Peril and Possibility: Direct Sales Channel Marketing

The limited number of dispensaries and other points-of-purchase, consumers’ lack of education regarding cannabis benefits, and the patchwork nature of state-agnostic regulations hinder growth potential in the cannabis industry. Accordingly, a good sales channel strategy with an emphasis on consumer education is critical for cannabis entrepreneurs to achieve success.

This is especially true for cannabis consumer device suppliers. These suppliers have historically sold pipes, vaporizers and other wares through retail shops. “Head” shops are everywhere—even in states that currently do not have any cannabis use rights at all—and typically it is not a problem to get products to those who want them. However, cannabis accessory shop owners are limited in their ability to demonstrate the benefits of their wares effectively. This problem is multiplied when a new type of device is released into the market, as it means a bigger learning curve for consumers.

When first-generation vaporizers emerged on the scene over a decade ago, they were rudimentary machines (basically just a soldering iron and a small fish bowl), but they worked if you knew how to use them. Later-generation vaporizers are more sophisticated and complex devices that require sellers to educate consumers on how to use them effectively. A direct-to-consumer marketing strategy is one way to both sell wares and educate consumers.

Direct sales marketing is the direct-to-consumer selling of products at either the buyer’s home or any other buyer-selected location. This includes everyone from door-to-door salespeople to entrepreneurs who throw “parties” in which the “host” uses this event as a means to sell their wares. Direct selling parties have been used to sell everything from plastic food containers and home items, to dietary supplements. Overall, this business model is very similar to an exclusive distributor model often employed in B2B markets.

Through the party setting, sellers are able to demonstrate their wares to people invited or qualified to join and then sell products from their own small stock of inventory or from a catalog. Importantly, party hosts earn sales commissions from sold products, not from new host referrals. An example of a cannabis industry company employing this business model is Healthy Headie Lifestyle, Inc., whose mission is to “provide tools, resources and information to people interested in cannabis for their health.”

However, companies like Kannaway are introducing a more complex and controversial business model called Multi-level Marketing (MLM) whereby a company recruits independent salespeople and incentivizes them not only to purchase and resell products but also recruit new salespeople. But the devil is in the details. The independent salesperson is contractually required to regularly purchase a preset inventory, despite whether or not the seller actually needs replenishment. Each salesperson is also incentivized—either with lower inventory requirements or increased commissions—to recruit other independent salespeople.

For the MLM company, the benefits of this business model are obvious. They do not need to focus their marketing dollars on tracking the actual consumer demand for their products. MLM companies basically transfer this responsibility to their independent salespeople. Most importantly, they have a continuous pipeline of new recruits to sell this contract to, which could mean significant revenue growth.

Unfortunately, this puts undue pressure on sellers, who are not always equipped to bear the burden of inventory ownership. In fact, the additional recruitment incentive offered by MLM companies as a means to lessen the burden of the inventory contract further increases the costs and risks for independent sellers because they are just adding new competitors into their own market. This decreases their individual profit potential.

Entrepreneurs must research direct marketing companies and business models carefully. There is a clear difference between a company that is dedicated to educating consumers and a similar model that operates more closely to a pyramid scheme, capitalizing on the cannabis illiteracy of consumers and entrepreneurs. Usually, the more complex and bogged down the business model, the less likely an independent salesperson will succeed.

Ultimately, it is up to the entrepreneur or investor to determine the legitimacy of a business, but a few simple guidelines to consider are whether or not there is a membership and associative cost, how much a person needs to sell to gain a reasonable return on investment, and whether the business offers training for those engaging in the business model as well as the tools to deliver education to end users.

If the organization focuses on best practices including industry education, transparency, and genuine partnership, the investment is sound. But if the primary business incentives do not trickle down, it might be time to reconsider.

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