Marketing Marijuana

Forget Big Tobacco—is the era of "Big Marijuana" that far off? As Harvard Business School marketing professor John A. Quelch reports, the Mile High City is taking on new meaning as a laboratory for the marketing of marijuana in Colorado—and across the country.
by Michael Blanding

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.

Suddenly, 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.

“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”

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.

As states continue to decriminalize its use, marijuana
is increasingly available to (some) consumers.Photo: iStockPhoto

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 percent 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."

“I believe guys like Philip Morris and R.J. Reynolds are looking carefully at this”

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. Somewhere, the ghost of Bob Marley is smiling.

About the Author

Michael Blanding is a writer based in Brookline, Massachusetts

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In order to be published, comments must be on-topic and civil in tone, with no name calling or personal attacks. Your comment may be edited for clarity and length.
    • Tazio Grivetti
    • Innovation Manager
    Will companies that try to become "Brands" in the dope space be vilified like big tobacco? Dope smoke contains 50% more benzopyrene and 75% more benzanthracene (both known carcinogens) and due to the way it is inhaled, a user gets 5X the level of carbon monoxide concentration and 3X the tar, and higher levels of wonderful things like ammonia and hydrogen cyanide. An enterprising lawyer might conclude that it's even more evil than tobacco, and these companies KNOW it based off the scientific research. As soon as their pockets are full of drug profits, they will be ripe for attack - since they obviously don't care about people's health, and are just interested in their ill-gotten gains at the expense of the dope-smoking public!
    • Ellen Clark
    • Owner, Advent Technologies
    Let's make the US a cartel and screw any good biz. I am very mad at this and the Open/Conceal Carry. Looks like they are making US a big cartel. Would like more discussion on this, especially the guns.
    • Kedareshwaran S
    • Assistant Professor, T.A. Pai Management Institute
    The whole idea of legalizing marijuana which is far more harmful than tobacco and alcohol is like a slap in the face to the entire health activists community who have fought so hard to spread awareness of the health hazards related to tobacco and alcohol.

    It is only going to add to the burden on the healthcare sector and ultimately lead to a more unproductive population which is the price to be paid for such 'market' driven decisions.
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    In my view, encouraging use of any drug is an anti-social activity. Such items are a grave health hazard. When the entire world is getting serious on curbing use of tobacco in whatever form, permitting growth of marijuana is not a positive development. I am not aware of what the legal prescriptions are, but stongly advocate a ban.
    • Dave Davidson
    • Director, Stockpot Catering
    Very informative article!
    A drug is a consumable good -just like food, water or oxygen. If pleasure and prosperity are derived to the user by its consumption then enjoy it! (we're all going to die remember). Oh and yes 'drugs' are sometimes the reason behind a persons ill circumstances however the list of life's problems really is endless. It's called living guys and its incredibly fun : ).
    • Darren
    • na, na
    I think Quelch's take on cannabis pricing is interesting. He's certainly right that a respectable portion of the recreational market is not price sensitive. However, from my understanding the medical patients are still very much a deal seeking crowd.

    I have a few close friends and one family member in Seattle that won licenses to run rec shops (who had also run medical shops prior) that say medical patients not only buy more - and more frequently - but are extremely price conscious.

    Medical shops are also significantly cheaper than their recreational counterparts even in the same cities.

    If you check out dispensary price comparison site you can see the difference.

    If you go to the recreational Denver page you can see how many grams various recreational dispensaries in the area will provide at various price points:

    Compared to medical shops in Denver and you'll see the difference:

    Seattle rec and medical prices are even farther apart but they have a different tax structure than Colorado. In Washington State local taxes take 20 pct from producer to dispensary and then another 20 pct from dispensary to consumer. Colorado's is just 28 percent total.