This is Part 4 of a 5-part, in-depth series with valuable information for those who wish to start or grow a cannabis business. This post will outline some considerations for planning a cannabis business.
Starting and expanding a business is a monumental task which is not to be taken lightly — especially in a highly regulated industry such as the cannabis business.
Without proper advanced planning, you’re either setting yourself up for total failure or creating the potential for a devastating amount of additional effort as you scramble to deal with expanding and unforeseen difficulties.
There are considerations common to all categories and there are considerations that are unique to each category.
For this reason, this section will be broken up into six headings.
Cultivators - expanding by increasing yield
Manufacturers - expanding production capacity
Laboratories - expanding handling capacity
Distributors - expanding inventory and fulfillment
Retailers - expanding locations and sales channels
Common Planning Considerations
There are a number of aspects of running a company which all businesses have to deal with. Some of the considerations which are common to all businesses include:
Fulfillment (varies quite a bit)
Human resources (employees, contractors, consultants, etc.)
POS (point of sale - tracking/documenting purchases)
ERP (enterprise resource management)
Although these are common considerations, the exact details will differ for all categories of cannabis companies.
We’re not going to go in depth on these, but let’s take a look at each of these considerations in some more detail.
Financing Your Business
Growth requires capital investment. And getting funding to grow your business is one of the greatest challenges facing entrepreneurs.
Aside from the conventional methods of financing your business, there are a growing number of technology platforms available to entrepreneurs such as crowdfunding, peer-to-peer loans, and so forth.
If a company does not raise enough money to implement its plans, disaster can ensue leaving an entrepreneur strapped with debt they cannot repay.
The most common method used to raise capital is bank loans. The size of a loan and the interest rate you must pay are typically based on a bank’s assessment of risk and your ability to repay their loan within an agreed upon time period.
Bank loans are a viable option for both short or long-term financing. Unlike selling stock in the company, bank loans allow you to maintain ownership and control of your company.
Friends and family are also an option for securing loans.
If you don’t want to take on debt, equity financing is also an option. With equity financing, you are essentially accepting working capital in exchange for an ownership share in your business.
Equity funding can come from friends and family, angel investors, venture capitalists, and private equity firms. The source of equity funding depends heavily on the experience of the principals of the company, their past track record, the scope and feasibility of the plan, and so on.
Entrepreneurs with little or no track record are generally limited in their choices and often create partnerships with people who already know and trust them.
A big benefit of equity financing is that there are no loan payments to eat into your cash flow. The downside is that a portion of your profits and equity will go to your investors. If your company is highly profitable — which is a good problem to have — you could end up paying investors far more money than if you were paying interest on a loan.
Investors typically want large returns on their investments, whereas lenders seek low-risk opportunities and ask for relatively little in return.
Another consideration is if your investors control a large enough portion of your equity, you may be required to consult with them before you make important decisions about the direction of your business. Shares in corporations often come with voting rights pertaining to certain decisions.
Finding the right balance of debt and investors can mean a meteoric rise for a new or expanding company. Taking on too much debt, or the wrong investors can spell disaster for an entrepreneur.
Branding is the process of creating a recognizable and popular brand name. This involves not just naming a product (or product line), but also designing a logo for the product, and designing packaging, labeling, and advertising for the product.
There are two ways to expand brands:
Expand a product line to include new products
Add additional product lines
Companies often start with one product or service — such as a particular consumer product or a particular service such as lab testing or distribution services.
When building a scalable business it’s a good idea to start with one or a limited number of products so that you can assure their success, and have a long-term plan for expanding your product line. For example, a line of dried cannabis flower can be extended to offer extracts, cartridges, oils, etc. made from that flower. But if the flower itself doesn’t yet have a strong brand name it will be more difficult to brand an entire line of products — although not impossible.
Adding a new brand with a new product line is another method of expanding. For instance, if you have a line of cannabis products such as in the example above, you might add a second line that appeals to a different audience. One product line might appeal to recreational users, while another might appeal to medical users. The possibilities here are endless, but just as with expanding a product line, it’s wise to have some idea of future brand expansion so that you can decide which demographics you plan to roll out when.
There are many factors which can influence product line strategies that need to be considered such as timing, demand, competitive landscape, manufacturing costs, technological innovations, budgets and so on.
TIP: Marketing new products under an existing brand is far less expensive than creating a new brand.
The same applies to services. If you offer lab services, you can expand the list of services that you offer, expand the number of regions that you serve, or expand into other services such as cultivation consulting or transporting services.
Cannabis Branding Resources
Marketing is the process of reaching out to the market to offer your product or service. The full scope of marketing is debatable but generally includes advertising, promotion, sales methods and tools, sales channels, and so on. All of these disciplines should dovetail with your branding.
Marketing can be scaled up by increasing budgets, expanding into new sales channels, advertising in additional media channels, increasing promotional events, etc.
While developing your marketing strategies you should be asking yourself, “is this scalable, or is it limiting?” And, assuming your marketing plan is scalable, how do you intend on doing so? For example, if you’re marketing to a niche demographic it might be more difficult to expand that particular brand.
Another consideration here is, does your marketing team have the bandwidth to increase output? Or will you need to expand your creative team — whether in-house, freelancers, or an agency?
The way you expand marketing can make a huge difference in how you get started. If you’re running a local business such as a retailer, will your advertising and promotional events translate will into new locations without having to reinvent the wheel?
TIP: For retailers, social media is currently the most productive advertising after word-of-mouth. Whereas for B2B, nothing beats handshaking (direct sales, trade events, etc.).
Each category in the cannabis business sells its products or services in different ways.
Most of the time, sales involves reaching out to prospects or handling sales inquiries, but in some cases, sales can be automated such as with online order for delivery.
For a business-to-business company such as a producer, lab, or distributor, quite often sales involves building a sales force to call on each of your prospects individually.
For a retail business, expanding sales might include hiring new budtenders for new locations, which would apply for brick and mortar business, or possibly increasing your capacity to sell online, which would apply to delivery services.
As you’re planning your sales strategies it’s wise to consider what will be involved in scaling them. Will you need more space for more desks? If so, when? Should you plan on having room for them at your current location? Or will you need to develop more space? How hard will it be to find additional salespeople? How much traffic can your website handle?
TIP: Don’t just train your budtenders in cannabis knowledge, train them in sales as well.
Sales and Marketing Resources
Customer Relationship Management (CRM)
These days, sales teams are managed with software-based tools called customer relationship management systems CRMs. A good CRM will provide for a database with a wide variety of information from customer names and contact info, to which salesperson is working each contact, which marketing channel brought them in, what purchases they have made, what demographic they are part of, and much more.
Most CRMs these days are cloud-based, but in-house CRMs are still used by some companies. If you’re using a cloud-based CRM, you main scaling consideration will be the cost of the service. They’re usually priced by the number of sales reps using them.
The main consideration for scaling an in-house CRM is the price of the software. Some software is priced by how many machines you install it on or how many users will be logging in. Another consideration is the hardware requirements. How much storage will you need? How will you expand storage? How will you handle a disaster such as being hacked, or shut down by an act of God?
Inventory and warehousing facilities and technologies often require a substantial investment in time and money. The proper management of warehouse processes can have implications for all other aspects of your business. It can also affect customer experience, and therefore have an effect on a customer’s lifetime value (LTV).
Warehouse and fulfillment capacity must expand hand-in-hand with marketing and sales capacity. Otherwise, a flood of sales — which would normally be a good thing — can easily overwhelm your current systems causing fulfillment delays resulting in a poor customer experience. This can, in turn, result in bad reviews that can also dissuade other potential customers from doing business with you in the future.
Without a robust warehouse management solution, one that is tied into inventory, sales, and fulfillment, it’s possible to oversell, leaving you with the unpleasant task of having to inform customers that their order cannot be filled in a timely manner.
TIP: The better the fulfillment experience, the more money your customers will spend over their lifetime.
There are also other potential risks involved in running a disorganized warehouse aside from overselling. Packaging errors, damaged merchandise, stolen merchandise, and employee injuries can all slow your productivity, disrupt other processes in your supply chain, and negatively affect your bottom line. Furthermore, packaging errors can also result in lawsuits if they result in harm to a customer.
Technology can be key in streamlining warehouse operations. An efficient warehouse plan will increase the number of products your company can process, and also improve the speed of fulfillment, help to ensure regulatory compliance and security, improve safety, and prevent theft.
Just as important, proper warehouse procedures can provide valuable insights into supply chain logistics.
No matter how your warehouse is set up, managing and processing orders becomes increasingly difficult as your company grows. Automation can be key in streamlining warehouse operations, improving efficiency, and allowing for expansion.
Manual processes not only make your warehouse prone to errors, they also severely hamper scalability.
Today, everything from purchasing to inventory management to invoices and shipping labels can be automated. State-of-the-art automated warehouse systems include retrieval and sorting technologies, barcoding and scanning, label printing, and shipping solutions.
Barcode scanning is a necessary part of smooth warehouse operations. Barcode scanning ensures that the right products are being received, stored, picked, packed, and shipped in a timely and efficient fashion. Barcode scanning technology is also useful for taking inventory.
In order to properly measure the efficiency of a warehouse, all procedures and metrics should be available to managers via a single, comprehensive dashboard.
TIP: Before planning your warehouse be sure you fully understand all related regulatory requirements.
Warehouse Management Resources
Warehouse Inventory Management: 10 Tips You Need to Knowhttps://www.skuvault.com/blog/warehouse-inventory-management-tips
How to Manage a Warehousehttps://www.wikihow.com/Manage-a-Warehouse
Warehouse Operations Best Practices: 55 Awesome Tips and Tactics to Improve Warehouse Management, Organization and Operationshttps://www.camcode.com/asset-tags/warehouse-operations-best-practices/
50 Expert Tips on How to Organize Your Warehouse More Efficiently https://www.camcode.com/asset-tags/how-to-organize-a-warehouse/
Warehousing and Inventory Management https://dlca.logcluster.org/display/LOG/Warehousing+and+Inventory+Management
Warehouse Management: A Complete Guide to Improving Efficiency and Minimizing Costs in the Modern Warehousehttp://a.co/8eF5bGK
World-Class Warehousing and Material Handling, Second Editionhttp://a.co/hJiZgBx
Essentials of Inventory Managementhttp://a.co/1W9xgMT
Warehouse Management: A Complete Guide to Improving Efficiency and Minimizing Costs in the Modern Warehousehttp://a.co/7O7USF7
Fulfillment is the act of getting the product into the purchaser’s possession or delivering a service. Business doesn’t end when the sale is made.
Cultivators and manufacturers need to deliver their product to distributors and retailers. Labs need to have a system for taking in and processing samples. Distributors need to get products in and out of inventory and into the hands of retailers. And Retailers often have to deal with filling advance orders and have them ready for pickup or delivery. Shipping and fulfillment processes have to be fast, accurate, and efficient.
These days, fulfillment data is also expected to be accessible by your customers. Customers want to keep track of what they purchased, when it will be shipped, and when it is expected to be delivered.
Integrating order and inventory management systems is crucial. It allows for real-time tracking of purchase orders, stock quantities, sales orders, shipping, and fulfillment. Orders need to be created, tracked, and modified quickly and easily.
Is your fulfillment model going to be scalable? What will be involved in scaling it? Will you need more warehouse space? Will you have adequate loading dock space or shipping facilities, etc.? Will you need more employees? Or more equipment? Will you have to increase the size of your fleet of trucks? Can you handle the increases in activity that come with busy seasons?
These things should all be considered as you are planning your business model. As a business grows, so grows fulfillment complications.
TIP: Giving your customers access to order status and providing updates at each stage greatly increases customer confidence.
When you’re planning your business model, it’s important to consider how many employees, contractors, consultants, etc. you’re going to need to meet each level of expansion.
Which positions will need to be filled? If you’re cultivating, will you need additional master growers and farm hands for your expansion, and how many? If you’re a retailer, you might need to hire a couple of managers and a handful of budtenders per location. If you’re a distributor, how many people will you need in packing and shipping as you increase sales?
As with the other considerations, it’s necessary to know in advance what additional staff will be required.
POS (point of sale - tracking/documenting purchases)
The days of taking a customer’s money and sending them on their way are long since passed. In today’s competitive marketplace post-sale engagement and data mining can be a very powerful, sales- and profit-maximizing tool.
Post-sale engagement is the process of touching base with your customers after the sale. Landing a new customer costs money. The price you pay for a new customer is commonly referred to as acquisition cost. Once you’ve got a customer, that price is paid. The more orders you can get from existing customers, the more profitable your company will be.
In order to assure repeat business, you need to capture a customer’s contact information and as much demographic information as you feel comfortable in requesting. Storing and utilizing all this customer data requires an electronic point-of-sale system, or POS.
Not only will a good POS help you remain in contact with your customers, it can also help you determine what products or services to offer to them. By tracking a customer’s purchasing habits you can determine what products and services they are interested in as well as when they might need to reorder.
Post-sale engagement is a highly efficient way to expand sales.
TIP: Don’t pay acquisition costs over and over again by only reaching out to new customers through advertising. You can reach out to existing customers directly at a far lower cost.
Legal Requirements for Scaling
If you’re already up and running, hopefully you already have your legal team in place and all the proper licenses required to do business in your states. But there may also be additional legal considerations that need to be addressed as you expand your business.
For example, as mentioned earlier in this report, oftentimes state regulations will require a particular level of licensing depending on the size of your business.
It’s of paramount importance that you run your plans by your legal advisors before you set them in stone.
We’ve looked at some important considerations that all companies must deal with in order to launch or grow a cannabis business. Now let’s take a look at some of the considerations that are specific to each category.
The main consideration that growers face aside from those common factors listed above is increasing yield. This can be done in two ways:
Increase the output of your current operation
Increase the size of your operation
In order to increase the output or scope of a grow system, all expenditures and resources must be maximized. Here we get back to the idea of using a seed-to-sale ERP.
A cannabis-focused ERP can help growers maximize the yield and the profits from a current operation not only by increasing the yield but by making clear areas where they might be able to save money. This could including everything from electricity and water usage, to nutrient distribution, to human resources, to equipment expenditures and costs, and so on.
TIP: it’s wise to maximize the yield of an existing operation before attempting to scale the system up so that you’re not duplicating inefficiencies.
Manufacturers have numerous scaling considerations. These include supply chain management, production capacity, equipment requirements, raw materials management, space requirements, inventory, warehouse and fulfillment logistics, utilities, and so on.
There are a lot of questions that need to be answered here not the least of which is what products are we going to manufacture? Are we going to manufacture and market more of what we’re producing already and expand our sales and marketing? Or are we going to expand our product line and run new products through our existing sales channels?
Also, does your current operation have the bandwidth to increase production capacity? Can your current suppliers provide you with the raw materials you will need? Is more equipment required, and what will be its impact on operations? Will you need more hands? Will they need more training? Who offers the kind of equipment needed and which company has the most cost-effective systems? How will they impact our utility costs?
TIP: While one phase of expansion is being implemented its important to consider future phases of expansion so that a holistic plan can be implemented.
Also, keep in mind that expansion doesn’t happen in a vacuum. It affects future plans as well. It’s not a cyclical process where you plan to scale up, then you scale up, then you begin to plan the next expansion. While one phase of expansion is being implemented its import to consider future phases of expansion so that a holistic plan can be implemented.
Scaling up a lab service is somewhat straightforward. Its similar to scaling up a manufacturing business in that you’ll need to determine if your current operation — including equipment, data systems, and manpower — will allow for an increase in production or will you need to expand the entire operation?
Cutting edge technology is another important consideration. Often times being a first mover or early adopter of a new technology can provide you with capabilities which your competitors haven’t started considered and land you a treasure trove of new customers.
Expanding on your current technologies and increasing your service menu is also an option.
TIP: When public health is involved, errors can spell disaster. Make certain your tracking system is foolproof.
No matter how you approach the expansion of a lab facility, the ability to properly track incoming samples and test results, and assure that there are no mistakes is critical. This goes for all cannabis-related businesses, but labs, especially need to assure that there are zero mistakes.
When public health is involved, errors can spell disaster. The same goes for regulatory compliance.
Once again, an expandable, cannabis-focused ERP is essential.
Distributors typically do not produce products. They purchase in bulk and distribute wholesale to retailers.
In order to expand a distribution operation, a company needs to simultaneously expand its supply chain, warehouse, and inventory systems, as well as its fulfillment capacity.
Some questions that will come up are: Will we need more space and equipment, or do we have the space and equipment we need already? Are we going to expand our sales and marketing channels? Or are we going to expand the catalog of products we offer to existing customers? Or, perhaps, both? And does our current ERP solution have the capabilities needed to scale up the operation as well as for reporting and regulatory requirements?
Retail operations can also expand in a few ways. They can service more areas, which involves adding brick and mortar locations. They can expand their sales channels such as adding or expanding online sales. They can add services such as delivery. Or they can develop a more robust post-sale engagement strategy. Typically, the answer is, all of the above.
Perhaps the first step for any retail business would be to sell less of the products and services that don’t make a lot of money, and expand the list of products and services which provide more revenue and are more profitable.
Retail sales is a business model which directly interfaces with the public. In this space, mistakes can be disastrous and result in the end of the line for your business. It has happened in this industry again and again.
Licensing requirements can be overlooked, employees may break rules, products might be misrepresented causing harm to a customer resulting in a lawsuit, and so on. This is not an industry where a business wants to attract negative attention either from the media or the government or law enforcement.
As your cannabis business grows, you need to be extremely cognizant of all rules and regulation involved whether they be cannabis related, or more general. Working within the law means knowing the regulations and how to remain in compliance.
As we said, some might expand to new locations, some might decide to expand into online sales, and so on. Each of those methods of scaling up a business requires that they have in place proper technology for tracking everything from inventory to employees, customer data and much more.
There’s no sense in duplicating your IT systems when there exists powerful software that can help you manage multiple locations, inventories, staff, etc. And once again, this is where a proper cannabis-specific ERP comes into play.
TIP: Retailers wishing to grow their operations should be considering plans for both local and regional expansion.
We’ll cover ERPs in much more detail in the next chapter.
Business Planning Resources