Beating the Cannabis Black Market

For decades, black market cultivators and sellers serviced the huge cannabis-using population in the United States. Recent passage of legalization initiatives in a number of states, on both recreational and medical fronts, was designed to finally curtail illicit sales and distribution of cannabis products. Still, black-market sellers are an ever-present threat to the legal cannabis market, and many entrepreneurs are taking steps to fight back. In this article, we will discuss best practices for outsmarting the cannabis black market, helping legal companies to encourage their consumers to support the growth of a legitimate and thriving cannabis market.


A Regulatory and Taxation Quagmire

As of April 2018, 29 U.S. states and the District of Columbia have passed some level of medical marijuana legislation, legalizing the cultivation, distribution, possession, and sale of cannabis or cannabis-infused products. Nine states and D.C. have also passed recreational marijuana legalization initiatives. Together, the legal cannabis industry represents billions of dollars in retail revenues and taxes – in fact, industry analysts suggest the retail side alone may be worth as much as $40 billion by the year 2020.

Despite these glowing figures, all is not well with the legal marijuana industry. To a large extent, legitimate cultivators and distributors are still battling against black market operators. Why hasn’t legalization legislation stamped out the illicit production and sale of cannabis products? The problem is two-fold, and centers on taxes and regulation of the industry.

Taxes on retail marijuana sales can be extremely steep, exceeding 15% or more in some states. For example of the restrictive taxes imposed on retail cannabis sales, California charges sales tax and an excise tax on retail sales of marijuana products. Taxes on producers and distributors further drive prices up. These taxes have tended to make legal products prohibitively expensive, forcing many consumers to source their products on the illicit market. To counteract this trend, lawmakers in California and in other states are considering bills that may temporarily lower taxes in an effort to spur the legal part of the industry while curtailing the cost advantages the black market represents to customers.

Licensing is another area where the black market gains an advantage. The licensing process for legitimate cannabis businesses is complex and expensive; high fees and a potentially long waiting period before license issuance means that many would-be marijuana entrepreneurs give up before completing the process. In the meantime, unlicensed cultivators and operators are flooding the market with cheap cannabis. Avoiding licensure and operating under the radar gives them significant advantages, allowing them to offer their products more cheaply to budget-minded consumers who don’t mind the risk.


Tips for Cannabis Entrepreneurs

Faced with challenges in combatting black-market production and sales of cannabis products, what can legitimate marijuana entrepreneurs do to turn the tide? Business advisors and cannabis industry analysts have put much thought into strategies that reward consumers while taking away some of the advantages that black market operators have in the current industry atmosphere. In simple terms, these strategies:

  • Build brand and business loyalty
  • Help entrepreneurs gain customers and retain those customers
  • Encourage lawmakers to reform existing taxation and licensing issues

Here are some of the techniques savvy cannabis entrepreneurs are using to advance the legal market:

Loyalty Programs – in any business, rewards or loyalty programs encourage repeat customers, providing incentives on prices or special deals. In the legal cannabis industry, enterprising retailers have instituted similar loyalty programs. There are several types of programs, including those that offer points for each purchase, discounts for signing up for newsletters and updates, or point-of-sale perks. Signups for news and updates seems to be one of the most popular programs; these programs offer instant discounts or discounts to be used in future purchases. And, this allows the dispensary or retail outlet to share information with their customers, which ultimately impacts sales in a positive way. Communication with customers is key in building brand loyalty.

Humanitarian Support – in a crowded marketplace, retailers often look for ways to differentiate themselves from one another. In the legal weed industry, a large number of operations work to support humanitarian causes such as food banks, medicine for underserved populations, and clean water initiatives. This type of support appeals to conscientious consumers – those who make purchasing decisions with their hearts as well as with their wallets. Delivering social good creates an atmosphere of goodwill, and customers across market sectors tend to support companies that give back to the communities around them.

Education and Customer Outreach – as mentioned earlier, communication with customers helps to build brand loyalty. One way that cannabis entrepreneurs further the communication is by providing information and education to customers at the point of sale and on packaging/labeling. Certain states, such as California, require cannabis products to be laboratory tested. Even in states where this is not a requirement, having products assayed by a certified lab can mean the difference between increased sales and lackluster retail performance. Educating patients and recreational customers on the safety standards, lab testing processes, and concentrations of active ingredients in the cannabis products goes a long way toward building brand awareness, differentiating those that educate from others that simply sell products. This kind of education is simply unavailable on the black market, creating a significant advantage for legal operators. Of particular note is the market segment containing infused products and extracts; black-market operators have no incentive to adhere to safe practices, and their products may contain harmful chemical residues. Legitimate extracts producers, however, can demonstrate to their customers that their products are free from contaminants and are made under industry best practices.

Originality – in any market, brands that are perceived as original stand out from their competitors. This is just as true in the regulated cannabis market. Cultivators, distributors, and retailers can showcase their originality by developing products and strains that meet certain criteria, such as potency or concentration of CBD, an active compound shown to provide significant health effects without the debilitating “high” of recreational marijuana products. Strains that are produced regionally can be “curated” much like fine wines, lending a sophisticated air to the retail environment. And, innovative products, such as extracts, vaping cartridges, and flavorful edibles provide plenty of opportunities for smart cannabis retailers to be original. Black-market operators can’t or won’t match the dizzying array of products and strains, putting the ball directly into the court of legitimate cannabis businesses.

The black market sales and cultivation of cannabis will continue well into the foreseeable future. However, with some regulatory reform and creative thinking on the part of legal cannabis businesses, the black market influence will lessen over time, opening new doors of opportunity for the regulated players in the legitimate and booming commercial cannabis industry.