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How to Evaluate Cannabis Profit Margins & Buy Better (For Dispensaries)

by | Jul 17, 2019 | Dispensary Marketing

Updated Feb. 19th, 2021

Lessons Learned from the Early Days

With the explosion of growth here in the Oklahoma cannabis market, today there are more flower options than I could have ever imagined when I first wrote this article back in 2019. I have learned so much as a result of being involved in this Oklahoma market since the beginning.

The industry has changed and the pricing game is, at the end of the day, a race to the bottom. But there is still a way to succeed, which requires a different perspective on the situation, which I will get into shortly.

In the early days, as a vendor supplying dispensaries with product, I was able to sell any decent flower I could get my hands on, and we were getting $2,600 – $2,800/lb all day on the good stuff.

The issue back then was the number of dispensary owners and purchasing managers who had ‘rules’ that they couldn’t spend more than $2,400/lb no matter what.Β 

Meanwhile, the dispensaries who knew what they were doing down the street were still buying it and if I had to guess, this is one of the situations which ultimately lead so many dispensaries to shut down in early 2021.Β Β 

People will go to great lengths to find the good stuff at the right price.Β Β 

But now, the situation has shifted.Β Β 

Why Write this Article About Marijuana Margins?

1 – To help dispensaries understand how they are currently pricing their product in terms of profit margins compared to pharmacies, liquor stores, and other comparable businesses and to show them how the businesses who are killing it are doing things.

2 – To highlight a flaw in the logic that was being used to purchase early on which eventually lead many of the shops to not being able to keep their doors open.Β 

3 – To show how that same flawed logic has been shifted into a situation where dispensaries are choosing to stock apocalyptically low-priced mids over top-shelf flower at a great price.Β Β 

Lessons Learned in a Market Flooded With Middle-of-the-Road Product

Today, the mids market is completely flooded. Now, we are lucky if we can get $2,000/lb on 29% THC Voodoo Child that we could have sold in 2019 for $2,800 without any issue. And it’s not because shops can get another Voodoo child that tests the same. It’s because they can get middle-of-the-road 21% green crack for $1,200, which forces growers with a better product to lower their prices.Β 

It’s the same situation as the early days but rather than a rule dictating the price, it’s the flooded mids market and an idea that the entire market should come down with it. But, they are the ones paying so technically they make the rules. We will see how many growers will ultimately survive and be able to make profits. I would guess it’s not going to be many. But I digress.

Fortunately, for patients, I have seen this decrease across the board although, not as much on the flower as it is for concentrates and edibles. Today, there are deals all over the place for concentrates that are well below half of what they were 2 years ago.

And the fact of the matter is that, by putting a cap on the amount you are willing to invest in flower, you are selling your business short – and you’re doing it to your patients too. Especially when you could easily be paying more and charging less and still be making money. Likely even more than you are now.

Hear me out. We will cover some numbers first, then get into some real-world reasoning and examples.

Calculating Cannabis Flower Profit Margins for Your Dispensary

Some quick formulas, for reference:

Dispensary Profit Margin & Markup Formulas

 

  • The gross profit P is the difference between the cost to grow/purchase your product C and the selling price or revenue R.
    P = R – C
  • The markup percentage M is the profit P divided by the cost C to purchase or grow the product.
    M = P / C = ( R – C ) / C
  • The gross margin percentage G is the profit P divided by the selling price or revenue
    R. G = P / R = ( R – C ) / R

Let’s say, for example, you had the opporunity to buy a pound of Voodoo Child testing at 29% THC for $2,000/lb (which you do, if you own a licensed Oklahoma dispensary). And you price it at $10/gram.

—————————————————–

If your hypothetical $10 grams include tax (out the door pricing), the 21ish% must be deducted from the $4,500 revenue (excluding deductions for operational expenses)… which brings the revenue to about $3,555.

Profit = $3,555 – $2,000 = $1,555.00
Markup Percentage = $1,555 / $2,000 = 77.75%
Gross Margin Percentage = $1,555 / $3,555 = 43.74%

—————————————————–

If your hypothetical $10 grams do not include tax, then there is no need to deduct taxes, as they are collected separately.

Profit = $4,500 – $2,000 = $3,500.00
Markup Percentage = $3,500 / $2,800 = 125%
Gross Margin Percentage = $3,500 / $4,500 = 55.56%

—————————————————–

Comparing Dispensary Profit Margins to Alcohol from Other Businesses

When we get into comparing to these other businesses it’s important to keep in mind the other revenue streams that these businesses have, which dispensaries may not.

Most convenience stores sell gasoline, which everyone buys. Grocery stores sell food – which everybody needs.Β  Restaurants sell an experience.

What kind of margins are typical grocery stores operate on?

Looks like it depends on which one and which products.Β  Costco operates at around a 12-13% margin but charges membership fees to be able to do that.Β  Supermarkets

The average pharmacy in the US operates at a 21.8% profit margin.

Liquor stores operate at a 21-24% profit margin.Β  And assuming they do $1,000,000 in sales, that leaves about $225k in profit after inventory costs – with payroll, insurance, and any costs associated with leasing or buying the building and running utilities to pay out of that.Β  It’s not much.

Restaurants, on the other hand, get to operate on a closer to 80+% profit margin.Β  But that is because they are selling an experience rather than a commodity.Β  Something to keep in mind for your business as well.

 

Charging more increases your profit margins, but at the cost of making potentially (er… likely) fewer sales).

Advantages of Owning a Dispensary vs a Liquor Store

There is some additional insight to be found when looking at the advantages of owning a dispensary vs owning a liquor store.

For one, liquor stores are generally not allowed to sell products for less than what they cost wholesale.Β  This can be a very effective strategy to use in the cannabis industry.Β  After all, there is a reason it’s prohibited in the liquor industry – because it works.Β 

Another is that liquor stores are selling the exact same products everywhre.Β  Sure, some of them have unique brands, but I feel like the liquor industry is generally more commoditized than the cannabis industry.Β  I also feel like the cannabis industry is headed in that direction but it’s not quite there yet.Β  Not with 6,790 grower licenses and 1,290 processor licenses and an infinite variety of strains and potential products that can be sold.Β  But this is also why it’s more important to purchase quality product at great prices vs mid-range product getting flooded to the market everywhere for absurdly low prices.Β 

Another is that cannabis actually helps people and alcohol doesn’t – but you already knew that.

And finally, when was the last time you heard about a liquor store that almost always had a 45 minute to 1 hour wait to get in the door to make a purchase?Β  Probably never.

Thats because they are selling commodities and cannabis just isn’t there yet.Β  There are dispensaries with this situation happening here in OKC and the main reason is because the owner of that dispensary understands that yes, maybe you have to sell 3x the product if you are making 1/3rd the margin as everyone else, but in return, but when you do that, you can get something closer to 10x the business in return.Β  Word of mouth is much more powerful than any kind of $5k/month Weedmaps feature (I promise).

SummaryΒ 

So, here is the deal.Β  If buying low to medium shelf flower at a discount is what it takes to maintain peace of mind about the way you are running your business, I would recommend re-evaluating the situation.Β  Quality at the right price is what keeps the patients coming back.

And here in Oklahoma, it’s a volume game.

You have to win both games in order to win in the market.

If you have product that nobody wants to buy, it doesn’t matter how much of a deal you got on it.Β  There is flower that has been sitting on shelves of dispensaries here in Oklahoma for well over 6 months.Β  Nobody wants it.Β  They have too many better options.

What the market needs (and what a few shops have already caught onto) is that if you carry quality inventory priced properly, you will never be short on patients/customers.Β  Especially here in Oklahoma where, per capita, we have the largest patient base in the US, with 10% of of the population having patient carts.Β 

(The patient count as of revising this is 10k more than when that article was written but I also believe the population has increased by at least 1-2 million over the past year so it’s likely about the same percentage of the population.)

As you can see from the numbers above, you can still set your pricing right and run a profitable dispensary.

That’s all for now. If I were to make any other recommendations it would be to take a hard look at your dispensary SEO game plan, as it’s likely one of the most important time, money, and energy investments you could be making.Β  And to consider outsourcing your company’s HR and payroll services to help you keep your employees happy and to have access to even better employees.

 

TTFN!

 

Mitch Smith

Mitch Smith

Business Development Strategist

Cannabis enthusiast and entrepreneur dedicated to advancing the Oklahoma cannabis industry by utilizing the experience and skillets I have developed over the past decade managing sales, marketing, business development, and digital marketing for businesses in a variety of industries.

In my ‘free time’ you can find me (usually) in OKC producing music or playing with my pup.

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