of discounts in mind as you plan a promotional strategy. The goal of running a discount is to change customer behavior in order to drive incremental unit volume, increasing penny profit. Without understanding the right metrics, it can be easy to fall into the trap of offering discounts without much thought to whether they are actually helping to increase profits.
The goal of discounting is to change customer behavior in order to drive incremental unit volume and thus increase penny profit.
A discount can only be considered successful if it drives an increase profit to the retail business. Let's take a look at a hypothetical example to better understand how to measure the success of a discount.
An unsuccessful discount
Let's say we'd like to run a promotion on a vapor pen cartridge that has been popular in our shop lately. Each unit is purchased from the manufacturer for $10 and sells for $20, and 1000 units are typically sold every week.
Under normal circumstances:
Profit per unit is ($20-$10) = $10 profit per unit
1000 units sold per week → 1000 units * ($20- $10) = $10,000 in profits per week
When these vapor pen cartridges are priced normally, the resulting profit is about $10,000 each week. But what happens if we apply a 10% discount and sell each unit for $18 without taking unit volume into account?
10% Discount but no increase in unit volume:
Profit per unit is ($18-10) = $8 profit per unit
No increase in unit volume → 1000 units * ($18 - $10) = $8000 in profits for the promotional week
There is no evidence that this discount drove new or additional customers to buy the cartridge and profits fell $2000 during the promotional week.
What would make this discount successful?
In order to increase our total profits on this product during the promotional week, we need to increase the unit volume above average. To determine exactly how many more units we need to sell, we do a little algebra:
$10,000 in profits = ($18 - $10) * X units
$10,000 / $8 = 1250 units
With our 10% discount we need to sell 1250 cartridges in one week to match the same amount of profit we make on that product during an average week. That's a 25% increase in unit volume for the same total profit. This is a great example of why it's so important to develop a data-driven strategy around offering and tracking discounts in your cannabis retail business. It is easy to accidentally give away margin, especially during times of the year when customers expect significant discounts, like the holiday season.
Metrics for successful holiday discounts
This graph, which can be found on the Holiday dashboard on our Insights tool, shows the average daily sales for each product category during the week before Christmas (red bar), the four previous weeks (purple bar), and the percent increase in that value (orange dot).
All categories had positive growth during the week leading up to Christmas, but some categories were more successful than others. Edibles, with 31.1% growth, Topicals, with 38.1% growth, and Beverages, with 26.2% growth, did particularly well. From this chart alone, we can see that not only was it a busy week, but also that customer shopping patterns were different from normal. Edibles, Beverages, and Topicals all make great gifts, and Edibles and Beverages in particular might be welcomed at a holiday party. This may lead us to wonder whether we should offer special discounts on these products because they are so popular during the holiday season.
In this graph, available from the Demand Planning dashboard on Insights, we can see the average discount by week for our the gift categories that we identified above, Edibles, Beverages, and Topicals, compared to the average discount for the total California market for each week of December 2019.
There are two clear takeaways:
Our selected categories have consistently lower discount rates than the total market.
There was a significant increase in market-wide discounting for the last full week before Christmas last year.
As we approach the holiday season this year, it may be tempting to offer discounts on these product types, because we know that customers are likely to be more interested in them than normal. However, we are at a big risk of needlessly giving away margin if we discount products that customers were ready to buy at full price. It would be better to hold our margin on those desirable holiday products, and then use discounts to entice those customers to expand their baskets by adding products from other categories. Perhaps a "purchase a full-priced Edible or Beverage, get 10% off a premium eighth of Flower" would be effective.
This is the same graph, but focused on the month of November 2019. The week of 11/25 was one of the biggest weeks in US cannabis retail last year due to the presence of both Green Wednesday and Black Friday. These are both retail shopping holidays and the sharp increase in discounts shown on this graph reflects that. During this holiday week, Edibles, Beverages, and Topicals were all discounted more on average than the total market. If customers were already thinking about cannabis gift shopping and were ready to buy these product types, perhaps California retailers were giving away too much margin with these discounts. As we discovered previously, these discounts would only be considered successful if the discounts increased the incremental unit volume of these products, which would increase profits.
This graph, also on Insights, shows us the same the unit volume and average discount for our selected categories (Edibles, Beverages, and Topicals) for each week of November 2019. From the week of 11/18 to the week of 11/25, we see a large increase in both the average discount (7.8% to 10.1%) and unit volume (533K to 562K). If we make some broad assumptions on this data we are able to do some rough calculations that will tell us about the effectiveness of this trend in discounting.
Let's assume that all products in these categories have an average price of $16.84 before discounting and taxes (this is the Average Item Price of these three categories during November 2019 in California) and that they all cost exactly half of that at $8.42. That would give us a base margin per unit of $8.42. The margin per unit on the week of 11/18 with a discount of 7.8% would reduce that margin to $7.11 per unit, and it was reduced further still, to $6.72, during the week of Green Wednesday and Black Friday. Unit volume also increased, so what was the final return?
Week of 11/18/2019
533K units * $7.11 margin per unit = $3,787,753.84 in profits
Week of 11/25/2019
562K units * $6.72 margin per unit = $3,776,167.92 in profits
($3,776,167.92 - $3,787,753.84) / $3,787,753.84 = -0.31% week over week change in profits
While this is a rough generalization about a complex market full of individual retailers running their own unique promotions, we can see that at large, there wasn't a significant increase in profits on these three categories during the week of Black Friday and Green Wednesday. Based on our calculations, there was in fact a small decrease in profits despite the 5.4% week over week increase in unit volume.
This is an example of how complex measuring the success of a discount can be. Fortunately, the Impact Analysis tool on Headset Retailer can make these calculations much easier and help ensure that every discount is successful.
Headset Retailer: Impact Analysis
Headset Retailer provides a way to help you measure the success of your holiday promotions, and all your promotions throughout the year. This tool can build sales trend predictions based off your store's historical data, and then compare your actual sales to the prediction for your selected time period. This allows you to get a clear view of the effectiveness of any promotion.
You can view the results by total sales, total units, and total profits which will allow you to truly understand the impact of your most recent campaign. Learn more about Impact Analysis and other Retailer tools and find out how all your promotions can be successful. If you're wondering how to better target your customers with more effective marketing campaigns, take a look at our new segmentation dashboards. These dashboards are designed to segment your customers into meaningful groups and provide recommendations on how to engage these various groups of customers.
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