WHOLESALE DEMAND IN THE MEDICAL MARIJUANA MARKET IS HIGHLY ELASTIC
By New Frontier Financials, www.frontierfinancials.com
Optimizing the sales price of cannabis to maximize both sales volume and profitability is one of the biggest challenges
facing cultivators in the marijuana industry. Not only is there significant competition to contend with in the legal market,
but there is also a robust black market competing for the same business.
Understanding the nuances of wholesale marijuana demand is therefore critical for operators to optimize their pricing
strategy and maximize revenues. In order to understand how pricing has shaped wholesale demand, New Frontier
tracked over 300 wholesale transactions in Colorado’s medical and retail market, covering the eight-month period
between June 2014 and February 2015.
Using a technique called demand frontier modeling, we were able to calculate the highest volume of product you would
expect to sell at a given price point. In the chart below, the points highlighted yellow represent the outer bounds of price
and quantity, and the yellow line is the demand frontier.
This analysis also tells us that there is significantly greater revenue at lower prices than at higher prices. As the chart
below shows, during our observation period, only 5 lbs. were sold at $3,000/lb., the highest price observed, yielding
$15,000 in revenue.
Comparatively, 200 lbs. were sold for $1,900/lb., netting $380,000 in revenue. This confirms the significant difference in
revenue between the top end and bottom end of the markets.
Modeling Aggregate Wholesale Demand in the Medical Market:
In order to create a model for aggregate demand in the medical market which would explain how changes in price affect
the volume of marijuana sold, we first clustered the data into five usable groups, or bins. The bins were then used to
calculate the aggregate demand curve which tells us the total quantity of product sold within each bin against the
average price within the bin, as plotted in the chart below.
Our analysis found that sales volume increased significantly as the prices decreased, with sales being five times higher at
prices below $1,850/lb. than they were at prices above $2,300/lb.
The importance of this finding for medical marijuana producers is that a relatively small shift in price, for example from
Bin 3 ($1,900 - $2,150) to Bin 2 ($1,800 - $1,900), can yield nearly twice as many sales.
The finding of such strong price elasticity in the medical market – i.e., as prices increase, demand decrease – has
important implications for cannabis cultivators, including:
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As more cultivators enter the market, growers will begin to compete on price, resulting in lower wholesale prices,
and lower profitability for growers.
There will be increased focus on lowering production costs, and which will include reducing the very significant
energy costs associated with marijuana cultivation
In markets like Colorado where indoor cultivation has dominated, more growers will begin moving to greenhouses
and other outdoor growing environments to reduce their real estate and energy costs, while enabling them to
capitalize on economies of scale through larger growing facilities.
These are just some of the findings from New Frontier’s wholesale demand analysis, and we found even greater
differences in the adult use market.
To learn more on how small price changes can impact your revenues in the medical and recreational market, and what it
means for growers moving forward, click here to see New Frontier’s latest Owner/Operator case study.