By Colton Peterson
“There are lies, damn lies, and statistics”
“All models are wrong, some are useful”
-My Little Brother, MACC
That’s great Colt, really inspiring, what does any of this have to do with me running a successful business? The answer. Data. Specifically cannabis data. Data is arguable the most valuable commodity in the world today, with all 4 trillion dollar US companies (Microsoft, Amazon, Google, Apple) having a heavy hand in either the creation, processing and storage, or dissemination of big data. The reason it is so valuable, is that because for most things in life, human behavior follows a normal enough distribution that it can be predicted with >51% accuracy when variables are properly accounted for.
What does that mean for your business?
It means that if properly applied, cannabis data analytics can help your business maximize revenue, reduce overhead, and minimize the amount of working capital you have tied up in inventory that sits on the shelves. This is especially important in cannabis, where fierce competition, tight access to capital, and antiquated regulations, like 280E, can leave your bottom line squeezed hard.
Most every operator in the space uses some flavor of cannabis specific software, for simplicity’s sake, let’s look at a dispensary with a simple point of sale (Dispensary POS System) platform. This software will ideally produce several key cannabis data points, when inventory arrived, time of sale, price, ticket number, client age, gender, area code, discounts, time of sale, etc. The question now becomes, how does this large pool of cannabis data become useful to me, and what insights should I look for?
The first thing is finding a way to condense this into something useful, now your POS system might have some slick dashboards or in-depth reports, but I’ve found that most platforms don’t deliver the in-depth insights you really need to gain an edge. Excel can be a very useful tool, but I find it can be difficult to build drill down features or look at different time periods, even for a pivot tabling, hasn’t touched the mouse in years index matcher like myself. Python is another powerful tool, but you’re an entrepreneur, not a coder. Therefore, I recommend the Tim Ferriss solution, outsource your life. There are several powerful tools available for relatively little money. Let’s look at ROI, if you spend $150/month on a cannabis data analytics tool, how much flower do you have to avoid throwing out or selling at little to no margin to avoid spoilage to make your money back? It’s not much, but more on that later.
The Power of Cannabis Data
Ok, so now you have a slick dashboard that tells you everything you need to know, over whatever time period you want, now what? It’s time for trend analysis. Since modern daily life is regimented for the majority of Americans, and most are creatures of habit, you can run simple regressions to optimize your operation. First, look for trends in the number of tickets to see when you need additional staff and when you should save on labor costs. Make sure you are looking at enough data to see the full trend. Is it busy every Friday afternoon? Or just every other because people have paychecks burning a hole in their pocket. While this type of analysis is useful, I would caution against relying on past cannabis data for outlier events such as 4/20, as such things can often times fall out of the bounds of a normal distribution.
So we know when we’re busy, that awesome, I’ve never even heard of VLookup and I could do that on excel, so what’s next? Another basic function can be to easily identify your best selling items, and also identify seasonality. For example, sales of edibles often times increase around holidays that are typically associated with candy or flowers, such as Mother’s Day or Valentines Day. Obviously a lot of dabs are sold in early July. Again, these types of insights are everything and nothing at the same time, if you don’t have them, you’re dead, but if you only have them, you’re just as dead, it will just be more painful.
Price points and discounts: multi-variable maximization. This is an area where smart use of data analytics can really help your business thrive. Let’s say you’re selling pre-rolls for $10, and on average you sell 100/day for $1k/day in pre-roll sales. Some of your budtenders complain that the price is too high, and customers occasionally have sticker shock.. You lower the price to $8, now, on average, you sell 120/day. That’s great! You’ve increased sales 20%! A number any venture capitalist would be drooling over. But not so fast, you’ve only made $960, so your top line revenue went down, furthermore, say each pre-roll cost $2 to produce, you cost of goods sold (COGS) has gone from $200 to $240. Now, instead of gross profits of $800, you’re down to $720.
It is these types of multivariable supply and demand calculations where dispensary data analytics can really add value to your business beyond a simple excel sheet with a line graph. (alt+n+c1 for you hotkey fanatics) The calculations can be tricky, and being able to see a direct impact between business decisions and the bottom line is what makes operators nimble enough to not only survive, but thrive.
Garbage in, Garbage out
Just remember, any cannabis data model is only as good as the information you’re feeding it. To ensure that you’re not shooting yourself in the foot with bad insights, establish procedures for operating the POS and hold people to it. This is especially important in cannabis as failure to maintain systems up to date can result in hefty fines, losing your business, or even criminal action.
Don’t be “fooled by randomness”
As anyone who has ever watched the news will tell you, things always must be attributed to a cause, and often, this is false. Headlines such as “Dow plummets on coronavirus fears” or “Stocks rally on positive jobs report” are more often than not erroneous. I guarantee you that there is a security out there somewhere that correlates exactly to the average temperature in Bangkok, I assure you, they are not related. Randomness plays a much larger role in daily life that you would like to believe. Don’t mistake correlation for causation. I would also highly recommend reading the book by Nassim Nicholas Taleb for which I titled this paragraph.
The future of cannabis data
Moving forward, there are a multitude of insights that can be gained as cannabis data streams become more robust and we better understand what the numbers mean. Mobile apps and CRM platforms can measure ROI from ad campaigns in real time while gaining insight into consumer behavior. Video analytics can help retailers optimize the layout of their store for upsell opportunities. Customer wait times can be regressed against average ticket spend to optimize staffing, and so much more. As the cannabis space becomes more mainstream, and companies continue to innovate, data will continue to enhance the consumer experience while enriching the entrepreneurs that know how to use it properly. Don’t get left behind.