The Devil is in the Discount: A Call to Action
In the cannabis industry, deep discounts may seem like a good way to attract customers, but they often come with hidden costs that can devastate your business. Marking products down by 40% or more isn’t just a bad habit—it’s a destructive practice. Here’s why.
The Financial Breakdown
When you discount a product by 40% or more, you’re effectively losing money before the sale is even complete. Consider this:
Inventory cost typically runs around 50%.
Labor takes up an additional 20%
That means your costs alone total 70%, but you’ve only charged the customer 60% of the original price. You’ve just paid 10% of your customer’s product out of pocket, which doesn’t even account for general business expenses like rent, utilities, or marketing. These discounts directly lead to cash flow issues that ripple throughout the supply chain, putting cultivators and processors under immense pressure to cut costs in a world of razor-thin margins.
Teaching Customers the Wrong Value
By heavily discounting your products, you’re unintentionally teaching your customers that your product isn’t worth its full price. Once you’ve set that expectation, it’s nearly impossible to reverse. Cultivators and processors are then forced to slash their own costs, often sacrificing quality to survive—and all of this happens while dispensaries race to the bottom in a toxic cycle of price wars.
Red Lobster’s “Endless Shrimp” promotion is a perfect example of this phenomenon. While it may have drawn crowds, it ultimately tanked the company’s profits because the deep discounts couldn’t sustain the high operational costs. This same principle applies to cannabis dispensaries: unsustainable pricing practices hurt everyone in the long run.
Focus on What Matters
Small cannabis businesses can’t and shouldn’t try to compete with large corporate players like Good Day Farms on price alone. Instead, we can stand apart by focusing on:
Quality products: Support local cultivators who produce exceptional cannabis.
Knowledgeable staff: Invest in training to ensure your team offers top-notch guidance.
A welcoming environment: Create a dispensary that feels like home, not just another retail chain.
We aren’t their competition because small businesses are the heart of the cannabis industry. Our focus should be on quality, care, and the patient experience—not just high THC percentages or low prices.
The Real Problem with Deep Discounts
Dispensaries offering steep discounts often do so under extended terms and conditions that shift liability onto cultivators and processors. In many cases, these discounts are essentially a cash flow Band-Aid, disguising deeper financial problems. Running a dispensary like a consignment shop might keep the lights on temporarily, but it’s not a sustainable business model.
Beyond the immediate financial losses, there is also a significant tax consequence to discounting products too heavily. To reasonably provide these discounts you have to squeeze your vendors. In the cannabis industry, Cost of Goods Sold (COGS) is the only allowable deduction under federal tax laws. Forcing vendors to comply with lower costs lowers your COGS. Leaving nothing to reduce your taxable income safely. This leaves you with a higher taxable income and, ultimately, a bigger tax bill. These discounts hurt your cash flow and your bottom line come tax season.
A Call to Action
We need to work together to educate patients about what quality cannabis looks like and why it matters. The responsibility of attracting customers lies with the dispensary, not the cultivators and vendors. Let’s find a balance between fair pricing and the value we offer our customers. Let’s prioritize:
Educating patients about more than just THC percentages.
Building strong, sustainable partnerships with cultivators and processors.
Offering excellent service and creating a memorable dispensary experience.
The devil truly is in the discount. Let’s stop selling ourselves short and start building a market that values quality, care, and community over cutthroat competition.
Conclusion
Niche Accounting is the premier partner for optimizing your cannabis business. We know this industry inside and out and provide the tools, insights, and strategies to help you run an efficient, profitable operation. By focusing on improving your business’s efficiencies and avoiding common pitfalls like over-discounting, we ensure your cannabis business thrives in a competitive market.
