INSIGHTS BLOG > Model for Evaluating Alternatives for Increasing Dispensary Revenues

Download dispensary_model

The Situation

Dispensaries have several different options for increasing their customer counts and associated sales:

• Bring in new customers from the nearby community through advertising, community outreach, or other sources.
• Increase retention rates, that is, the portion of existing customers who become repeat customers.
• Increase referral rates, that is, the portion of repeat customers who refer the dispensary to friends and family.

Which of these options is most effective in increasing revenues?

Feel free to click on the link above to download the model and play with it yourself.

Base Case Model Assumptions

I assume the dispensary starts with some number of seed customers at time 0.

During any given month, the dispensary:

• Attracts some number of new customers from outside sources, calculated as a percentage of the outside community, that is, the dispensary’s potential market.
• Retains some portion of last month’s total customers as repeat customers who will purchase again this month.
• Attracts new customers this month generated from referrals made by repeat customers last month.

Model Inputs

[1] Existing number of monthly customers to start.

[2] Average monthly revenues per new customer.

[3] Average monthly revenues per repeat customer.

[4] Size of the outside community from which new customers are drawn.

[5] Portion of the outside community attracted as new customers this month.

[6] Customer retention rate, that is, the portion of customers that will purchase again next month.

[7] Repeat customer referral rate, that is, the portion of last month’s repeat customers who refer the dispensary to friends/family resulting in a new customer. 

Model Outputs

[8] Total annual sales under the assumption inputted.

[9] Increase in 3-Year Sales over Base Case

Obvious Oversimplifications of the Model

• The size of the outside community is not unlimited. Rather, it is likely decreasing over time as the potential cannabis customers from the community start consuming from different sources.
• The model assumes all customers, new and returning, are retained at the same rate. Yet, returning customers probably have a greater propensity to return next month than new customers.

Scenarios

Base Case: Starting point, that is, current levels.

Referral Rate: Increase referral rate by, say, 10% from the current level.

Retention Rate: Increase retention rate by, say, 2% from the current level. Presumably the retention rate starts at a relatively high level, which makes it difficult to increase it further by any significant amount.

Outside Source: Increase the portion of the outside community attracted as new customers by, say, 10% from the current level.

Basket Size: Increase basket size of repeat customers by, say, 10% from the current level.

Insights Gained

• When rates are high, it’s difficult to increase them further: This didn’t come directly from the model, but playing around with the model makes it clear.

• To survive, a dispensary must have either: 

• • Large outside sources of new customers, and/or
  • High customer retention rates, and/or
  • High customer referral rates.

This should be obvious, but I didn’t realize how large the rates needed to be. You can see why loyalty programs are becoming an important mechanism for suppliers to successfully compete in the market. Along these same lines, having educated budtenders who can match customers with products that will provide the experiences customers are seeking is important for generating loyalty.

• Rates are not interchangeable, because

• • They act on different bases: For example, a 10% increase in the retention rate (on total customers) won’t have the same impact on sales as a 10% increase in basket size (of repeat customers).
  • They have different follow-on effects (see comment on the retention and referral rates below).

• The impact of increasing any one of the variables depends on the levels of the other variables. Generally speaking, when all the rates are high, further increases have greater impacts on profits than they do when all the rates are low.

For example, in the scenarios below,

• • The first set of calculations (Figure 1) uses a Base Case retention rate of 25%,
  • The second set (Figure 2) uses a rate of 50%, and
  • The third set (Figure 3) uses a rate of 75%,

while all other variables are held constant. The set of outcomes in the first set (respectively from row [10], 1%, 1%, 6%, and 4%) are generally lower than they are in the second (3%, 3%, 6%, and 4%) and third sets of calculations (12%, 15%, 5%, and 5%). 

Figure 1: Base Case Retention Rate = 25%

Figure 2: Base Case Retention Rate = 50%

Figure 3: Base Case Retention Rate = 75%

• Increasing the retention rate has more bang-for-the-buck than the other alternatives (see Figures 1, 2, and 3) because it generates both

• • Direct sales from repeat customers, plus
  • Indirect sales from referrals generated from repeated customers.

Plus, both effects compound flow through as increases in each subsequent month. In other words, the effects compound.

• As with increasing the retention rate, increasing the referral rate also has a large impact because the effects compound over time. 

I always find it amazing how insightful a simple model can be.