How to Improve the Margins in Your Cannabis Business

How to Improve the Margins in Your Cannabis Businesses

As cannabis legalization sweeps across North America, albeit at slower speeds in the US, many cannabis businesses are realizing that the margins they put down on spreadsheets in business plans are not panning out to be as high as they thought. While companies that sell cannabis are facing margin compression from lower prices on the black and gray markets, even the ancillary or “pick and shovel” businesses are facing margin squeezes from low cost providers shipping plastics from the likes of China, Vietnam and Cambodia.

So what can cannabis businesses do to improve their margins? If you can’t raise prices, known as the top line in your financial reports, how can you improve the bottom line. Top line numbers are usually referred to as overall revenue, did you sell more stuff? It does not look at, was the stuff you sold profitable? The bottom line usually refers to the profit of the company, meaning you take your revenue and subtract out all your other costs to come up with, what you hope, is a positive number, or profit.

With growing worldwide competition for cannabis products, not only the actual flower and selling the marijuana plant, but also on the ancillary side of selling things like packaging, plastic bongs, LED lights etc., how is a company suppose to make a profit? If you can’t raise your prices due to competitors offering lower prices on the same products, how can you fatten up your bottom line and squeeze more profit out of your company?

Selling the Flower –

As readers of Cannabis.net know, we are shorting the price of cannabis flower for the next 100 years. There will be so much cannabis grown worldwide and, in every field, closet, room, and office that the prices will only come down. One way to increase profits of a consumer good that is becoming a commodity (think tomatoes, broccoli, lettuce) is to make the product an ingredient in something with a higher profit margin. Tomatoes into pasta sauce jars is one example. Hershey’s takes the commodity of sugar and turns it into a much higher margin product known as a Hershey’s chocolate bar. In the cannabis world, you will need to take your cannabis flower (with lower and lower margins) and turn it into a higher margin product like oil, chocolates, gummies, or concentrates. The margins are much higher in edibles than in selling direct cannabis buds. Turn your commodity into an ingredient and then put that in a higher margin product.

“Picks and Shovels”

If you are in the ancillary cannabis space, such as items used in the industry but that do not touch the flower per say, you have margin compression from low cost Asian competitors. The competition is fierce in the vape pen and vaporizer market, as well as the LED or grow light areas. All those supplier can be made at low cost Asian factories and shipped directly to the US now. So what can you do if you have just launched your vape pens line or LED light business?

Expand your offerings to be more comprehensive. In the same sense as our edibles example, package up lower margin items into groups or packs and sell them at a higher margin. For example, if you sell LED grow lights, why not team up or import in the container to put cannabis plants in, and the water hoses to irrigate them. Instead of selling LED lights at 15% margins due to competition, sell a beginners’ grow pack that includes all 3 items and that you can mark up to 50% margin? Take your one commodity (LED light) and turn it into a high margin product (grow kit, all-in-one start pack).

Get Your Customers at a lower cost

One trick that the internet and internet traffic is great for is getting a customer at a lower cost than you competitor. I know what you are thinking, you can’t run cannabis-based ads yet so I can’t drive people to my products or webpages. Not so fast, team up with cannabis websites like Cannabis.net (see rates and ideas here) or TheFreshToast and run targeted campaigns. Try sponsored posts about your company that get blasted out on social media and to email lists. Are you doing short videos about your products? Did you know YouTube is the 2nd largest search engine in the world?

The point of getting leads to opt-in to a form or email list on your site is to get a customer lead at a much lower cost, so you can improve your margins. Let’s look at this example. A Massachusetts dispensary pays around $35 to get a new client to walk in the door, that new client spends $200 with that dispensary. So $35 in marketing minus the $200 in sales, means they are up $165 on that total transaction.

What if you could get a lead for an order or an actual order, for $2 online? If you pay $2 and get the usual customer to spend $200, you just improved your margins by thousands of percentages. Just because you can’t raise prices on the top line (cannabis bud prices) doesn’t mean you can’t lower costs and expenses to improve your bottom line. If you can remove 20% of your wasted marketing budget, or cutting the fat as they call it, it means you can add 20% to your profitability without ever raising your prices.

Finding areas of your business where you can be more efficient? How much is your phone bill a month for your business? VoIP companies can now run business phone lines for a few dollars a month. Is your website using chatbot and responses so that every person that comes to your website gets asked to join a list or fill out a form? Are you trying to at least get a phone number to put them on a text alert-type phone notification list for specials and price discounts? Can you covert potential customers to real customer at a 10% higher rate if you changed the “above the fold” section of your website or had more edibles and vape pen cartridges out front or by the exits in your store?

This is all stuff you can do to improve your conversion rates on sales and great a higher profit margin, whether you are touching the flower or not.