October 13, 2022
Adam Hoeksema
According to IBIS World, the medical and recreational marijuana industry is worth $19 billion. Around 25,000 businesses employ over 56,000 individuals throughout the country. But, of course, dispensaries are limited by individual state laws, with only certain states making the substance legal on a recreational level and in a medical capacity.
Despite the restrictive nature of many states, it’s no wonder future business owners want to get in on their slice of the pie – the $19 billion industry. This article will outline how to start, the startup costs, and how profitable a dispensary might be.
Common Steps to Starting a Profitable Dispensary
- Researching and planning, such as whether you can move forward with recreational marijuana or only medical
- Licensing and application which will largely depend on the location
- Write a Business Plan
- Estimate the cost of starting a dispensary
- Secure financing for the business
- Find the ideal location
- Choosing the right team members and technology
- Create a security plan
- Source the product
How Much Does It Cost to Start a Dispensary Business?
On average, it costs $750,000 to start a new dispensary.
We were able to determine this average startup cost based on taking the average of three sources.
According to (Cova, TheCannibisIndustry, Blaze), the following startup costs can be expected:
- Minimum startup cost for dispensary business = $150,000
- Maximum startup cost for a dispensary business = $2 million
- Average startup costs for a dispensary business = $750,000
The majority of dispensary startup costs will fall into the following categories:
- Required Capital - The amount will vary depending on the state. For example, Illinois requires $400,000 in the bank before granting any licenses.
- Licensing and Applications
- Real Estate
- Professional Services
- Staff
- Equipment
- Security and Surveillance
- Marketing and Advertising
- Product
How Much Can a Dispensary Business Make in Sales?
The average dispensary makes between $3,269,718 and $4,195,992 in annual revenue.
We were able to estimate this based on a couple of assumptions:
- The average dispensary generates $974 annually per square foot of space. (Gateway Proven Strategies)
- Dispensaries average between 3,357 and 4,308 square feet of space with recreational dispensaries averaging toward the higher end of the range. (MJBizDaily)
After gathering that information, the calculation is rather simple. $974 x 3,357 = $3,269,718 or $974 x 4,308 = $4,195,992. Of course, this doesn’t mean that the dispensary has to stick to this revenue or size. A larger dispensary might make more, but it also comes with a higher operating cost. Larger doesn’t guarantee the same income per square foot, leaving a wide range of potential revenue.
Although this is a useful bit of data on the average revenue of a dispensary, just because you open a space doesn’t mean that you will magically sell $974 per square foot per year. So in our Cannabis Dispensary Financial Model Template we like to take a more foundational approach. Our financial model leads you to make the following assumptions to get to a projected revenue number:
- Advertising spend
- Cost to acquire a new customer
- Word of mouth new customers
- Average number of visits per customer
- Customer retention
- Average product sold per customer visit
You can see screenshots from our model below to get an idea of how we like to think about it:
Customer Acquisition for a Dispensary
Below you can see assumptions used to calculate that customer acquisition cost for a dispensary:
Average Order Value per Customer Visit at a Dispensary
The average dispensary customer will spend between $25 and $50 per visit according to Salesfuel. You can see how we allow you to build out your product offerings, pricing and sales per visit in our model.
As you finalize your revenue forecast for your dispensary here are a few more sources to help you get a good range of the low end and high end of revenue for most dispensaries.
These three sources (AmericanCannabisCompany, MJBizDaily, GatewayProvenStrategies) explain the potential revenue a dispensary could achieve.
- Minimum revenue for a dispensary = $500,000
- Maximum revenue for a dispensary = $4 million
- Average revenue for a dispensary = $1,000,000
What Are Common Expenses for A Dispensary?
As with any other business, dispensaries come with a whole host of expenses. Dispensaries are said to come with a higher revenue which could turn into a good profit, but expenses need to be taken into account.
There is a whole host of variable and fixed expenses a business will incur throughout the month or year. Fixed expenses are predictable, and rarely change without advanced notice. Variable expenses change often, sometimes from month to month, and are rarely predictable.
Variable Expenses
- Repairs
- Maintenance
- Utilities
- Credit Cards (if any)
- Supplies or product
Fixed Expenses
- Rent or mortgage
- Taxes
- Insurance
- Software
- Permits (these might be yearly, depending on the area)
- Advertising and marketing
- Accounting
- Payroll
Dispensary Profit Margin
The average profit margin for a cannabis dispensary is 15%.
Three different sources (NStarFinance, AmericanCannabisCompany, Blaze) provide with a good overview of potential profit margins for a dispensary.
- Minimum profit margin for a dispensary = 12%
- Maximum profit margin for a dispensary = 21%
- Average profit margin for a dispensary = 15%
How much profit can a dispensary generate?
The average dispensary can generate between $100,000 and $1.2 million in annual profit.
If you are the 100% owner of your dispensary, then you can expect to earn between $100k and $1.2 million in annual income as a dispensary owner.
We came to this conclusion based on a couple of key assumptions:
- Dispensaries typically generate between $1 million and $4 million in annual revenue
- Dispensaries typically generate a profit margin of between 10% and 30%
Then with a little bit of math we can determine the profit range for a dispensary:
- 10% of $1,000,000 is $100,000
- 30% of $4,000,000 is $1,200,000
Once you are done entering in all of your own assumptions into our financial model you will get to see a profit and loss at a glance that will show you how much profit your dispensary is forecasted to make. You will want to make sure that your projections fall within what is reasonable for the industry. Things like:
- Annual revenue between $1 and $4 million dollars
- Profit Margin between 10% and 30%
You can see in our example dispensary projections that we fall close to industry norms which is what your potential lenders or investors are going to be looking for in your projections.
Ready to get to work planning your new Dispensary? Our Dispensary financial projections template makes it easy to generate the items this article covered in no time at all. Check out this video demo of the template and how it works!
Dispensary Startup FAQs
There are a couple more common questions we wanted to answer:
How to Set the Prices in a Dispensary?
The first step toward a good profit estimate is to decide on the product’s price. There are two common ways of setting the price: market-based pricing and target-based pricing.
A) Market-Based Pricing
Market-based pricing sets the product price based on the wider market. All that is needed is a quick and simple online search. This pricing model aims to determine what prices potential competitors set and ensure your prices stay in the ballpark.
Staying within the price of other dispensaries will give your business an advantage without fear of chasing customers away. Prices set either too high or too low have an impact on whether individuals walk into the dispensary in the first place. Low prices have the same effect on a consumer’s mentality as a price that’s set too high.
B) Target-Based Pricing
The target-based approach will require more work. Product price is set with an end goal since you’ll want to target an overall profit. Rather than attempting to match competitors, you focus on your business by trying to achieve a certain monetary goal at the end of the year. The best way to start this approach is through determining a goal profit margin.
According to Northstar Finance, the profit margin for a dispensary is an average of 15% to 21%. So let’s say for the purpose of the estimate, the goal is a 20% profit margin. The next step will be determining the potential operating costs. With both numbers, you can quickly determine the amount of revenue the business needs to meet the profit margin.
Product prices should then get set to meet the needed revenue to offset the operating costs. Of course, the profit margin the business aims for could be any number you choose, but it’s good to remember that there is competition. Dispensaries are a growing business within the approved states, and you don’t want to turn off any potential clients with too high prices.
How many potential clients will come to a cannabis dispensary?
While calculating potential revenue and profit, estimating the number of clients is vital. A Gallup poll conducted in 2019 revealed that 12% of all Americans smoke marijuana, with the CDC claiming at least 18% have tried it once. In addition, specific age groups and country regions have been found to frequent dispensaries more than others, bringing everything back to the location.
When going through a potential revenue estimate, consider the dispensary’s location. We’ll assume it’s in a legal state, but the city and people who live there make a huge difference in the overall success of the dispensary. The Western and Eastern regions of the United States show to frequent dispensaries more often; 16% and 15%, respectively.
According to the same Gallup study, the younger age group from 18 to 29 are more likely to partake as well, with numbers as high as 22%. So choosing a city with a younger crowd will make all the difference in potential revenue, something to keep in mind.
If you have any more questions, please reach out to us and let us know so that we can continue to answer key questions for new startup dispensaries.
Photo by RODNAE Productions from Pexels
