The authority when it comes to analyzing the cannabis industry

Ingredients for Approval

As we noted in the MA Dispensary Analysis post, the Massachusetts government has made getting into the industry a serious business process that requires deep pockets from in-state residents. Meticulous protocols and procedures are required (though for some, the steep barrier to get in has caused applicants to blatantly distort their applications). The MA application fee alone is $30K. Then, after approval, you have a $50K fee to register as a dispensary. There are several other requirements:

  • A Board of Directors
  • A believeable budget and three-year business plan
  • Be able to cater to medical needs first and foremost (e.g. offering discounts for patients in financial hardship)
  • Posses medical and business professionalism
  • Posses the clout and ability to work closely with the host communities
  • Posses Show a bank account with $500k cash in the name of the dispensary

The top ranked dispensary, Medical Marijuana of Massachusetts, which has not been accused of misrepresenting its application, is run by the Chief Operating Officer (COO) and the Chief Financial Officer (CFO) of the Ophthalmic Consultants of Boston . Rounding out the team is a former DEA agent, a 30-year veteran police officer, an ex-president of a substance abuse treatment center, and…well, you get the picture. They may not have experience growing, but they have been extensively “delivering the highest quality healthcare.” It looks great on paper, and the fawning authorities loved it.

Of course, a business in the industry requires a proper public relations plan: patient services, education, privacy— all are necessary. Also, working closely with existing medical service providers, like hospices and other patient support groups, demonstrates a dispensary’s ability to increase awareness. The professionalism should translate into proper office setting (e.g. no images of marijuana leaves on the wall), and in case things go wrong, MMM has liability insurance for $1MM of coverage (costing $165k per year).

It is also important to win approval from local authorities. MMM obtained letters of “non-opposition” from the City Council. In addition, it helps if you’ve been operating a medical practice for 30 years, as MMM’s principals have done. In fact, MMM was one of the few dispensary applicants that obtained a letter of support from town authorities (pg 23-24). We think there are three other important points to highlight:

A) Security: the application blacks out this portion but there is no doubt dispensaries should have armed guards, closed loop security cameras, limited visibility from the street, professional safes for cash storage, and collaboration with local police to ensure operational transparency. MMM’s dispensary will have bullet proof glass, too.

B) Well Compensated Staff: President, CFO and Chief Compliance Officer are paid $250k per year, Head of Cultivation coming in at $150k per year, Director of Security and Community Outreach Director paid $100k per year, etc. (page 34). Those are pretty high salaries!

C) Product Testing: MMM is using a top rated third-party marijuana testing service. This is important in ensuring proper quality. Because marijuana isn’t FDA approved (no inspectors will tour the growing facility), there is a significant business opportunity to provide an accepted seal of approval. Testing is a great recurring revenue business because every growing period, every batch needs to be certified.

Barriers are steep in MA, the steepest process out of any state going through marijuana legalization.  The costs (not the requirements) listed above are probably on the high end of what’s needed. Yet, other states that do not have a history of dispensaries may follow similar footsteps toward licensing. It’s not a bad idea to cover all your bases. And just like a pilot going through protocol prior to take-off, having a proper checklist will vastly improve your organization’s capability and probability towards approval.

Elasticity of Marijuana Demand

The elasticity of a product gauges how likely people are to keep on buying as its price changes. If the price of soda increases by 10% but its demand decreases by less than 10%, it’s inelastic— the increase in price isn’t completely offset  by the loss in demand. Conversely, if demand decreases by more than 10%, demand is elastic.

Many studies have been carried out since the 70s, and for the most part, they find marijuana demand is inelastic. These studies make various assumptions and their results should be taken with a grain of salt, but as more marijuana is sold in approved dispensaries and reliable data becomes available, credence should be given to these relatively consistent results. One of the most recent studies claims that, with an elasticity demand between -0.3 and -0.6, “the demand for marijuana appears relatively insensitive to price changes.” This is equivalent to saying that with a 10% increase in general prices, demand would drop between 3% and 6%.

60% of the cannabis examined in the previous study was reported as being of high quality, 33% of medium quality, and 7% of low quality. What this implies is that quality matters extensively, and people are willing to pay a premium for high quality (or the perception of quality, given that classification may be fairly subjective). If the product you are selling is remarkable, market it as such and let people try it for themselves. After it an initial successful “try out” period, it might not be a bad idea to experiment with pricing increases— a single $1 increase on a $15 gram is a 7% revenue increase. Low and medium quality cannabis is more elastic than high quality one (low quality is a bit more inelastic than medium, interestingly), so raising their prices may bit more dangerous to your bottom line. It’s a better strategy to keep these varieties at “safer,” more stable prices and attempting to sell them in large quantities. For reference, Medicine Man charges 20% more for a gram of high quality cannabis than low quality ($17 vs $14; many dispensaries have 2 kinds of quality instead of 3 as the study.)

However, at the end of the day, you need to realize how closely these dynamics apply to your customer base. If your customers tend to be on the younger side, pricing might be more important to them as their income might be more restrictive, so you might want to focus on making special deals with low and medium quality cannabis. In CO you have dispensaries in the same geography charging significantly different prices, likely because they cater to different customers ($17/g  vs. $12/g). If your customers generally fall below poverty levels, perhaps offer them additional discounts. Several Massachusetts dispensaries have detailed “hardship” pricing programs in place especially if you have a medical condition. At the end of the day, medical dispensaries have to allow patients to affordably purchase medicine.

Knowing your customer base should always be a top priority, you are running a business to help them fulfill their needs, and knowing how to best cater to them will give you the necessary edge to bring back the clientele over and over.