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

by | Jul 17, 2019 | Dispensary Marketing

There has been some concern expressed about the cost of the flower currently available on the Oklahoma cannabis market. 

And it makes sense, particularly with the amount of competition here in Oklahoma. 

Being frugal is generally a wise approach when it comes to running any business.  And today I am going to show you a better way to evaluate the amount of money you are willing to invest in keeping an inventory of top-shelf flower.

Some of this may sound elementary at first, but you will see where I am going in a second. 

Your two primary considerations when making cannabis flower purchasing decisions should be:

1. The quality of the product you are evaluating.
2. The potential profit margins involved.

That being said, I am often surprised as to how frequently I run into Oklahoma dispensary owners who put a cap on the amount they will spend on flower.  Rather than being open to the possibility of evaluating high-quality flower that (they can still make healthy profit margins on, as I am about to show you) they are eliminating the possibility of everything that costs over x amount per pound. 

There is something missing to this logic, however.  And that is the fact that profit margins are irrelevant unless the product sells and profit is generated. 

For example:   

Lately, I have been running into dispensary purchasing managers and owners who say that they will not pay more than $2,300 or $2,500/lb for top-shelf flower.

And while, in the perfect cannabis utopia, that would be a fantastic situation, it’s simply not the case in Oklahoma (at the time of writing this article), unless you have the capital required to make exclusive deals with high-quality growers with legitimate operations.  Most dispensary owners in Oklahoma are not in that kind of a situation.    

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, and more importantly, your patients, short.  Especially when you could easily be paying more  and probably charging less and still be making money.  Possibly even more than you are now.  

Hear me out.  

I am about to show you how you can afford to pay $2,800/lb or more for high-quality, top-shelf flower, with profit margins which are more than sufficient – even if you are selling grams for $10/each, out the door, tax included.  

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 Amherst Sour Diesel today for $2,800 (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 15ish% must be deducted from the $4,500 revenue (excluding deductions for operational expenses)… that brings the revenue to about $3,825.

Profit = $3,825 – $2,800 = $1,025.00
Markup Percentage = $1,025 / $2,800 = 36.61%
Gross Margin Percentage (minus taxes) = $1,025 / $3,825 = 26.80%

—————————————————–

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 – $2,800 = $1,700.00
Markup Percentage = $1,700 / $2,800 = 60.71%
Gross Margin Percentage = $1,700 / $4,200 = 37.78%

—————————————————–

Here is a simple profit margin calculator.

Comparing Dispensary Profit Margins to Pharmacies, Grocery Stores, & Liquor Stores

If we compare those numbers to grocery stores and beer, wine and liquor retailers that average 25-30% gross profit margins (pre-tax and operational expenses), we are in good shape with that entire scenario described with the Amherst Sour Diesel, even if we are providing out-the-door pricing.

The average pharmacy in the US operates at a 22.1% profit margin.

See the table below for examples of profit margins for beer and convenience store retailers in the US in 2017.

Statistic: Gross profit margins of beer in convenience stores in the United States in 2017, by type | Statista
Find more statistics at Statista

I have personally visited 50+ dispensaries in Oklahoma and I know that most of them have not entirely embraced $10/gram top-shelf strain pricing.

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

Sacrificing Quality to Save… Money?

It’s understandable to see why some dispensary owners have come to this conclusion that they must purchase their top-shelf flower for $2,500 (or less…  I’ve heard as little as $2,200) per pound. 

Who wouldn’t want to make profit margins upwards of 80+%?   It’s a nice idea but it’s also a fairly tale.  Patients have far too many alternatives with better products and lower prices to reasonably expect that you can get away with highway robbery and keep them coming back.  

Additionally, today in Oklahoma, there is an abundance of sub-par flower floating around the Oklahoma marketplace.  And from what I have seen, at least 80% of the Oklahoma dispensaries have plenty of it on hand.  In fact, if you have never browsed the OKmarijuana subreddit, I recommend doing so.  You might be surprised to see how many patients are complaining about the consistently low quality flower they are finding everywhere they go.

Summary

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

Patients seek quality and value.  If you can be the one to provide it to them, it’s going to work out better for you in the long run, even if it cuts slightly into the ‘profit margins’ you may hypothetically have otherwise, assuming you are able to make sales.

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

The name of the game is ultimately to develop a loyal customer base, and that won’t be possible unless the quality of your product and your pricing is on point.

That’s all for now. If you have not subscribed to the Canna Solutions newsletter (dispensary owners only) to receive updates about flower vetted Oklahoma suppliers, click the button below.

If you own a processing, grow operation, or dispensary, or other product/service intended for this audience and would like to discuss the possibility of working together, please schedule a 30 minute strategy call using the other button, below. 

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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