Operating a cannabis dispensary? Thinking about dipping your toes in the cannabis industry as a dispensary owner?
In this post, we cover everything you should know about operating a successful cannabis dispensary from a financial perspective.
Looking for expert assistance managing your legal cannabis business’s financials? Northstar is ready to increase your dispensary’s profitability!
Contact us now to learn more about how we’ll enhance your weed profits with the right financial services.
What is the Average Dispensary Profit Margin?
Whether you’re operating in medical or recreational marijuana, your average profit margin is important. Besides the cost of opening a dispensary, other expenses exist – and these will impact your profit margin.
Medical and recreational marijuana cannabis dispensaries usually operate with an average net profit margin between 15 and 21 percent after accounting for taxes. However, equally important to note is that this percentage varies in accordance with state or provincial regulations.
The cannabis dispensaries distributing medical marijuana and recreational cannabis usually have the best net profit margin. However, creative recreational dispensaries can dominate the dispensary space, too.
After your initial investment to open your doors, you’re ready to operate. But ongoing expenses can affect profitability.
Here’s a list of the expenses likely to affect your operating profit margin:
Cannabis Real Estate
Besides the initial licensing fees for cannabis businesses, dispensaries should expect to spend at least $100,000 annually in rent. But if you find real estate for cannabis that requires renovations, this could increase the initial cost to $50,000 or more.
However, if the cannabis dispensaries locations are purchased outright, dispensary owners mainly have to worry about property taxes impacting their net profit margin. For additional insight, make sure to check out our post on buying commercial cannabis property.
Cannabis Industry Banking Fees
Part of your estimated annual revenue will go towards banking fees. It costs money to have your own growing business, but the cost of banking is higher in this grey-area space.
Since cannabis is still technically federally illegal in the US, many banks still refuse to work with dispensaries. However, it’s still possible to work with credit unions and private marijuana banks in some regions. Even with this being the case, some of these organizations will charge holding fees as high as $2,000 per month.
Cannabis businesses need electronics to operate successfully. Each square foot of space could be holding thousands or even tens of thousands of dollars worth of inventory. So, you’ll need a security system and a fully compliant POS system to manage your inventory.
Advertising budgets in cannabis vary, of course. But, depending on your location, you may need to invest more than a quarter of your annual revenues in an advertising budget to compete.
Attorney on Retainer
While a dispensary makes money, these earnings don’t always come without risk. This is why it’s a good idea to have an attorney on retainer.
Dispensaries are especially vulnerable to lawsuits. Thus, having an attorney ready for a worst-case scenario situation is always ideal in this space. This could cost up to $50,000 annually.
Even a smaller dispensary serving the adult market will need a team to operate successfully. Depending on the size of your cannabis operation, your annual payroll could be $250,000 or more!
How Much Does a Dispensary Owner Make?
How much a dispensary owner makes depends on several variables. For example, medicinal weed sales might earn more in one cannabis market than it does in another. However, in some spaces, medical marijuana might not be as popular as adult use.
Furthermore, your cannabis business might grow its own marijuana indoors. This would minimize your inventory cost while allocating some of your operating income towards elevated utility costs.
The money dispensaries or cannabis retailers spend on inventory varies. Some might spend more to supply stores with special medical-grade strains while others need to focus on stocking other cannabis products like extracts or edibles.
Operating dispensaries isn’t an exact science. But you can learn a lot from your sales data and use this to increase your annual revenue and average profit margins.
But how much money should you expect as a dispensary operator? If your business generates over $5 million annually, you could expect to pay yourself an annual salary of $500,000+.
How Much Does a Dispensary Make in Sales?
Dispensary sales are much like coffee shops; annual sales depend on several factors.
Think about the market competition. Dispensaries focusing on patient access to marijuana can run a profitable company. But they miss the adult-use market.
However, entrepreneurs interested in operating a dispensary in the recreational marijuana space will need a strong marketing campaign to acquire customers. Medical dispensary businesses will also need marketing, but the operation can become profitable based solely on word of mouth if they’re in the right location.
If a location is saturated, running a profitable marijuana business becomes more difficult. Business opportunities become more profitable with less competition, and this holds true in cannabis, too.
Tips for Maximizing Dispensary Profit Margins
Find Your Break-Even Point
Use the break-even formula to determine your break-even point. This is the point at which marijuana dispensaries break even, meaning this is the minimum dispensaries must earn to continue operating.
Check each month’s revenue receipts to determine whether you’re within the threshold of breaking even. Marijuana dispensaries are notorious for having high inventory costs. But if you’re selling enough product to cover all costs and then some, your cannabis supply store could be running at a profit.
Research Your Competition
Marijuana prices have been dropping throughout the US. As more competition enters the space, more marijuana is available, and this drives the price down.
Look at your competition. They likely use professional packaging, sales, and digital marketing to increase their market share. See what you can do and how you can improve upon what your competition is doing.
Improve Your Product Offerings
Whether you operate a recreational cannabis supply store or a dispensary focused on medical marijuana, you’ll need to offer more than just cannabis.
You need unique and preferred cannabis dispensary products to stock your shelves.
You might even go the extra mile for your customers by offering their favorite infused snacks or drinks. You can win over customers by analyzing what the market demands.
For example, your average supermarket might notice that more customers are looking for organic items. To compete with the local Whole Foods Store, it might begin offering more organic options.
For a dispensary, you might notice that more people are looking for quality concentrates. If this is the case, sourcing these products from top producers could be a good idea. While you might need to charge a premium, you could maximize your profit margins by offering products no one else is offering.
The same goes for impressive flower strains, edibles, and other product offerings.
Doing promotions on a limited-time basis is a good way to increase dispensary sales. And if it’s something you can purchase in bulk at a great price, you could increase your profit margins tremendously with the right promotion.
For example, you can run a promotion offering a first-time discount on concentrates on first visits. You could even try implementing a loyalty program that offers customers high-quantity discounts for purchasing regularly from your dispensary.
You might also consider providing a daily deal. You could offer 50% off a single item or a free gram with a purchase of an ounce.
Streamline Your Operations
One of the simplest most direct ways to optimize a dispensary’s profitability is to make it more efficient. Identify your operation’s daily functions and look for ways to reduce costs. With the right system of checks and balances in place, you can ensure your business is operating as cost-effectively as possible.
Business owners should also make every effort to only carry the products they need. Being selective about inventory will help save on monthly carrying costs while minimizing costs related to these risks.
For example, if you’re already paying rent for space, using that space effectively can increase dispensary revenue and profits. What’s more, adding storage shelves or cabinets to that space can help you store more product, allowing you to purchase in bulk at a discounted rate.
Manage Your Inventory
Inventory control is one of the most critical aspects of operating a marijuana dispensary. Government regulatory requirements in the US demand dispensaries closely monitor their inventory. Without a POS system in place to manage inventory data in real-time, inventory audits and discrepancy reporting are nearly impossible, and this can result in costly compliance violations that put dispensaries out of business.
Also, if you lose track of what you have, you could find yourself with excess products and nowhere to store them. Or worse, if your records aren’t accurate, you could run out and jeopardize the health and well-being of your customers.
You can avoid these issues by ensuring that your inventory records are organized and up-to-date. This can also help you make better purchasing decisions moving forward.
Staying mindful of dispensary costs is essential for success in this competitive industry. Profitability depends on bringing money in. But if costs become too excessive, this can become a serious problem.
Regularly monitor your dispensary expenses and make adjustments as needed. Focus on the expenses that have the most significant impact on the business’s profitability, and outsource critical non-retail operations to experienced professionals.
Think about your marketing activities and how you can enhance them. Use your sales data insight to get the most out of your marketing budget, as well.
Dominating the Cannabis Industry with Northstar
The marijuana industry is growing exponentially every year, and attracting more people to the market means that there’s room for many dispensaries to do well in spite of competition from larger businesses.
Looking to increase your dispensary’s profitability? Northstar scales dispensary profit margins successfully with the right financial guidance.
Contact us now to learn more about how we’ll grow your dispensary in this budding space.
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