Profit margin is one KPI to which all cannabis retailers should be paying attention.
Once you find that sweet spot, however, cannabis businesses should continuously try to improve their average gross profit margin.
How to Calculate Profit Margin
To find your profit margin, subtract your business’s total expenditures from your total revenue (to get net income). Then divide your net income by your total revenue to determine your profit margin.
Profit margin is one of the metrics that investors will look at when evaluating your company. If you’re worried about your gross profit, you’re not alone: across the cannabis industry, very few dispensaries are reported as “very profitable.”
The majority of cannabis dispensaries are “modestly profitable” or just reaching their break-even point. As a benchmark, retailers outside the cannabis industry see an average gross profit margin of around 50%.
Of course, pricing your product is just one half of the equation to boosting your gross profit margin. There are other ways to boost profit on your top selling product that will impact your bottom line and balance sheet positively.
Here’s what to know about boosting the profitability on your top selling products to help your cannabis business grow.
Increase the “perceived value” of your merchandise
Cosmetics brands are one sector that see higher gross profit margins that most businesses. This is in part because these companies focus on the “emotional and lifestyle values” their product can provide. People buy makeup on BRAND perception just as much as the quality of the end product.
Cannabis companies can follow this trend by offering “premium” pricing on their best selling products.
With a little branding and marketing, dispensaries can highlight the more emotional benefits of purchasing their products.
- What is it about the strains or products that you sell that make them better than the rest of the market?
- How do your products make customers feel good about their purchases?
If you don't know the answers to these consumer questions, then ask the consumer as they exit the dispensary and give them a $5 coupon for their next visit.
Upsell, cross sell, and bundle your items
Upselling, cross selling, and bundling are three techniques that many retailers use to increase sales.
Dispensaries can use these methods to boost the average basket size of each transaction, giving a boost to profits while also helping build a relationship with your best customers.
Here are some examples and tactics:
Bundle rolling paper and other single-use products with your top selling strain in a limited time promo package that allows consumers to try – and love – new products they might not have normally picked up. Sometimes you can even get brands to 'donate' product for these initiatives, and create a win-win for both companies.
Offer low-end, mid-tier and high-end price points within each product category to give your sales people something to upsell. For example, if a customer likes x-product at a lower price point, they might like y-product at a slightly higher price point (enter premium pricing!) Train your team to simply ASK the customer if they want to try the more premium product. Ask enough and you will get a "YES"!
Use your POS data to identify products frequently purchased together, giving your employees data points necessary for upselling and bundling.
Dispensaries can play a role in education customers about cannabis and cannabis products, and capitalize on customer loyalty down the line. If something costs more because of the time it takes to make, or because it's more rare, then tell the customer and give them context to what they are paying a premium for.
Further, if you're analytical enough or even just take a quick peek at your marketing product mix, then you will see that probably 20% of your products drive 80% of your sales. And by adjusting which products get prime merchandising space, you may be able to drive sales of more profitable products.
Increase buying frequency
Besides higher prices and selling more products, frequency is a key business metric that contributes to boosting profitability.
Try to decrease the amount of time between customer visits and increasing how often a customer buys from you. Reward returning customers with a loyalty program that incentivizes not only purchases but word-of-mouth marketing.
Try using marketing initiatives like buy-one-get-one or discounts when a customer spends a certain dollar amount.
Overall, it’s important to make sure your rewards don’t incentivize one-time visits. Don’t fall into the Groupon trap of attracting visitors just interested in a quick deal. Make sure your promo program reaches customers who come often, spend well, and are loyal to your dispensary.
One quick way to increase frequency is to give coupons that expire within a tighter time period than the normal return visit. For example, if you see customers come every 15 days, then offer a generous coupon to come back within 10 days. Track the number frequency and see if it increases.
Lower the cost part of the equation
Are there hidden costs that are dragging down your gross profit margins?
Take a hard look at your dispensary’s operations to see where you could pick up some extra savings. It could be as simple as charging for plastic bags, or perhaps there are areas where you’re experiencing business shrinkage and not realizing it.
Spend as little as possible on things like packaging, try to streamline your inventory management, and consider how your business processes impact waste.
Your POS system should be able to give you deeper insights into key stats like:
- your busiest time of day
- your slow-moving inventory
- your sales cycle, which can help you streamline when you restock
- how many employees you have on shift at once, and
- what items you need to cut from your inventory.
Keep a close eye on these metrics to keep your costs down and boost profitably.
Revisit your vendor contracts
Retailers who work with different distributors and cultivators should always be on the lookout for a better deal.
Revisit your vendor agreements every six months to make sure they’re still giving you the best deal on the market.
In addition, certain vendors can give you the justification you need for premium pricing.
For example, a third-party certified vendor will distinguish your product from others. Clean Green and Certified KIND are two industry gold standards for green, organic farming methods.
Regardless of who you choose to work with, make sure to negotiate to get the best possible deal on products for your dispensary.
For more ideas on how to boost your profitability, talk to our experts by clicking the "Get Started" button below.