Cannabis Business Case Study
Does S-Cannabis have what it takes to last another 10 years in this ever evolving industry? Do current macro economic forces pose a threat to small businesses who lack business intelligence?
I was working at NASA’s JPL my senior year as an intern barely making ends meet as I made my way through UC Berkeley’s Computer Science program. One day, I received a phone call from an old high school friend who was in an emergency situation due to an expired SSL Certification. She runs a Cannabis Storefront (will refer to S-Cannabis for short) in Southern California. Before I knew it, I began managing all of their business’s web development and marketing.
What happened? Long story short, S-Cannabis hired a Website company in Los Angeles to develop a website which they hosted on word press and barely maintained. The issue seems to have been as a result of lack of oversight , and structure in S-Cannabis’s daily operations. Their SSL Cert expired and as a result the website hosted in wordpress was now no longer pointing to their domain. The website company wanted $10,000 for revival.
I quickly resolved with a replacement site I made via Wix. As I began looking deeper into the issues which led to this, I quickly learned that S-Cannabis was spending $16,000 a month on SEO and SEM services provided by an industry wide known Marketing Agency in the Walnut Creek area.
This company was charging S-Cannabis $10,000 a month for SEM strategy, content, and google ads management. After digging into the Google Search Console and Google Ads Dashboard, I noticed that their account was suspended from running google ads. This was due to the fact that Cannabis sales are illegal at the federal level. Upon further research, I found that this SEM company was charging a service fee of $10,000 and an additional $6,000 on average for clicks from Google Ads. The Ads were pointing to a temporary landing page with one input component asking users for their emails. If the user engaged it would then route them to S-Cannabis’s landing page. S-Cannabis was never aware of any emails gathered or that this was being done. They were also responsible for the ~$6,000 average total monthly cost as they charged per every click the ad produced.
A year later, S-Cannabis is now asking me to manage their WeedMaps(WM) advertising campaigns. I sat down with the lead salesperson and solutions engineer from WM as they were walking us through a very elementary live session of how to interact with their dashboards to create and schedule ads. S-Cannabis had agreed to pay WM $15,000 for ad space on their widely used application. S-Cannabis decides to purchase ad space and start advertising immediately.
The Deal They Advertised? 30% off First Time Delivers, For First Time Customers only.
I couldn’t help but ask myself, I wonder if they keep track of a metric I consider very useful — Revenue Per Cost of Ad Spend.
Hypothetical Situation To Consider
S-Cannabis pays WM $30,000 per month for ad space for the next 12 months. This costs $360,000 per year.
This results in 50 new customers per month who each spent $100.00 to save 30% on their desired order at that time ($130.00). These 50 customers never return again for the remainder of the year. These ads also result in 5 new regular customers who each spend on average $40.00 per week.
50 (new customers, they don’t stick)* $100 (each customer spends)* 12 months= $36,000 revenue per year**.
56 weeks per year * $40.00 spent/ customer * 5 new regular customers = $11,200 revenue per month**
*This does not include operational costs.
Breakdown:
Spend $360,000 / year on ads alone
Revenue ~$47,200 / year revenue from ads (not including costs)
Loose over $300,000 / year from running ads (still need to include costs)
Is there some potential for upside? Sure there is! However, without an efficient process and sticky brand, eventually your competitors will out price you. This means you are essentially betting $300,000 on your brand and delivery experience to be super sticky.
Super Sticky? What does that mean?
S-Cannabis is a small mom and pop Cannabis store in the middle of a highly competitive Los Angeles Cannabis industry. They operate only one store, and are worried they are loosing market share. Companies such as Med Men, Ohana, etc. are expanding state wide. These multi operational companies have become deeply embedded brands. They are scaling at a rapid rate and blending nicely into culture and society.
If S-Cannabis runs ads for the next year, and notices that these ads are instead leading to growth in customer retention over time, then we have no issues. The problem is that without insight into these metrics, they will not be able to determine if this is the case.
S-Cannabis is owned and operated by a generation of CEOs which seem to be neglecting the advancement of technology. I believe that these solutions and concepts do not easily register with them because of the complicated terminology and setup cost it requires. As a result, I am not confident in their long term financial health unless they make a serious pivot in business strategy.
Why do I care? Since the pandemic, I have experienced an influx of similar requests ranging from the Tax industry, to real estate. I can’t help but wonder if the 4th Industrial Revolution will cause many long with standing storefronts to collapse if they do not keep up to date.
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