Unlocking Profitability and Happy Customers: Mastering Cannabis Retail Inventory

Understanding Your Margins: More Than Just a Percentage

Your profitability hinges on understanding your margins and there are two simple calculations that will allow you to do that: margin percentage and margin dollars. 

Margin percentage reflects the portion of your revenue after subtracting the cost of goods sold (COGS), helping to assess your overall pricing strategy and competitiveness. 

Calculating Margin Percentage

To calculate the margin percentage, you need to know the revenue and cost of goods sold for a specific product or service. Once you have these figures, the formula is simple:

• Subtract the cost of goods sold (COGS) from the revenue to calculate the gross profit.
• Divide the gross profit by the revenue.
• Multiply the result by 100 to get the margin percentage.

Margin dollar, on the other hand, represents the actual profit you earn per sale (revenue minus COGS). This metric is crucial for identifying your most profitable products and informing inventory decisions.

Calculating Margin Dollar

Calculating the margin dollar is straightforward. Simply subtract the cost of goods sold from the revenue:

Margin Dollar = Revenue - Cost of Goods Sold

Understanding your margins and getting your Inventory Funnel right will lead you to all-star status.

The Inventory Funnel: Your Guide to Product Selection (Visual) 

Selecting the right products is crucial for maximizing profits and avoiding costly mistakes. Enter the Inventory Funnel, a decision-making tool that helps you narrow down your options. It works by asking a series of critical questions:

• Will customers find it useful? Prioritize products that align with your customer needs and avoid impulse buys. Not every product needs to have a space in your store.
• Does it fit your brand identity? Stock products that resonate with your store's mission and target audience. If you position yourselves as a luxury cannabis experience, prioritize high-end products and accessories. On the other hand, some shops are more focused on holistic wellness. These shops position themselves around overall wellness and may stock CBD products, yoga apparel, or other health-focused items alongside cannabis.
• Do you already have something similar? Avoid redundancy and maintain a diverse assortment to cater to varying customer preferences and prevent overstocking. 

By applying these questions through the Inventory Funnel, you'll ensure your inventory aligns with your customer demand and brand values, ultimately leading to better sales and a more loyal customer base.

Cannabis Pricing Strategies - Beyond the Dollar Sign

When pricing your cannabis products, understanding what influences customer buying decisions is crucial. Here are some factors to consider:

• Price sensitivity: How much will your customers pay for a particular product? Analyze customer data to understand their price sensitivity. An item priced too high may turn customers away; you may eat into your profits if it is too low.
• Product velocity: How quickly do your products sell? Faster-selling (high-velocity) products can have lower margins but still generate significant profit due to high turnover.
• Margin dollars: Focus on maximizing profit per sale, not just margin percentage. Identify your high-margin-dollar products and consider any pricing adjustments strategically.
• Perceived value: Customers are willing to pay more for products they perceive as valuable. Ensure your pricing reflects the quality and benefits of your offerings.

By considering these variables, you can develop a pricing strategy that optimizes both sales and profitability.

Measuring Inventory Efficiency: The Inventory Turnover Ratio (ITR)

The Inventory Turnover Ratio (ITR) is a valuable tool for gauging inventory management effectiveness. It measures how often you sell through your entire inventory within a specific period. A high ITR indicates efficient management and fast-moving products. In comparison, a low ITR suggests slow-selling inventory that may require adjustments to your buying strategy.

Here's the formula to calculate your ITR:

ITR = Units Sold / Average of (Starting units + Ending Units/2)

For example, you sold 500 packages of watermelon-flavored gummies in a year. At the beginning of the year, you had 50 packages in your inventory; at the end of the year, you had 20 packages left. Using the formula:

ITR = 500 / ((50 + 20) / 2)

ITR = 500 / 35 = 14.29

This means you sold all your packages of watermelon gummies approximately 14 times in a year.

Multi-Store Inventory Management: Tailoring to Local Needs

If you operate multiple locations, a one-size-fits-all approach to inventory won't work. Customer preferences and local regulations can vary between locations. The Inventory Funnel can also be your ally here. Use it to analyze demand patterns and customer preferences at each location; you can optimize inventory allocation, minimize stockouts and excess inventory, and ultimately boost sales across all your stores.

Best Practices for Retailers and Brands: Working Together for Success

Here are some best practices to keep your inventory management on point:

• Retailers: Conduct year-end reviews to assess product performance, diversify your assortment based on customer preferences, and start with limited quantities for new products to minimize risk.
• Brands: Share product roadmaps with existing partners to assist in planning and provide category data to new partners to guide their initial inventory loads and prevent overstocking.

Effective communication and collaboration between retailers and brands are critical for ensuring a smooth supply chain and optimal inventory management. This planning leads to a loyal customer base that trusts your store's expertise. 

Inventory Management Matters

Investing in effective inventory management practices offers many benefits for your cannabis dispensary. It improves the customer experience. Happy customers come back. Ensuring you have the products they want in stock creates a positive shopping experience. It increases profitability. Smart inventory decisions lead to higher margins and less waste. It reduces shrinkage. Minimize your losses from expired or unsold products. It gives you a competitive edge. Stand out from other cannabis stores by offering the right products at the right price and delivering exceptional customer service.

By mastering your inventory management and margins, you unlock long-term success in the ever-evolving cannabis retail market. Remember, it's not about having all the products on the shelves—it's about having the right products at the right time and meeting your customers where they are. 

We all know there's no better feeling than watching happy people leave your shop with a bag in their hands.