Toxic Growth: The Dangers of Undercutting
The cannabis industry is evolving rapidly, with businesses striving to expand and establish dominance in their markets. However, not all strategies lead to sustainable success. One of the most harmful approaches being used is aggressive price undercutting, where businesses lower prices to capture market share at the cost of long-term profitability and industry stability.
While lowering prices might attract customers in the short term, it often creates significant financial and operational challenges. Here’s why undercutting prices is a risky approach and what businesses can do instead to achieve sustainable growth.
The Problem with Price Undercutting
1. It Leads to a Race to the Bottom
When one business drastically lowers its prices, competitors feel pressured to do the same. This results in an industry-wide price war that shrinks profit margins and creates a business model where everyone struggles to survive. Over time, the constant price reductions make it difficult for companies to reinvest in product quality, innovation, and compliance.
2. It Harms Small and Mid-Sized Businesses
Larger cannabis corporations with significant financial resources can afford to temporarily operate at a loss while lowering prices. However, small and mid-sized dispensaries and growers often do not have the same flexibility. This leads to market consolidation, reducing consumer choices and pushing out local operators who helped build the industry from the ground up.
3. It Devalues the Cannabis Market
Customers often associate price with value. If prices are consistently driven down, consumers begin to expect low-cost cannabis, disregarding product quality. This creates a cycle where businesses are forced to cut corners to maintain profitability, ultimately lowering overall industry standards and consumer trust.
4. It Encourages Regulatory and Compliance Shortcuts
To compensate for lost profits, some businesses may attempt to reduce costs by cutting compliance efforts, which can include:
Misreporting sales to lower tax liabilities
Skipping necessary product testing
Misclassifying workers or underpaying employees to avoid labor costs
These shortcuts not only risk legal penalties, fines, and license revocations but also damage the reputation of the entire industry.
Sustainable Alternatives to Price Undercutting
Instead of engaging in destructive pricing tactics, cannabis businesses can adopt sustainable strategies that promote long-term profitability and industry growth.
1. Focus on Brand Value, Not Just Price
Consumers are willing to pay more for quality products and a great shopping experience. Businesses should differentiate themselves by emphasizing:
Organic and sustainable cultivation practices
Exclusive and high-quality product offerings
Exceptional customer service and knowledgeable staff
2. Implement Loyalty & Subscription Programs
Rather than continuously cutting prices, businesses can create value through programs that encourage repeat purchases, such as:
Points-based rewards systems
Subscription models that offer consistent product deliveries at a fixed rate
VIP memberships with access to exclusive products and promotions
3. Educate Consumers on Quality & Effects
Instead of competing solely on price, dispensaries should educate customers on what makes a high-quality cannabis product. This includes:
The importance of proper curing, terpene profiles, and cannabinoid balance
Why certain strains cost more due to premium genetics and cultivation methods
How to distinguish between budget and premium products based on lab testing and certification
Shifting the conversation from price to quality allows businesses to maintain profitability while retaining customer loyalty.
4. Strengthen Supplier and B2B Relationships
Rather than slashing prices at the retail level, businesses can reduce costs through smarter purchasing and supply chain management. Strategies include:
Negotiating better bulk pricing with suppliers
Partnering with other dispensaries for co-op buying agreements
Investing in technology to streamline operations and minimize waste
By focusing on operational efficiency rather than price reduction, cannabis businesses can maintain strong financial health while offering competitive pricing.
Under IRC Section 471-11, cannabis processors classified as manufacturers must use the full absorption method for inventory accounting. This means:
You must capitalize both direct and indirect production costs into your inventory.
You cannot expense things like utilities, rent on processing space, or wages of production staff immediately—they must be allocated into the cost of goods sold (COGS).
This method aligns with GAAP and is critical for clear income reflection—particularly under IRS scrutiny.
Conclusion
While undercutting prices may seem like a quick way to grow, it ultimately weakens the cannabis industry by creating unsustainable competition, lowering product quality, and reducing profitability. Instead, businesses should focus on brand differentiation, customer education, and strategic cost management to foster long-term success.
Looking for guidance on pricing strategies and financial sustainability in the cannabis industry? Niche Accountant specializes in helping businesses navigate financial challenges and develop long-term growth plans. Contact us today to build a smarter, more profitable cannabis business!
