One aspect of legal marijuana that is not often acknowledged is the difficulty of making money in the industry. Despite seemingly bottomless demand for cannabis, companies face problems that stem from its unique semi-legal status. Many pot companies, for example, have to deal with 280e, a few lines of the tax code left over from the early Reagan years. It's the measure that prohibits companies that deal in federally illegal substances from deducting business expenses on their taxes. It’s a crushing burden, especially for small businesses.
Within the market itself, companies struggle to differentiate themselves, leading to brutal competition. Every weed grower, vape designer and edibles maker can explain at excruciating length why his product is incomparably superior. But only the most fanatic connoisseurs appreciate the difference, or care.
Companies can try to get their brand out, but advertising opportunities are limited. And despite the baroque claims companies make – "faster acting," "predictable," "specific sensations" — product innovation isn’t a driving force in cannabis right now.
One place the business can seem especially zero-sum is at dispensaries, which have the thankless task of luring customers away from the indistinguishable dispensary on the next block. Aside from attracting people who live or work nearby, what can a shop do to keep customers coming back?
Denver-based company Baker, which is beginning to arrive in Southern California, is one way a dispensary can develop repeat customers. The startup offers three main services for dispensary patrons: It allows customers to order online, helps dispensaries to set up customer loyalty programs and enables stores to target customers with deals.
Baker co-founder and CEO Joel Milton, 30, was hanging around New York’s startup scene when he became interested in the industry. As he tells it, during a 2014 trip to Denver he was struck by how long dispensary lines were, and that regular customers might get annoyed if they were waiting behind “tourists” like him who’d never gotten to choose between an indica and sativa before.
Milton and his partners soon realized that for dispensaries this was part of a larger problem: Shops were spending money to get customers to come in for the first time but not devoting the same amount of energy to developing relationships with customers. As with booze and cigarette makers, marijuana companies depend on heavy users.
A customer might visit a dispensary for the first time because of a coupon, but if a store doesn’t give him a reason to come in again, he's likely to make their next purchase anywhere. It’s the “Groupon phenomenon,” Milton said, explaining that the online discount phenom tanked because participating companies didn’t create repeat customers. Baker decided “to be on the dispensaries’ team.” Shops pay Baker a monthly fee and it promises them a way to build better relationships with customers.
The mechanics are familiar. Dispensaries collect customers’ information and preferences and send them appropriate deals; it doesn’t send offers for edibles to people who only buy bud. Milton speaks with the most pride about targeted messages that he claims can achieve a 20 percent “conversion rate.”
Since Measure M passed recently, L.A.’s cannabis market — the world’s largest — is poised to be regulated. One consequence of this is that legal dispensaries will increasingly fight for business on a level playing field. That’s the kind of climate where Baker and other ancillary businesses may thrive.
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It's working for Baker so far. In 2016, it expanded from 30 to 250 dispensaries in 10 states.
During the California gold rush, it’s often said, the least risky way to make money wasn’t in panning for gold but in selling “picks and shovels” to all the prospectors.
Something similar has begun to happen with the green rush.
Many ancillary cannabis businesses focus on helping companies do what they do more efficiently, whether that’s bring in repeat customers or lower energy consumption. These trends suggest that legal cannabis is a rapidly budding industry.