In recent years, cannabis has become widely accepted across the United States. As an increasing number of states adopt marijuana programs with specific regulations, many executives of licensed cannabis businesses and brands seek inventive manners to expand their reach and pull in new customers.
According to Avis Bulbulyan, CEO of California-bound cannabis consulting agency Siva, methods such as brand licensing, franchising, profit-sharing, and revenue-sharing become critical in overcoming interstate commerce restrictions.
Bulbulyan explains, “It’s all really licensing; it’s just how you go about it.”
The Siva CEO notes that “There are 50 different ways to split the fees,” making it seem all the more complex of an ordeal for emerging cannabis brand owners. In the bargain, licensing arrangements are relatively inflexible more often than not.
Licensees traditionally have to pay for the right to use a brand’s product or intellectual property rather than own it altogether. Licensing additionally involves an upfront fee, and the licensee is expected to undertake the bulk of the financial risk when paying the brand, regardless of how much revenue is garnered from sales.
Despite these legacy practices, some cannabis businesses are shifting the standard with these contemporary strategies.
Developing Revenue-Sharing Agreements
Stone Road, a California-bound cannabis brand, moved away from the customary licensing model in favor of revenue-sharing. According to Sabrina Wheeler, the brand’s COO (chief operating officer), this switch was fueled by the business’s desire to distribute its marijuana flower and pre-rolls differently.
Revenue sharing equally administers earnings and losses among all involved parties. This method ensures that the financial risk is shared due to payments relying on generated revenue. Subsequently, all parties have more incentive to maximize revenue and success.
Wheeler explains, “There’s more at stake for both the brand and the manufacturer.” As a result, she finds that it places “everybody in a more collaborative position.” The COO and the Stone Road team tailor the company’s stock-keeping units (SKUs) to address gaps in specific markets.
The brand’s efforts have been beneficial thus far. In one of Stone Road’s many optimized operations, the company designed and developed a novel multipack tin of pre-rolls explicitly for New Mexico (NM), Massachusetts, and California.
Wheeler additionally unveiled a neglected market for cannabis concentrates in NM, leading Stone Road to launch one- and two-gram concentrate products for the state.
Vetting and Reviewing Partners
Finding formidable partners in the cannabis sector can be long and arduous. As Stone Road expands into untouched markets, the company determines which companies will best collaborate. The brand vets up to 20 groups before making any decisions, according to Wheeler. She explains how “some are receptive” while others are not. “Some think there’s more value to creating an in-house brand,” she adds.
Despite the belief that revenue-sharing and profit-sharing are the same, the two practices are fundamentally different. Profit-sharing distributes profits to each party rather than total revenue.
Without profit, there can be no financial administration. Bulbulyan states that profit-sharing is only beneficial if the brand builds a close relationship with its collaborator. Consequently, the method “creates a lot more accounting situations and issues.” He says it isn’t “a one-way transaction.” It remains “a licensing deal.”
Brand Licensing
While licensing alternatives are available, they aren’t always compatible with every business’s internal operations. However, Old Pal, a marijuana flower and edibles brand in California, continues to introduce licensing agreements. The company’s CEO, Rusty Wilenkin, remarks that Old Pal prefers “to keep things simple.”
While the business has already received profit-sharing deals, Wilenkin finds them nonsensical for his specific company because they require supplemental collaboration with partners to be effective.
In place of profit-sharing, Wilenkin’s licensing partners receive a percentage of sales. His preference for this licensing model stems from its simplicity and scalability. “The licensing model for pure-play brands has been really great.”
The Growing Cannabis Market in the US
Bulbulyan anticipates that cannabis brands will emerge and grow into novel markets. Some operational models will likely be preferable over others. Currently, these companies boast chaotic structures, with owners leveraging whichever models work best for their companies.
As cannabis executives shift their intentions behind their business practices, states with existing marijuana adoption regulations should expect to see an increasing number of brands develop in the coming years.
