As Price Plummets to Historic Low, Marijuana Entrepreneurs Need to ‘Pivot, or Die’
In state-regulated markets, marijuana is getting cheaper thanks to the economic forces of supply and demand.
As the U.S. legal marijuana market matures, pot is getting cheaper than ever. The price per pound has fallen at least 25 percent in Colorado since last year, according to data from Colorado’s Department of Revenue.
Sally Vander Veer, co-founder of Medicine Man, a marijuana cultivator and retailer, says that in 2010, her company would have been able to sell a pound of marijuana for $5,000. That was during the early days of the above-ground legal marijuana market. Today, a pound of goes for as low as $1,000 to $1,200. According to Colorado’s Department of Revenue, the wholesale price per pound for marijuana reached a historic low of $1,471 per pound, a drastic 24.5 percent drop since 2016. Vander Veer says her company’s margins for flower dropped by 40 percent in one year.
Geoff Doran, co-founder of Tradiv, an online wholesale cannabis marketplace, says the average price per pound in Denver is currently $1,200, down from $1,900 last year, and down from $2,600 in fall of 2015.
This should be no surprise, as policy experts have been warning about the imminent crash. After studying marijuana price data from Washington’s Liquor and Cannabis Board last year, Steve Davenport, a researcher at the Pardee RAND Graduate School, and Jonathan Caulkins, a professor at Carnegie Mellon University, predicted that the price would drop two percent each month. That’s an annual decrease of 24 percent.
In his book, “Marijuana Legalization: What Everyone Needs to Know,” Caulkins explains that pot prohibition had built-in costs (i.e., running a covert operation, and higher employee wages due to legal risk). But as the legal market blossomed, those costs disappeared. States now tax cannabis sales; Colorado has a 15 percent excise tax, but the cost of production and running a business is much lower.
Brendan Kennedy, CEO of Privateer Holdings, says the price per pound in Washington has “dropped precipitously” since legalization. “At the end of the day, cannabis is an agricultural product not that dissimilar from grapes or hops,” he said.
The commoditization of cannabis means that companies need to scale their operations, invest in technology, and build a strong brand that will differentiate their products from competitors, he added.
Cy Scott, founder of data analytics company Headset, says in Washington the price dropped 15 percent this year from 2016. He says there’s always a drop from December through February as freshly-harvested flower floods the market and a price increase during the lean spring and summer.
Roy Bingham, founder of BDS Analytics, a point-of-sale and data analytics company for marijuana dispensaries, started a similar company in the natural foods space before getting into the marijuana industry. “Twenty years ago, a big chunk of ‘natural foods’ was bulk bins,” he said. “Today, ‘natural foods’ is a brand bonanza. I see similar trends unfolding in cannabis.”
In the next 18 months, Vander Veer predicts that a wave of cultivators will go out of business if they don’t adapt. “It’s sad, but it’s Economics 101, we’re not immune to the forces of supply and demand,” she said. “You need to ride the wave of over-supply. It’s pivot, or die.”
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