From Forbes: Marketing Marijuana: How Will Producers Create Demand And Build Brand Loyalty?

Nov 30 • Industry News • 2786 Views • No Comments on From Forbes: Marketing Marijuana: How Will Producers Create Demand And Build Brand Loyalty?

My favorite quote:

““You really have four markets,” says (John) Quelch, (a Harvard Business School marketing professor,) “medicinal, individual grower, recreational, and the illegal market.”
Author Michael Blanding continues: “Each segment shows different dynamics in terms of its sensitivity to price, marketing, and convenience.””

BY MICHAEL BLANDING | 11/19/2014

On Tuesday, the family of deceased musician and celebrated marijuana user Bob Marley announced what it claimed will be the first global cannabis brand, Marley Natural.

Marijuana is a growth industry—and increasingly, a legal one. When the smoke cleared after the November 2014 election in the United States, two new states, Alaska and Oregon, as well as the District of Columbia had legalized the recreational sale of marijuana. They joined Washington and Colorado, which legalized pot in the 2012 election, as well as two dozen states that have decriminalized possession to accomplish something that hadn’t been done in 81 years—make an illegal drug legal.

Of course, the question remains: How will state residents be able to buy, sell, and use something that is still against federal law? But in the absence of enforcement action by the United States government, perhaps the better question is, what will the inevitable national market in marijuana shake out? Will it consist of grungy underground head shops? Designer weed boutiques? Or will “Big Marijuana” companies—perhaps the existing “big tobacco” powerhouses—muscle their way in and perpetrate “The Bud Light-ification of Bud,” as the New York Times suggested?

Those pursuing answers need look no further than the Mile High City and its surrounding environs, where the first great experiment in selling smoke is already under way. Marijuana for recreational use officially went on sale in Denver and across Colorado in January 2014.

In a new case study to be available shortly, Marketing Marijuana in Colorado, Harvard Business School marketing professor John A. Quelch and coauthor David Lane look at lessons from the first few months of legalization to see what they may tell us about eventual trends. Quelch, the Charles Edward Wilson Professor of Business Administration, holds a joint appointment at Harvard School of Public Health as Professor in Health Policy and Management.

Creating Demand

One big open question is the degree to which illegal demand will be significantly diminished by the availability of recreational marijuana, says Quelch. “And a second is, how much will overall demand increase—since, now that it’s legal, you’ll have people demanding it who wouldn’t have demanded it before.” Early indications are that demand is there—and growing.

Despite tight regulation, between January and July the number of retail marijuana licenses grew in Colorado from 37 to 200, along with creation of 500 medical marijuana dispensaries. Most recreational buyers seemed to be casual users. In fact, for those six months, recreational marijuana accounted for 80% of the $25 million in tax revenue from marijuana sales, with the state predicting $134 million in the next fiscal year.

As Quelch found in his research, however, the picture is more complicated than medical versus recreational users.

“You really have four markets,” says Quelch, “medicinal, individual grower, recreational, and the illegal market.” Each segment shows different dynamics in terms of its sensitivity to price, marketing, and convenience.

Medicinal consumers, for example, do not care so much about variety. “Once you find the strain and supply source that best alleviates your pain, you are going to stick with it,” says Quelch. But medicinal users are frequent customers so they do care about price. “They do not need to buy it at a fancy store—they’ll go to a back alley basement shop as long as the product delivers.”

Recreational users are the opposite; they are looking for variety and willing to pay extra for it. “Many recreational users come in from out-of-state and enjoy the novelty of the shopping experience—and the cost structure goes up if you offer a well-fixtured retail store,” says Quelch. Small-to-medium-sized marijuana producers are already trying to build brand loyalty by marketing strains such as Grape Stomper, which boasts a high THC content; sweet-tasting Golden Goat; and low-THC Critical Mass, which markets itself as a more mellow bud.

Price of Pot

Since Colorado restricts TV and radio advertising of marijuana, retail storefronts in Denver, Vail, and other ski towns have become the marketing battleground—featuring attractive sales staff in quality retail spaces in prime locations for foot traffic, all of which drives up the retail price.

“The retail storefront and signage is game one,” says Quelch. “Can you pass those prices on (to consumers) and command a brand premium? I think the answer is yes—there is a large segment of the recreational market—including relatively infrequent users—that is not price sensitive.”

Surprisingly, the recreational segment includes a high number of users who are eating marijuana rather than smoking it. About 50 percent of sales in the city stores are edibles. “That reflects new consumers coming into the market who aren’t interested in smoking joints, because that’s a dirty habit,” says Quelch. “But if you give them pot in a cookie, they have no problem with it.”

The potentially high price of retail marijuana, however, leaves frequent recreational users in a bind. To escape price inflation, they could grow their own pot at home, but that’s a time-consuming and harder-than-it-looks process.

Or they can consider the illegal market. Options here include trying to scam a red card for access to medicinal marijuana at a medical dispensary, where prices are reduced due to lower state and municipal taxes. Another alternative: buy on the street, enjoying low prices (no state and municipal taxes) but risking arrest. The extent to which the illegal market continues to flourish, says Quelch, depends on how much states charge in taxes, and how much additional recreational demand continues to drive up retail prices—both of which remain to be seen.

As for Big Marijuana creating a national mass-market brand of pot, that is probably a long way off. As long as marijuana sales remain illegal on a federal level and in all but a handful of states, large cigarette and alcohol companies will probably stay clear of the risk—at least until a critical mass of states legalize. Says Quelch: “I believe guys like Philip Morris and R.J. Reynolds are looking carefully at this, but they are not going to make a move until the recreational market is more established and looks likely to go national.”

It is likely, however, that some entrepreneurial marijuana companies may expand to multiple states, in an effort to achieve early market share and economies of scale that would position them to be bought out later by national players. Unlike craft beer, marijuana would be inexpensive to transport across state lines to retail outlets across the country.

“I think you’ll definitely see a couple of companies get licenses in more than one state,” says Quelch. Those enterprising companies may have the most to gain from getting in on the market early—before the potential tidal wave of legalization sweeps the country.

When and if this happens, it may not be long before you see Grape Stomper behind the counter at a convenience store near you.

About the author: Michael Blanding is a senior writer for Harvard Business School Working Knowledge.

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