There are two pricing strategies when introducing a new product and/or a new category: profit margin vs volume.
A high profit margin makes sense for finite items like art, or those with a luxury positioning like jewelry, or that are novel like HempNut shelled hempseed was at the beginning.
But for the average retail business, it’s better to make less profit in order to turn inventory and cash flow faster. Over time as the novelty wears off and competition picks up, expect prices to fall.
“Fast nickel” means to price it a little less in order to sell it faster, trading profit for cashflow. Besides profit, cash also has a time value. If you use cash to buy $100 of inventory but it just sits, that ties up your money let’s say for 3 months until it finally sells. If you want to double your money, a common retail pricing strategy, that would be $100 gross profit on $200 in sales, “keystone pricing” or a 50% gross profit margin. But if you sell it for a little less in only two weeks, say $80 profit instead of $100, and do it every two weeks, in three months you’ve sold it 6 times and made $480 at a 44% margin instead of only $100 at 50% margin. Fast Nickel vs Slow Dime.
When introducing HempNut in 1996, my vision was to disrupt low-cost soya so I pursued a low price, high volume strategy. Just like I did for years with soybeans, I would buy hempseed from any nation as long as it met our quality standards.
The protocol was to bring hundreds of tons of certified organic whole hempseed from China to Germany to be shelled, then to Los Angeles for packaging and distribution. Cost of the whole seed was US$0.27/pound, delivered to Hamburg. Cost of shelling was $0.25 per input pound, $0.52 per input pound total.
Since it takes 2.5 pounds of whole hempseed to get one pound of shelled, at a COGS of $1.30 that gave HempNut a huge cost advantage, and allowed me to sell organic at a price well below the Canadians’ cost of conventional, and still have a decent margin. Compare that to their costs, paying 70¢ for whole seed: $2.38 for conventional vs organic HempNut at $1.30.
Conversely, the Canadians chose the high margin path, what I call “Canada Über Alles,” always buy Canadian no matter the price or quality.
One is good for everyone; farmer, processor, and consumer. The other is good only for the processor raking it in. That’s why a large hempseed company sold for an unusually high multiple twice in recent years.
There’s no good reason organic shelled hempseed today couldn’t sell for $5/pound at retail. That would increase sales volume, acres planted, and importance in consumer diets. Everyone would be happy: the farmer is growing more acres, the processor is running at higher efficiency, and the consumer gets a low price. Farmers and processors need to be on the same page, have the same interest.
Otherwise, the processor is always at odds with the farmer, as we saw in Canada. Paying no premium for the lower volume, promising 70¢ but paying 10¢ and taking two years to do it, letting no contracts, forcing stock instead of cash, talking SK into growing more to leverage a lower price from MB, using taxpayer dollars to develop the process then hurting taxpaying farmers, the appearance of price collusion; and all of it covered-up by processor not farmer trade associations, the rise in processors’ hegemony and asynchronous power since 1998 came at the expense of farmer income and stability. Even the mandatory THC test is a risk for farmers but not processors, as the 10ppm max THC in foods is enforced only on imports.
There are lessons to learn for U.S. farmers. We saw the same happen with CBD, processors had too much power over farmers. Walking away from contracts and invoices, bad genetics and worse advice, many empty promises and broken dreams. It appears lawyers made more than farmers on CBD.
And now with Chinese CBD isolate flooding the market, U.S. farmers aren’t even making a dime on the current “Frankenoids” sweeping the country, like delta-8 from hemp, HHC, and the like with their bizarre byproducts having unknown effects.
Our HempNut strategy allowed us to have amazing products at great prices. In 2000, the Arizona Republic newspaper wrote in “Don’t Laugh, Hemp Can Be Good For You:”
“HempNut, from California, absolutely rules the market. The company offers a startlingly diverse line of products, from lip balm to cookies. All of it is vegetarian, most is vegan, and some is organic.”
One can use a Every Day Low Price (EDLP) strategy, but better is to start with a high list price then use a series of discounts to get to a competitive net price. New customer discount, continuing customer discount, prompt payment discount, intro discount, quarterly discount, volume discount, ad discount, promotion discount, friend and family discount, affiliate discount… there are a zillion ways to get the price to wherever you want it, hopefully at least a few points above EDLP.
You also want to start high and come down gradually over time, not start low and have nowhere to go in response to competitive pressure or Buyer demands. Using trade discounts, even if the net price is a little higher, is a great psychological trick to get the Buyer thinking you’re his new best friend. It lets them “win the negotiation.”
If not for that fiber association killing foods for years, you would see $5 HempNut today. No wonder they so zealously protected investments up there afterwards, their four-year PR stunt almost sunk Canadian as well as U.S. hemp!