4 Ways to Make Your Dispensary More Profitable

For cannabis dispensaries, profitability is the name of the game at the end of the day. High operating costs and strict regulations make it challenging to maintain a healthy dispensary profit margin despite having what customers may perceive as high retail prices.

Cannabis retailers must monitor their gross and net profit margins closely to ensure financial sustainability and allow room for business growth. The following strategies will help your cannabis retail business reduce costs, increase prices, and boost sales.

1. Reduce Costs

Cost reduction is the first place to begin when seeking to improve your cannabis retail business’s profitability. Reducing costs immediately improves your gross and net profit margins without needing to raise prices. 

• Your gross profit margin refers to the direct profit made on each product sold, considering only the cost of purchasing or producing the product (COGS). 
• Your net profit margin refers to your dispensary’s profits after overhead costs and tax are taken into account.

To reduce your costs, begin by auditing your current spending and identifying inefficiencies in your purchasing and processes. The most effective way to reduce costs is generally to cut expenditure slightly in several areas with careful consideration of the potential impact of these cuts on revenue. 

Start with the following steps to identify places where you can safely reduce costs:

Analyze Operational Efficiency

Consider your operating expenses (overhead) first when looking for places to improve efficiency. Operating costs such as rent or mortgage, utilities, hardware and software subscriptions, labor costs, and insurance are significant and ongoing. 

If your individual retail products are profitable but you have excessive overhead or inventory expenses, you could still end up with a negative net profit margin because too much of your cash is tied up in items on the shelf or in the storage area. 

Reducing your operational costs strategically will have a long-lasting impact on your dispensary’s overall profitability without needing to increase revenue.

Look at your sales by SKU, brand, and form factor (flower, distillate, etc.). Review how fluid products move in and out of the dispensary, and understand how seasonality impacts your inventory and operational cost outlay in order to have stock while not being overstocked.

Operational efficiency is an exercise in supply chain. Knowing how your supply chain works intimately will keep you at peak operational efficiency.

Consider:

• Rent or mortgage: Calculate the minimum floor space your dispensary needs to accommodate your average number of customers comfortably and display your products clearly. It's possible if you have too much space you could sublet some space out to recoup cost, or expand with an ancillary space to inject further cash into the business.
• Utilities: Calculate the dispensary’s average monthly electricity, gas, water, internet, and telecommunication usage and ensure your monthly bills are right-sized for your level of consumption. Look for ways to reduce utility usage, for example by increasing natural light or integrating renewable energy sources.
• Hardware: Analyze business expenses relating to hardware (such as computers, telephones, card readers, and ATMs) and how many you really need based on your current and projected future usage.
• Software: Identify the software features that are most valuable to your operation and find out whether you can find all of these same features in fewer platforms or programs. Most always there is redundancy in software being used and you can find efficiency by consolidating through a single vendor who has the feature set to expand with you.
• Staffing: Calculate the minimum number of staff you need to operate safely and provide a quality customer experience given your dispensary’s average foot traffic at different times of day. Seasonality will affect this too, i.e. 420 or the holiday season time. Some functions such as bookkeeping may be able to be outsourced or automated without reducing quality to reduce staffing costs.
  • Important: It is preferable to have two trained staff members and a supervisor on-site during operating hours to prevent cash and inventory theft. Hiring a qualified security guard also helps to prevent theft and ensure the safety of your workers and customers in the case of an emergency.

• Work efficiency: Create clear communication and operational procedures to maximize worker efficiency and avoid costly misunderstandings, errors, time-wasting, and double handling.
• Insurance: Review your insurance policy and confirm that all of the current inclusions are necessary to prevent significant losses based on your specific risk factors.

Negotiate With Vendors

Once you have worked out what your base operating costs are, you can often reduce your costs further by negotiating with vendors. Signing longer utility and software contracts often results in a lower monthly rate, for example. 

You may also be able to negotiate lower per-unit prices for products and supplies if you purchase in bulk, reducing your cost of goods sold (COGS) and improving your profit margins without raising prices.

Ideally, you have multiple vendors for supplies, packaging, etc. in order to mitigate against supply risk and be able to protect yourself from price gouging. Networks like Vert and our Vert MAX offering explicitly provide you with a packaging network, for example, to keep you well-positioned in vendor negotiations.

Launch Your Own Cannabis Brand

Launching your own private-label cannabis brand is an effective way to reduce costs and increase your profit margins. 

Products purchased from third-party cultivators will invariably have smaller profit margins because their prices need to cover transportation costs, shippers, sales and marketing personnel, and so on.

The absence of these costs and the ability to control decisions ranging from cultivation practices to processing and packaging present the opportunity for significantly larger profit margins. The following tips are especially impactful for developing a profitable in-house brand:

1. Expertise: Make sure your team has the expertise to develop products to rival those of your competitors, or purchase top-quality white-label products in bulk and add your own branding at the end.
2. Upskilling: Continue to upskill your production team on manufacturing best practices and industry trends.
3. Differentiation: Differentiate your brand with unique products or features and highlight your key value propositions to customers.
4. Quality Packaging: Invest in top-quality packaging from a specialty cannabis packaging supplier. Packaging serves several critical functions that cannot be overlooked:
   

a. Product protection: Packaging protects your products from damage and deterioration. Vacuum-sealed jars such as POP VAC jars, for example, significantly increase shelf life by protecting flower and concentrates from exposure to oxygen, light, and moisture.
b. Safeguard health: Packaging protects your customers’ health by preventing mold growth and contamination.
c. Brand awareness: Packaging captures customers’ attention and builds brand awareness. Research shows that creative packaging leads to stronger brand attitudes and buying intentions. Consider your packaging as much a part of your marketing strategy as channels like billboards and social media.
d. Information: Packaging communicates essential information to customers, helping them make informed purchasing decisions.
e. Perception of quality: Packaging communicates the quality of the product inside, which impacts the price your customers will be willing to pay. Premium print embellishments, for example, communicate luxury and potentially increase customers’ willingness to pay a premium price.
f. Compliance: Packaging can have to be in line with compliance depending on the state. Your packaging must meet all of the applicable state and federal regulations, including child-resistant packaging requirements at times, to avoid fines, penalties, product recalls, and legal problems. 

Improve Your Inventory Management

Proper dispensary inventory management reduces costs by minimizing inventory shrinkage due to loss, damage, and theft. Ensuring you stock the right products at the right time raises revenue and profits, and improves cash flow.

Analyze your sales data using data analytics tools to see which are your fast-moving and slow-moving products, how many of each you sell per month, and which products have the highest profit margins. Place product reorders based on past purchase trends to avoid product stockouts and overstocking, which often leads to spoilage and waste. 

You can use tools like Lit Alerts to look at data across your state as well to get a glimpse into what kind of wholesale or retail trends around cannabis SKUs are happening and adjust your own inventory to anticipate demand.

Protect Against Losses

Economic losses from theft, damage, spoilage, recalls, fines, penalties, legal action, and reputational damage can significantly harm or even bankrupt your cannabis retail business. Protect your business with the following strategies:

• Ensure regulatory compliance with both federal and local regulations at every level of the supply chain to prevent penalties, fines, and legal action.
• Protect against physical threats with secure locks, smash-resistant glass, a security system, and ideally a security guard. Use robust cybersecurity software to prevent and mitigate online threats such as data breaches and phishing scams.
• Have a contingency plan (and insurance policies if possible) for the most common kinds of emergencies that occur in your area.
• Continually upskill staff and educate customers on product selection, storage, and use.

Maximize Allowable Deductions and Credits

Cannabis retail businesses pay more in tax than mainstream businesses because of IRS Code 280E. Section 280E “disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.” 

This code applies even to the legal cannabis industry in states that have legalized marijuana.

The caveat to Section 280E is that cannabis businesses can deduct the cost of goods sold (COGS) when determining their gross income. 

This makes it vitally important to calculate your COGS accurately and maintain detailed records to substantiate the COGS claimed. Your dispensary may also be able to save on taxes by installing sustainable energy solutions that qualify for tax incentives in your state.

2. Increase Product Prices

Price increases may be necessary to improve your dispensary’s profit margins if certain products are still unprofitable after reducing excess costs. Prioritize fast-moving products for price rises to compensate for your slow-moving products, and put forward a compelling case for your priority products’ value to encourage your target customers to buy.

Tip: Research your competitors’ prices when setting your own—taking into account the legal market as well as what you can from the black market if your state has a very active one such as New York. 

Make sure your prices are comparable for the value you offer without seeming excessive or intentionally undercutting the competition, which devalues the cannabis industry as a whole.

3. Increase Cannabis Retail Sales

The final way to improve your dispensary’s profit margins is to increase your sales. This strategy will only be effective if your cannabis retail products (individually and collectively) are priced profitably. 

Try the following strategies to boost your dispensary’s sales:

Optimize Your Marketing Strategy

Craft your marketing strategy with an ideal customer profile (ICP) in mind. Effective marketing campaigns clearly speak to your ideal customer’s pain points and demonstrate how your products solve them. 

The marketing strategies you use also need to meet your ideal customers where they are, for example in areas where they physically spend time and on the online platforms they regularly use.

Diversify Your Sales Channels

Add sales channels beyond your physical retail store(s) with online menus, curbside pickup, and home delivery if local regulations allow. Different sales channels will better meet the needs of specific customer segments, such as those who want to purchase discreetly and the chronically ill. 

Diversifying may also help you maximize your sales in cases of inclement weather, traffic jams, health alerts, and so on—acting as a buffer against losses from circumstances that are beyond your control.

Motivate Purchases with Bundles and Promotions

Bundles and promotions increase customers’ perception of value, motivating a purchase. Time-limited offers increase this effect by activating the “fear of missing out” (FOMO). 

When setting promotional prices, balance the loss of profit on individual products with the cost of potential inventory losses from product spoilage. Try to bundle in less profitable or slower-moving products with a smaller number of profitable ones that function as a hook.

Display Products Strategically

Product placement also affects the perception of value. Place premium products next to standard ones to make your mid-range products appear more economical.

Provide a Top-Notch Customer Experience

Increase your customers’ perception of value by giving them the red-carpet treatment every time they visit your dispensary or interact with your staff. 

Research published in 2022 indicates that a majority of customers will pay more for better service or a better experience. Excellent service is something your team can offer without increasing your expenditure.

Likewise, monitor reviews and respond graciously to both positive and negative comments. Respond proactively to negative feedback and suggestions to improve the customer experience and repair reputational damage. 

Upsell and Cross-Sell

Upsells and cross-sells increase your average basket size, average order value, and customer lifetime value, without needing to acquire additional customers. Train your staff on effective product pairing and upsell opportunities that will enhance your customers’ experience while increasing revenue and reducing spoilage.

Prioritize Customer Retention

It’s easier to retain an existing customer than acquire a new one. The economic impact of focusing on customer retention is even greater when you consider that happy customers will earn you more through word-of-mouth referrals while dissatisfied customers could turn potential customers away.

Effective strategies for customer retention include consistently excellent customer service (which builds trust), loyalty programs to encourage repeat purchases, and subscription products and services at a slightly lower rate. 

4. Work With Experts to Improve Your Dispensary’s Profit Margin

Investing strategically in expert guidance and continuing education generally improves your profit margins, even though it carries a cost in the short term. Cannabis finance and business experts with years of experience will advise you on key performance indicators to track, guide you toward the most effective strategies for improving your profit margins, and help you identify and correct potentially costly problems early on.

Track, Protect, and Grow Your Profitability Over Time

Dispensaries become profitable with careful expense tracking, analysis, and optimization over time. Key adjustments to improve profitability include cost-cutting, price rises, increasing sales, and engaging expert help.

The first step to improving your profit margins is to audit your current expenses. You can then identify the most impactful adjustments to improve your bottom line.