Cannabis delivery is legal thanks to California’s new permanent regulations passed earlier this year.
The state-wide legislation makes it possible for cannabis operators to deliver to a customer, even when they live in a municipality that prohibits cannabis. Non-storefront delivery companies are able to serve these “cannabis deserts,” adding a lucrative new revenue stream to their business.
Adding delivery and online shopping can be a great way to reach new customers, increase your revenue, and build your business. But, it’s important to price your delivery service profitably – otherwise, your delivery service can easily drain your cash flow and make it difficult to sustain other parts of your business.
Here’s what you need to know about cannabis delivery pricing.
Pricing Cannabis Product for Profit
Delivery pricing comes down to a three-step approach. The first step is to look at the market and understand the current landscape.
You need to answer these questions:
We suggest that you do some competitive analysis to research the going rate in your area and put all of your research information into a spreadsheet.
Things to track would be:
You can read more about pricing cannabis products in our guide, but the basic goal is to take into account the unit price, as well as the overhead and fixed costs per unit.
Remember, product is just one of your expenses: you also have costs associated with gas, vehicle insurance, paying your team, and licensing fees. Factoring in these extra expenses gives you a breakeven point when your sales exactly cover your expenses.
Before we continue, let’s take a moment to understand what you’re learning about your company during this process.
Gross Profit Margin v. Contribution Margin
As a business owner in a competitive industry, it’s likely that you’re familiar with gross profit margin. This is a calculation of (total sales revenue - total direct costs of goods sold)/total sales revenue. This number “establishes the relationship between production costs and total sales revenue.”
Contribution margin is calculated as (revenue from sales of an item - production costs for the item ) ÷ revenue from sales of the item. This number tells you “how profitable one item in a product line is in comparison with another.” It lets you critically assess how your different products are performing; what we’re essentially doing is breaking out delivery as its own separate product line to assess if it’s a worthwhile investment.
Calculating the Contribution Margin
Calculate your contribution margin by subtracting variable costs from your sales. Obviously, this point is important because the goal is not to break even on delivery but to make a profit. Include all your cost of goods sold, employee wages, and taxes. Taxes are part of your variable costs, and you must include them in this calculation.
Then you will need to figure out how many units you will need to sell at a specific price point and contribution margin to breakeven and then be profitable.
So what you’ll you need to consider is your capacity and working capital.
First, ask yourself, how long will it take to get to the capacity to hit that target number of units?
Then consider, how much working capital do you need to last until getting to capacity?
Once you understand those two numbers, you will know your working capital needs and then can begin testing your assumptions.
Price Testing Cannabis Delivery
The third and final step is testing.
A big advantage of delivery is that it’s easy to test your pricing scheme quickly. E-commerce has a quick feedback loop, meaning you can perform A/B testing on your website and with different customer segments to zero in on the right pricing scheme for your business.
A/B testing is a way to compare two versions of a pricing model against each other to determine which one performs better. In the experiment, two variants are shown to user groups at random, and then statistical analysis is performed to show which option leads to better profit.
To perform A/B testing, first separate your customers into new and existing customers.
The “A” section of your test will be your control group: customers who exist with the same current margin.
Your test group B will receive new pricing wherein you test different margins. Use a few different cohorts at different markups to see how your customers respond to the new pricing changes.
For example, analyze each test group of customer’s purchase frequency and average spend per transaction to see if higher price points discourage shorter times between purchase. Compare to see where you can squeeze more margin without turning away your best customers.
Here’s an example of how to host a pricing A/B test. Pretend your customers, on average, order every 14 days. For two months you run a delivery pricing test where for one group of existing customers, you bump your price margin by 2.5-5%. Will they visit less frequently? Will they spend less per visit?
In parallel, you run a test on your new customers. You are able to perform an A/B test using two landing pages or sets or products. The first landing page is your existing, standard e-commerce website with your normal pricing. The second page tests a higher price margin – similar to the margins being trialed on your existing customers. Which landing page or product has a higher conversion rate?
Getting the Most of Your Delivery Test
How can you make sure to make the most of your pricing test?
Amplify your reach with ads, using flyers, Weedmaps, and more to make sure to get the word out.
Check out our guide on cannabis marketing to understand what you can and cannot do in your advertising campaigns. What’s great about delivery, though, is that a customer comes through your website, giving you full control over the check-out experience.
You’re able to gain insight into how their payments play out: will a customer use cash, debit, or credit?
Pro-tip: our experts recommend limiting how many credit cards you accept to lower your risk of money laundering issues.
You also get solid metadata including:
Learn more about profitable pricing by getting in touch with our experts at the button below.