After the Green Rush

Economically sustainable cannabis technology

Andrew Elliman
Apr 12, 2018 · 15 min read

“I’m from Colorado.” Hearing this, what is the first thing somebody from someplace else asks you about your home state? Easy, marijuana. Even four years, eight states and the District of Columbia later, Coloradans stay getting asked about legal cannabis everywhere they go. Which is fine. More than anything, it’s an innocently awkward attempt at breaking the ice. Like we’re guests on the Chris Farley Show. “So you have like, weed stores now … that’s awesome.”

As a matter of fact, it is awesome. Personally come to think of it, recreational dispensaries have made for a pretty delightful retail experience, in my opinion. Sure there’s the pungent aroma, the eclectic décor, the mild rush of sticking it to dad. But I mean beyond just the novelty of it. Really what makes the shopping so pleasant are the people behind the counter.

I’m talking about the budtenders, or dispensary agents if you prefer. With a few unremarkable exceptions, I’ve found them mostly to be super friendly pot nerds. Knowledgeable, yet nonjudgmental. Happy to share this part of their life they’re clearly passionate about with me, a total narc dork. Forging the kind of mutually fulfilling connection between clerk and customer, over an honest-to-god exchange of goods and tender. The kind you don’t get to have so much anymore.

Our Products Help Dispensaries Grow Their Business.” Baker Technologies makes business tools for cannabis people. Applications for helping those budtenders and their bosses effectively manage those special customer connections, and hopefully make many more of them. The Baker platform is a hybrid suite of software products that most every storefront uses, but tailored specifically to the highly unique needs of cannabis dispensaries.

The company was founded by a trio of New Yorkers that transplanted to Colorado in 2014. Just three of many tech dudes that fled inland from both coasts to capitalize on the Green Rush. Oh ye Subaru Outback be my covered wagon. Hi-ho sativa. However instead of getting down-and-dirty in the marijuana mines, most of these new startups settled for selling pickaxes and shovels.

By design, Baker and its contemporaries are what’s known in the cannabiz (sorry) as “ancillary” companies, meaning they don’t “touch the plant.” You have to understand that despite our tenuous recreational legalizations state-by-state, federally marijuana is still a Schedule 1 narcotic. As such, businesses that grow-and-or-sell it are considered untouchable by most venture capitalists, other institutional investors and even the most basic of financial services. For crying out loud these poor guys can’t even open a fucking checking account.

Nonetheless, like the Pike’s Peak gold rush of 1859, legal cannabis has been a boon for Colorado. To the tune of $1.5 billion-worth sold in 2017. Still, between accessible albeit scarce investment interest, unforgiving regulatory environment, and good-old-fashioned inexperience, a lot of these ancillary cannatech companies have struggled mightily to cash in. Baker Technologies on the hand has thrived, recently onboarding its 1,000th customer. Where has it struck rich whence a lot of the other ‘14ers struck out?

“Everybody wants to own the customer,” says Joel Milton, co-founder and CEO at Baker Technologies. “Build a brand.” Put their name on the marquee. Be the gateway product, so to speak. Whether by way of delivery, reviews, social media or some other customer-facing lane, many cannatech pioneers sprinted to establish a direct line to the end user. Maybe it’s a vanity thing, a natural Silicon Valley impulse. Baker meanwhile, rather than contrive an entirely new and distinct pathway for cannabis consumers to engage with the product, took a beat to study the market as it existed.

Arriving in Colorado as observers first, Joel and his two partners toured the hundreds of dispensaries budding open across the Front Range, and noticed the one thing many had in common. Long, ass, lines. Now anyone can see how long lines are an annoying inconvenience to those individuals at the end of them. Baker more shrewdly saw long lines from the perspective of the dispensaries. In so far as more time spent waiting equals increasingly irritated customers and less product sold. With that truly significant opportunity to make a meaningful difference for retail businesses, Baker got to work behind the scenes, building one of if not the only B2B solutions for the cannabis space.

They started right there, on the queue. Shipping a minimum viable product that enabled dispensary customers to order ahead and cut to the front. That way, while the window-shoppers took their sweet time to ogle, the savvy regulars would avoid waiting 30-minutes-plus, quite possibly only to find the particular strain they came for was out of stock. Participating retailers could also keep that most enthusiastic clientele abreast of new products and specials. For when the adage holds true, that 20 percent of customers account for 80 percent of revenue, Baker helps move those very important 20 percent in-and-out the door, keep them happier and get them buying more.

Product version 1.0 suited such a perfect product-market fit, that Joel and his team closed two-thirds of the dispensaries they pitched. However, in treating the swelling wait times, Baker happened on an even sharper dispensary pain point, symptomatic of anemic customer retention. Dispensary employees, many hailing from gray market cannabis backgrounds, navigating this uncharted transition to sanctioned selling, weren’t fully familiar with the unit economics of churn. Those which calculate acquiring a new customer to be 6x more expensive than keeping a repeat customer. Absent any systems for bolstering retention, many dispensaries instead focused on flailing efforts to drive store traffic, often losing money in the process. So to close the revenue-retention gap, Baker evolved from its online ordering origins into a dynamic customer loyalty platform, another industry first.

“Now we know who our customers are and what they like,” says Jeff M., dispensary manager at The Health Center (THC, lol). “So it’s fairly easy to keep them coming back.” THC operates two Denver locations, the flagship uptown and an outpost on the outskirts. Respectively they occupy a refurbished old Victorian on a residential block (above, bottom left), and a non-descript office building nearing the end of a long commercial strip. The latter is my neighborhood dispensary, for what it’s worth.

Echoing Jeff M., Baker Technologies keeps THC’s customers coming back. It’s a three-pronged strategy, unfolding as follows. First, upon entering the store, walk-ins are encouraged to check in on an iPad station, which Baker provides to all dispensary subscribers. To create a profile, customers enter their contact info and product preferences, be they flower or concentrate, indica or sativa or hybrid, whatever or what have you. Going forward, they tally points for each visit. After accumulating a pre-determined amount, they’re eligible for rewards. Boilerplate retail loyalty.

Second, the check-in data feeds directly into a program of automated SMS notifications. Dispensaries use the profiles to filter customers based on their inputs, so that they only receive messages relevant to their interests, and are thus less likely to opt-out. So hypothetically if you enjoy the occasional joint, you’ll get a text from THC on Thursday, alerting you that prerolls are on sale three-for-$20. And third, calling back to the MVP, Baker has fine-tuned the OG online ordering function so that customers can browse ahead of time, confirm their item is available and arrange to pickup at their own convenience.

Presumably for managers like Sue N., Jeff M.’s counterpart at THC’s sister location, the Baker CRM platform helps strengthen the recurring customer relationships her staff strives to foster. That in turn frees up time and resources to devote the necessary TLC to any cannabis newcomers (the other 80 percent). “We have a lot of regulars that come through, and we consider them friends,” she tells PotGuide on a virtual tour. “We want to be the kind of dispensary that you bring your out of town visitors, your mom, people that may be unsure about the experience, that it will be a welcome and fun time.”

“Cannabis is a serious medicine,” says Johnny, one of Sue’s budtenders. “We need to treat it that way.” More eloquently than I ever could, Johnny has stated the case for brick and mortar retail cannabis. In an ideal world, cannabis customers are patients and the purchases they make are treatment decisions. People who choose to use cannabis as a wellness product, for ailments mental or physical, recreationally or medically, should have access to a third place like THC. A place where they can seek everything from expert advice to a friendly recommendation, from somebody like Johnny, in a professional and safe environment.

“Food, laundry … cannabis is just one of those things you can get on-demand, delivered to your door,” says Jim Patterson, CEO of Eaze, stating an entirely different case for cannabis marketplace dynamics. Based in the Bay Area, Eaze is one of many tech-delivery apps running cannabis up-and-down the California coast. What makes his company special, Patterson claims, is the advanced algorithms it uses to efficiently route drivers to customers, ensuring they receive their item in 20 minutes or less. “That’s a really ‘wow’ experience,” Patterson recalls to the first time he hailed an Uber. “Eaze is the same way.”

“The problem with marijuana is accessibility,” explains Keith McCarty, Eaze’s founder and Patterson’s predecessor in the chief executive role. “We believe that people have the right to access their medicine where and when they need it.” Okay, undoubtedly there are medical marijuana users who can’t easily get out to a nearby clinic, on account of the condition they’re treating. Really though, with hundreds of thousands more Americans consuming cannabis, as recreational legalization sweeps the nation, these patients are an increasingly minuscule minority. So no, the problem Eaze solves isn’t accessibility. It’s inconvenience.

For all the hemming and hawing about connecting the world and making it a better place, tech disruptors have more than anything made the markets they disrupted more convenient for the consumer. In some cases, significantly so. Free two-day shipping, vast digital libraries of music and video, the freedom (exaggerated finger quotes) to instantly connect with people all over the world. These innovations are all extraordinary conveniences. The power to have or do anything you want, at the palm of your hand (extremely Common-in-a-turtleneck voice). But now that the “wow” factor is wearing off a bit, collectively we as a consumer society are starting to question … if we’re to engage in this fully on-demand economy: at what costs? And to whom?

“We are a tech startup,” Patterson tells TechCrunch about Eaze. “We’re investing in growth.” This in response to a report that Eaze is torching through $1 million in cash per month. To keep pace with the enthusiastic spending, the company closed a $27 million-Series B round, after exhausting the previously raised $24.5 million in VC investment. When courting comparisons to Uber, high burn rate probably wasn’t what Patterson had in mind, but like hell if the shoe doesn’t fit. You see, since these last mile delivery logistics networks only work at scale, Eaze (like Uber) is content to lose money on most (if not all) transactions, for the sake of aggressively expanding in pursuit of a dominant market-share position.

Thus far things have gone according to plan. The clear leader in transaction volume, Eaze has 350,000 customers across its more than 100 operational cities, all amounting to a stated 300 percent year-over-year growth in gross sales. For a sense of how that translates to real time, on average in 2017, a cannabis order was placed every 10 seconds via the Eaze app. Although as a marijuana middleman, technically Eaze’s customer is not just the end user. It’s also the partnering local dispensary, who sources the actual products on the app’s curated menu. One might assume dispensaries would be thrilled to have the supplemental revenue stream, especially considering Eaze seems to bear the brunt of the cost. On the contrary, my brother. The immense margin pressure extends across the supply chain.

Rather than charge customers for delivery, Eaze takes a percentage “marketing technology” fee from the partner dispensary on each order. For the privilege of leveraging its proprietary algorithm, obviously. Eaze doesn’t publicly disclose its pricing (always a good sign), but for point of reference we know competitive services net 10 percent per transaction. Meanwhile, average dispensary profit margins hover around 19 percent, as determined via survey data collected by Marijuana Business Daily. Maybe if delivery were an effective means of driving in-store customer acquisition, forgoing more than half your per-unit margin on incrementally additional purchases would be palatable. However, market research consistently confirms that where they have the option, consumers will more often than not stay home.

And what’s else, on the Eaze platform, partner dispensaries provide their products anonymously, so as far as consumers are concerned, they’re buying directly from Eaze. Thereby any hope for the dispensary accruing any brand loyalty with the end user goes up in smoke. Eaze owns the customer, while the dispensaries are essentially reduced to the role of a fulfillment center. All this leaves us with an already low-margin proposition for delivery-tech companies, cannibalizing cannabis dispensaries to the extent their own business becomes untenable. For dispensaries in California, where delivery accounts for 75 percent of purchases, this is a concern. From San Francisco to San Diego, physical storefronts are being shuttered, often to be replaced by end-to-end ecommerce platforms operated out of distribution warehouses, which were recently authorized under state law.

“A lot of the cities and counties really are sensitive to the perceived neighborhood impact of a storefront,” speculates Hezekiah Allen to The Cannabist. Allen is the Executive Director of the California Grower’s Association, a lobbying organization whose top legislative priority is legalizing delivery at the city and county level. Deficient of any actual data though, the perception that dispensaries correlate with a higher occurrence of surrounding crime is just that, a perception.

There is however an academic study, conducted by researchers at CU Denver (Go Lynx), that posits quite the opposite. Analyses confirmed that (1) dispensaries have no statistically significant impact on area crime rates, and (2) nearby residents do not “perceive [them] as an undesirable use of a storefront.” And while were on the subject of community impact, a separate study out of the University of Georgia (Go Dawgs), cleverly titled “Contact High,” found that homes close to new dispensaries saw their values increase 8 percent more than those further away.

So why would a cannabis advocacy organization resort to unfounded anti-cannabis rhetoric — usually deployed by law enforcement and other hardline prohibitionists — to shade legitimate retail cannabis enterprises? Well the answer escapes me. Regardless, I propose we can all agree that good businesses make good neighbors, and cannabis dispensaries are more often than not good businesses. According to figures from Marijuana Business, within six months of operation, in spite of all the red tape and regulatory challenges, they’re profitable 97 percent of the time. Perhaps even more so, with a retention boost courtesy of Baker Technologies, whose users see an average 40 percent lift in per-order revenue, and a 300 percent ROI in just ten weeks.

“The work is hard though, and it really brings me back to the mad respect I have for the cannabis community and the people who are on the ground floor making this happen,” posts Mia Jane of Denver to her blog, Life of a Budtender. “It’s every one of us every day, choosing to show up and help one more person have legal safe access to quality cannabis and medicine.” I hope I’m not making too much of a leap here, but good businesses create good jobs. Not just with respect to reasonable pay and employee benefits, but with responsibilities and duties that are meaningful and fulfilling to those who take them head-on. Honest, hard work that truly helps people. This is how budtenders like Mia value their professions. With a sense of gratitude and purpose.

In 2015, legal cannabis created 18,005 new full-time-equivalent jobs in Colorado alone, according to the Marijuana Policy Group. Retail operations — i.e. budtenders and other dispensary employees — accounted for 4,407 of those positions, by far the largest represented segment. I really don’t think it’s being glib to suggest that every single one of those new jobs, and the ones created since, are endangered by tech-delivery’s encroachment into cannabis. Don’t panic though, because if the platforms have their way, we’ll all have yet another opportunity to “get our side hustles on.”

Eaze is part of a broader movement emanating from Silicon Valley to “Uberize” our physical world. In other words, to monetize the digitally-coordinated movement of people and things. The motor that moves this business model is the on-demand labor market which it spawned — the gig economy. To prospective drivers, Eaze promotes the same set of intangible incentives as Uber. Make your own schedule, be your own boss, earn some extra scratch on the side. Also like Uber, Eaze uses a very similar dodge to absolve itself of any traditional employer-employee responsibility. A steadfast denial that drivers are actually its employees to begin with. Instead, even though they are hired, trained and managed by Eaze, drivers are legally-speaking employed by the multiple dispensaries for whom they deliver.

This of course is bull shit. Nevertheless, if it gets around guaranteeing wages and providing benefits to the people that make the technology work, Eaze will pedal it. And if a small fraction of the money that saves goes to labor attorneys and class action settlements, like Uber, so be it. And yet, conceivably even more troubling than the lack of basic rights afforded to employees, is the lack of agency in their work. Flexibility to set your own hours can easily be counter-interpreted as uncertainty regarding when you’ll work (all the time) and what you’ll make (very little). Then even assuming you do generate consistent income, with an algorithm making your every decision, will it be devoid of any meaning?

“It’s the merchants who will save our urban civilization.” So said Victor Gruen, the guy that invented the mall. Look, I know the mall sucks now, but trust me Victor’s heart was in the right place. After studying architecture at the Vienna Academy of Fine Arts, Victor fled Europe for the U.S. to escape the Holocaust. In the early postwar period that followed, he skeptically observed the rise of Levittown housing developments and the American car culture. To counteract what he anticipated to be an inherent disconnection in suburban life, his masterpiece creation centered on a guiding design principle — that people needed places outside of their work, their church and their home. Places where they could healthily interact with their neighbors and support local merchants and artisans.

Fast forward to 2018, two big things are happening in cannabis. One, California is clumsily rolling out the legalization of recreational dispensaries. So Baker Technologies is going to California. Two, Colorado is preparing to pilot a program for cannabis delivery, which until now has been staunchly resisted by state officials, led by Governor Hickenlooper himself. So Eaze is coming back to Colorado. That’s right, they’ve been here before. In February 2018, at the hearing for House Bill 1092, which passed to 8–5 to establish this trial delivery phase, Eaze was present at the capitol to lobby in favor. Company emissaries also generously offered to accommodate any tracking and regulatory needs therein.

I don’t want to seem naïve. I know that the majority of consumers highly prioritize convenience, and that the inclination will apply to cannabis. If fast home delivery is an available choice, then most people will choose it. I also don’t want to sound preachy about our consumer culture turning us into a nation of app-indentured serf-couriers, delivering on-demand satisfaction to a population that increasingly resembles the hover-chair humans from Wall-E. Finally, I’m not here to stump for some kind of “buy local” marijuana movement, because cynically I believe that at scale, any such movement that relies on the better angels of our nature is doomed to fail.

Make no mistake. The machines are coming for cannabis like they came for all retail, and not every dispensary will survive. I just hope that this time, with the benefit of hindsight, this new exciting industry can make it a fair fight. And that technologies like Baker’s, that help local businesses more than they hurt them, might even the playing field, if only a little. Help the budtenders do their small part, to save our urban civilization from ourselves. You know, lead us not into temptation, or however that goes.

Sources

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