The difference between markdowns, discounts & promotions

Throughout this series, readers follow Steve Allen (Owner of Cannaconnect) as he embarks on his mission to open 15 cannabis stores over the next three years. Backed by Vetrina Group, cannabis retail experts, as well as Headset data and analytics, Steve decided on an aligned approach to his retail expansion plan in order to optimize his profitability. He managed to accomplish this by establishing a solid, scalable foundation built on operational efficiency, customer service excellence, and utilizing a performance-driven retail strategy.

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Everyone remembers the story of the Tortoise and the Hare, especially the fable’s famous moral, ‘slow and steady wins the race’.

Steve will tell you, this type of mindset doesn’t work in the cannabis industry. Competition is fierce. If retailers keep their heads down for too long, the competition will be at their heels before they know it.

On your marks - Get set - Go!

Like many cannabis retailers, Steve Allen had a previous career. Twenty-five years, in fact, as the owner/operator of a shipping and logistics company. However, his interest in medical and recreational cannabis drew him towards the cannabis industry. The burgeoning industry’s future intrigued him. He kept a close eye on the first West Coast stores and followed the winners of Ontario’s retail lottery system. After spectating for a year, he was ready to play. Steve opened the doors to Cannaconnect’s first location in September 2020. One down, 14 to go!

Steve’s background as an entrepreneur gave him a leg up when he was getting started. He was comfortable managing a business, so opening the store would be the hard part. To help protect cash flow and control spending, he adopted a “be lean and lean in” approach to opening the first store. He had the skills, so he did it himself. When Steve began to feel like he needed some support, he invested in professional consulting.

The unexpected expenses related to retail-centric decision making caught Steve off-guard. He didn’t think that owning a retail store would be much different than owning any type of small business; that is until he began making important (and costly) decisions regarding his inventory, pricing, technology, and hiring.

In the new and highly regulated retail sector, there wasn’t much support Steve felt he could depend on to help him make the right choices. Cannabis in Canada had been legal for less than two years. With limited historical data to review, and new stores coming into the market all the time, everyone was hoarding their trade secrets. He realized very quickly that owning a cannabis store was a lot more complicated than shopping in one. Steve knew he needed more assistance getting organized.

In September 2020, Cannaconnect passed its final inspection. It opened its doors a week later. Steve struggled through the unknowns by figuring things out by himself, but learning everything himself was incurring major costs for the business. Steve understood he couldn’t sustain a profitable business this way.

Not knowing that Headset or Vetrina Group existed, Steve made his first inventory order blindly. His initial purchases were based on an article written by one of the first cannabis retailers. This retailer had purchased the maximum allowable amount of inventory every week, and yet kept selling out. Steve’s strategy was similar: always have enough for everyone. Who his customers were and how much he would need to buy, Steve still didn’t know.

Hindsight is 20/20

When Steve first started thinking about opening a cannabis retail store, he was inspired by the success of pioneers in the sector. Whatever they were doing was working for them. If he could replicate it, it should work for him too. While this helped him initially, Steve quickly realized it wasn’t enough.

In the first three months after Cannaconnect opened, a lot of what he had learned from these retailers didn’t translate to his business the way he imagined it would. He couldn’t see their opportunity gaps, or the errors these other retailers were making. Without knowing what was happening behind the scenes and in their books, these pioneers only seemed successful on the surface. Looking back, Steve realizes now how much he didn’t know.

Headset Retailer assists store owners like Steve to optimize their retail operations, by providing data and insights critical to a store's success. This aids in avoiding inefficiencies with inventory stock, staff management, product assortment and more. Subscribing to Headset Retailer, in addition to working with Headset's team of highly experienced analysts, would have helped Steve to determine what products would sell the most and the fastest.

A retail store is a lot like a machine; it has a series of moving parts. Vetrina Group specializes in supporting retailers to ensure those parts are servicing both their customers and their team members, which helps drive better KPI. Using supplementary data, Vetrina Group would have helped Steve make sure he was using the right products in the most efficient places at the best times, in order to encourage more sales.

Teamwork makes the dream work

Steve was confident in his business acuity and the competitive advantages he believed he had, so naturally Cannaconnect should thrive. Except, he didn’t have the same confidence in his retail skills. His strategy wasn’t solid enough to scale as quickly or smoothly as he had initially projected, and he wasn’t sure how to fix those issues. As the cannabis retail landscape continued to grow and evolve, it was critical for Steve to build a strong foundation. Otherwise, CannaConnect’s future couldn’t be certain.

Opening 15 stores in three years was a lofty target, and he didn’t have a lot of time to get it right, make Cannaconnect scalable, and above all else, remain profitable. Steve Allen looked to Headset and Vetrina Group to partner with him, so they could build him a stronger foundation through the use of a detailed strategy. One backed by data, which would allow him to progress and succeed in his retail journey the way he’d originally hoped he would.

The pricing strategy

Vetrina Group’s initial retail audit, supported by data through Headset's inventory dashboards in Retailer, proved what was uncovered was conclusive.

Steve was overbuying and overstocked in some categories, while consistently understocking others.

His bestsellers were in fact products that were just more readily accessible. They weren’t actually focused on what his customers really wanted.

Steve thought he was listening to his customers. After all, he was in the store every day talking to them himself. Steve believed the stereotypical Cannaconnect customer would be price conscious. But not all of his customers were vocal about what they wanted, and the data was telling a different story, a more accurate one. Headset data showed the true nature of what his customers were buying, as well as the price that they were willing to pay for it and what they wanted more of. Steve receives weekly shipments of product, so he can cater his weekly inventory orders to what products are trending in sales and low in stock.

Pulling it all together

When Vetrina Group pulled the Headset reports, historical sales data, and in-store observations together, they found limited consistency and minimal consideration in how Steve managed his pricing.

This is what was noted in those findings:

• Inconsistent markdowns
• Basic markup % (keystone) and manufacturer’s suggested retail price (MRSP) on all product
• Special prices on top-selling products
• A price match policy that was depleting profits
• Unregulated discounting
• Unsustainable competitive prices; i.e ‘prices so low they can’t be beaten’ (until they are)

Vetrina Group recommended Steve start 2021 with a pricing strategy to align inventory procurement with sales projections, through the use of data provided by Headset. This target would maintain profit margins and keep inventory fresh by moving inventory as quickly as possible. Steve didn’t quite understand what that meant or how it would be implemented, but he trusted the data Headset provided, as well as Vetrina Group’s retail expertise.

Throughout the series, support channels for Headset merged with Vetrina Group’s support channel, providing retailers with the consistent focus they needed to align important values necessary for building a business strategy. These included providing consistency in both inventory and pricing structures to help maintain a consistent profit margin, as well as strong brand positioning, designed to give Cannaconnect a competitive advantage in the market.

Sign up for a demo of Headset's Retailer Software for free business intelligence or to learn how you can better understand your customers, create effective pricing strategies, manage your staff, and more.

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Part 1: Developing a pricing strategy

In Part 1, Vetrina Group and Headset will help Steve develop a pricing strategy that is perfect for Cannaconnect's customers by comparing relevant reports that will provide much needed insight.

Click here to read and download Part 1.

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Part 2: Promotional pricing

Promotions can be used to add value to existing offers. The process of integrating promotions into a pricing strategy will vary depending on the store. In Part 2, we guide Steve through how to best create and measure an effective promotional strategy for Cannaconnect.

Click here to read and download Part 2.

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Part 3: Discounts

Discounts are used to target specific groups of customers and strengthen their loyalty to the store. In Part 3, Steve learns how to integrate a compelling discount strategy for Cannaconnect's customers.

Click here to read and download Part 3.

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Part 4: Markdowns

Retailers use markdowns as the basis for attracting new customers, enticing impulse purchasing, and liquidating old or poor quality products. In Part 4, we find the best markdown strategy for Cannaconnect.

Click here to read and download Part 4.