This report dives into what has been happening with pricing over the past several years. We will begin by exploring multiple metrics that can be used to analyze pricing data, focusing specifically on the Flower category. Then we discuss the significant affects discounts can have on pricing and try to understand which products are being discounted the most. Finally, we will see how recent pricing compression has changed consumer behavior in retailers.
Average item price and the average equivalized (EQ) price of Flower have been dropping over the past two years in both US and Canadian cannabis markets.
Pricing compression in the Flower category appears to be continuing to accelerate in US markets, while it is slowing down in Ontario.
Average discount rates have risen steadily over the past several years, likely due to the same competitive pressures that are driving pricing down.
Pricing compression and increased discounts do not appear to be majorly affecting retail markup percentage in US markets. There has been a slow and steady reduction in markup percentage in Ontario.
Discounts appear to be applied fairly evenly to old and new products alike.
Pricing compression is driving down average basket size since customers are buying the same number of products per trip, but purchasing them at lower prices than ever before.
Data for this report comes from real-time sales reporting by participating cannabis retailers via their point-of-sale systems, which are linked with Headset’s business intelligence software. Headset’s data is very reliable, as it comes digitally direct from our partner retailers. However, the potential does exist for misreporting in the instance of duplicates, incorrectly classified products, inaccurate entry of products into point-of-sale systems, or even simple human error at the point of purchase. Thus, there is a slight margin of error to consider.
In this report we examine sales from selected Headset Insights markets. This includes California, Colorado, and Michigan in the US and Ontario in Canada. We present all data in local currency (including on the same graph), and do not make adjustments for currency fluctuations.
Headset defines ‘price’ as the retail price consumers pay after any discounts are subtracted, but before consumer-paid taxes are applied.
Average item price of cannabis by market
The first metric to look at when talking about pricing is the average item price. This metric is calculated by simply dividing the total of all sales by the total number of units sold over the same time frame. This gives us an idea of what the average customer paid for a single cannabis product, whether that product was a single 1g Pre-Roll, a 500mg Tincture, or an ounce of top shelf Flower.
In this graph, we can see that average item prices have been declining in both US and Canadian markets since late 2020. That decline accelerated towards the middle of 2021. By October 2022, the average item price of a cannabis product in Colorado was 14% lower than it had been in October 2020. Average item prices declined in Ontario by -17% over the same time frame. In Michigan, a much younger market where new stores are continuing to open and introduce new competitive pressure, average item price dropped by an astounding -44% from October 2020 to October 2022.
Average EQ price of cannabis Flower
Average item price is a helpful metric because it provides an initial check on the state of pricing in a given market. However, average item price can easily be distorted by changes in customer behavior. Here’s a hypothetical example: imagine that over the course of several months, customers in Washington suddenly shifted from purchasing mostly 3.5g packages of Flower (usually priced at $24), to 14g packages (usually priced at $90). If this shift in customer preference was widespread enough, we would see a dramatic increase in the average item price of Flower products in Washington. This would hide the fact that the actual prices of those 3.5g and 14g products did not meaningfully change during this time period.
One way to navigate this issue would be to run a separate analysis for both the 3.5 and 14g package sizes, but that doesn’t help if we’d still like to get a picture of the total market, or at least the total category. Instead, we can use equivalized (EQ) price to normalize across all package sizes in the Flower category. For Flower, average EQ price is calculated as the total sales divided by the total number of grams of Flower sold, effectively giving us the average price of a single gram of Flower regardless of the package size that it was sold. This metric will better account for shifts in consumer preference between package sizes.
This graph above shows that the widescale declines in average item price were consistent with a significant decline in the average price per gram of Flower.
Change in Flower prices over time
Here we look at the average EQ price of Flower for the month of October in each year since 2020. While there were some slight increases in average EQ price in California and Colorado in Q2 2020, Flower prices have declined in all markets since the latter half of 2021. Ontario’s market has been experiencing slightly decelerating price compression in the category, while EQ price in Michigan’s younger market has been dropping steadily over the past three years. Notably this year, the average price of a gram of Flower in Michigan is just 35% of what it was in October 2020.
Year over year change of the price of cannabis Flower
This graph shows us the relative year over year changes in the average EQ price of Flower for each of the past three Octobers. As we saw in the previous graph, the average price of a gram of Flower actually increased between October 2019 and October 2020 in California and Colorado. In 2021 and 2022 however, the direction completely changed. In California, Colorado, and Michigan, we can see that pricing compression in the Flower category has accelerated between 2021 and 2022. In Ontario, where the squeeze of increased retail and wholesale competition was striking before the COVID-19 pandemic, pricing compression appears to be slowing down.
How do discounts fit in?
As mentioned above in our methodology section, when we analyze pricing at Headset, we are analyzing prices after discounts are applied. This makes trends in discounting extremely relevant to any discussion of price compression. This graph looks at the average discount percentage over time in each market. Unsurprisingly, discounts in all of our select markets have trended up. Discounts can be a powerful tool to attract customers in a competitive environment, but should be applied carefully and strategically to avoid too much reduction in margin.
Margins are all over the place
Here we look at the average retail margin percentage for 3.5g Flower products sold since January 2020. We can see that there has not been one consistent trend in retail margins over the past three years. Margins in Colorado increased through the latter half of 2020 before recently returning back to pre-pandemic levels. In California, margins seemed to decrease until mid-2021 and have since regained most of what was lost. Margins in Michigan have been pretty volatile, but seem to be averaging just below 50%. Retail margins in Ontario seem to have the most consistent trendline, declining slowly and fairly steadily since early 2021.
Which products are getting discounted the most?
Because discounts have such a great impact on pricing, let’s take a closer look at which products tend to receive the most discounts. This graph shows the average discounts applied to products of different ages. By ‘age’ we are referring to the length of time between a single product’s first and most recent sale within an individual cannabis retailer as of October 1st, 2022.
As we saw with the trends in retail margins, there is not a consistent story across markets here. In California for example, the newest and oldest products tend to have slightly lower discounts than those in the intervening age brackets. Conversely in Ontario, the newest and oldest products have higher discounts than those in the middle.
What is clear however, is that there is no universally accepted strategy of discounting newer or older products. In general, within a given market, discounts are applied fairly equally across all product age groups.
Proportional sales by product age group
In the previous chart we looked at discounting by product age. Now let’s look at the relative importance, in terms of retail revenue, of those different product age brackets. This graph shows the percentage of total retail sales in October 2022 derived from each product age group.
California and Colorado look relatively similar here with approximately 20% of sales coming from brand new products and 26% of sales coming from products that have been on shelves for more than a year. Michigan sees a much higher proportion of sales coming from newer products. 62% of sales in October came from products that had been on shelves for less than 90 days. This makes sense in a younger and quickly expanding market. Retailers in Ontario on the other hand, saw a full third of October’s revenue come from products that had first been stocked more than a year ago.
How is cannabis pricing affecting baskets?
Next, let’s look at how price compression is influencing consumer behavior. One of the most impactful choices a customer can make is the choice of how much to purchase in a given transaction. This graph looks at the average basket size for our four selected markets since January 2021. We can see a universal and steady decline in average basket size over the past year and a half. Between January 2021 and October 2022, the average basket size in Michigan declined by -26% from $84.14 to $62.30. In Ontario, average basket size dropped from $56.20 to $39.78, a decrease of -29%. With these major drops in transaction size, would we expect to see some significant decreases in the number of individual products customers are purchasing per trip?
Change in transaction size over time
Apparently not, it turns out. This graph shows the average number of products purchased in an average transaction within each market over time. We can see that there is no major trend of customers purchasing fewer products per trip. In fact in Michigan, customers are purchasing more products at once than ever before. The average number of products in a Michigan cannabis transaction has increased from exactly 3.0 to 4.0 between January 2021 and October 2022, a 33% increase. In the three other markets analyzed here, the average number of items per basket is now either the same or only slightly lower than it was in January 2021. This tells us that customers generally aren’t purchasing fewer items when they visit a retailer, they are simply getting them for a lower total price.