How to maximize a marijuana operation’s return on investment

(Editor’s note: This story is part of a recurring series of commentaries from professionals connected to the cannabis industry. Alex Glueckler has led financial strategy for several cannabis firms over the past six years.)

No longer operating in the shadows, the hypergrowth legal cannabis industry is well on its way for consideration as a mainstream business segment.

Total legal sales of marijuana in the U.S. are projected by some industry researchers – including Marijuana Business Daily – to grow by a double-digit compound annual growth rate of 18% and have forecast revenues to surpass an estimated $30 billion by 2024.

Even during the recent economic downturn, the cannabis industry is proving to be resilient, with sales up in most states.

For example, sales of both recreational and medical marijuana in Colorado set a record in July for exceeding $200 million in one month.

Clearly, the industry is growing – but growth doesn’t necessarily equate to profitability.

For cannabis businesses to enjoy sustained growth and competitive advantage, they must first achieve and maintain profitability.

Marijuana companies that are generating the highest margins, maximizing their return on investment (ROI), tend to share a few things in common.

Insight into costs

While it might seem like an obvious objective, gaining a crystal-clear understanding of what it costs to produce a product remains elusive to many cannabis companies.

When data related to production, procurement, sales and finance is held in disparate applications, coming up with a true cost of goods sold is quite difficult. Combine this with a rapidly growing business environment, and it is downright impossible.

Companies that have invested in bringing together operational and financial data under one roof vastly simplify their ability to determine which items are profitable – and which are not.

Armed with this information, cannabis operators can make strategic changes to their production cycles, product mixes and supply chain to maximize profitability.

Visibility across the supply chain

Visibility is a term thrown around a lot in the software business, and for good reason. Without clear visibility across the supply chain, cannabis businesses are handcuffed – potentially literally.

Cannabis operators must track product from seed to sale and back again, in what’s referred to as a forward-backward traceability.

In the event of a government audit, operators who cannot demonstrate the proper chain of possession can find themselves in legal trouble, subject to fines, loss of license or even prison time.

The most successful cannabis companies are those that have instituted technology tools that provide the necessary visibility into their supply chain, every step of the way.

Quality and consistency

Quality and consistency might be the two most determining factors in cannabis companies’ success. As the availability of legal marijuana increases, so too do consumers’ expectations surrounding quality and consistency.

Similar to the craft beer movement, discriminating marijuana consumers have begun seeking out premium products, favoring quality over quantity.

But even for value-priced products, there is a high expectation of quality. Similarly, if a product varies from batch to batch, customers will stop buying.

Quality and consistency are also key to brand recognition; once a shopper has made repeat purchases that deliver on their expectations, they’re likely to continue purchasing the brand.

Cannabis companies recognize the need to stay out in front of quality and consistency and are implementing quality-management programs with the goal of delivering a consistent product that shoppers come back for every time.

Technology as an accelerator

Like small businesses of all kinds, cannabis startups frequently rely on entry-level accounting software.

As they seek to scale operations, they begin adding additional applications (Excel, seed-to-sale programs) to store and track the data that simply doesn’t have a home in starter accounting applications.

While diligent operators can make a cobbled-together system function, it’s rarely scalable and ultimately cuts into resources that could be spent on revenue-generating activities such as new product innovation and expansion.

The most successful cannabis companies are deploying technology as a business accelerator, to automate existing processes, streamline workflows, provide visibility and insight, reduce errors and increase quality and consistency.

Learn from the best

The growth potential within the marijuana industry is enormous. As new contenders enter the market, they will be wise to learn from the lessons more established cannabis companies have learned.

Maximizing profitability and ROI in cannabis operations comes from practicing a diligent, considered business approach and roping in technology tools to support that approach.

Alex Glueckler is director of sales and strategy at Phoenix-based Silverware, where he is largely focused on their cannabis offering, Silver Leaf CBC. He can be reached at [email protected].

The previous installment of this series is available here.

To be considered for publication as a guest columnist, please submit your request to [email protected] with the subject line “Guest Column.”

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