{}Introduction

Jake Litke: Welcome, this is Jake Litke, your host of Cannabis Marketing Live, I'm the CEO of MediaJel. And today we have Dennis Ali, who I'm very happy to have on, because he has a wealth of information, and he's one of the small but growing number of people I know who have both deep experience in digital marketing as a practice and also the cannabis industry, through really all aspects of it. Dennis was the CEO of Kiva, brought that to market, and previously it was ReadyPulse, is that correct?

Dennis Ali: Yeah, which was a digital marketing platform.

Jake Litke: So this is going to be a great opportunity to see how those two things come together. Today we're going to be talking about discounts, as we have been for the last couple weeks, and how you can develop strategies to not lean on that as your primary method of attracting new customers and getting sales. Dennis, welcome — I gave a very brief introduction, but I think most people know what Kiva is, though we have people from all over the country, and the name Kiva doesn't really exist anymore in that form. Maybe you could start off with how you ended up in the cannabis industry, and I know you could probably talk all day about the Kiva story, but give us a short version, and then we can dive into conversation.

From ReadyPulse to Kiva: A Path Into Cannabis

Dennis Ali: Yeah, of course, Jake, pleasure to be here, looking forward to a fun conversation. By way of background, we had a tech company called ReadyPulse, did some cool things with that, we made Instagram shoppable, put Instagram pictures, shoppable photos, on websites, and that was before the term "micro-influencers" was actually a thing. After that, I had an old business partner who had an established company at the time, Kiva, one grow room and one retail center, and went over to help him grow that, and we had some good success over four years, and then we sold to a SPAC in 2021. So, on a four-year basis, had an incredible team to build a brand that actually still exists in a retail fashion, but, at the time, certainly the goal was building both a retail brand, an online destination, and a consumer products brand as well. And then, after the 2021 acquisition, it was sold a couple times, and I left shortly thereafter, about a year after that sale. My business partner, Hannah O'Brien, and I have been at a firm called Oichtreach, which means "journey" in Gaelic, and we've been hired by CEOs, boards, and investors, mainly to be a CEO co-pilot, and help build out an office of the CEO — it's really centered around a lot of go-to-market capabilities, underlying data, technology, and financial infrastructure support.

Jake Litke: Wow, that sounds like a lot — and my understanding is you're working with companies in multiple different states around the country today, which gives you an interesting perspective on where each state is in its life cycle. We've talked about this in the past, California and Colorado are pretty mature markets, they've gone through many stages of the cannabis operator life cycle, and we have newer states coming online — do you see that life cycle happening faster in the newer states, have people learned from the mistakes the more mature states have made, or what's your opinion on that?

The Hype Cycle and Market Maturity Across States

Dennis Ali: Yeah, I mean, if you look at Moore's Law, the power and speed of a processor doubles roughly every 18 months, just as it's reduced in size over that same time — you can almost put that same law into the commoditization of cannabis in every new state that goes into adult use, the supply of cannabis rises dramatically, and the price goes into commoditization twice as fast as the state before it. So, in general, most states are not learning from the same movie that's happened in every other mature state, and I think everybody should look at states like California and Michigan, as to what the bottom can be. It's funny, because states like Oregon and Colorado have gone through the real trough of disillusionment and are now a much more mature market, those can actually be seen as growth markets now — but it really follows a hype cycle in every market, and it's critical to know where you're at in that hype cycle in every market you're operating in.

Jake Litke: Great, so let's circle back to California, because you had a front-row seat for some of the most fun, or traumatic, times, depending on how you want to look at it.

Dennis Ali: All the above, all the above.

Growing From One Store to a Full Retail Infrastructure

Jake Litke: All right, so, on maybe a longer time scale than is happening today for newer states, let's talk about, as you were growing the business, trying to figure out the balance of how you price your products against the competition when you've got people all over the place from a pricing perspective — were you able to figure out some strategies, either through moments of brilliance or just pain and suffering, in terms of pricing your product, did you overcorrect, over-discount, were you able to come back, what did that look like for Kiva?

Dennis Ali: So, yes, yes, and yes — it never ends and it never changes. Certainly, the one thing over the past eight years I've learned is it's hard, if not impossible, to be judgmental of any company, brand, or store — the reality is most owners, CEOs, or general managers are making so many decisions every day without a roadmap, without the right support, without the right data, and they have to make those decisions, and a lot of them aren't the right ones, but they learn from them, it's just a hard industry and a hard job. Certainly at Kiva, I had an incredible team around me and learned a lot from them, and everything evolved — we started off with one store, we barely had our own house products, and at that time the store managers had a lot of autonomy as to what to buy, what to merchandise, what to price, what things looked like, autonomy around what our own house brands were named and how they were positioned — but by the end, four years later, we had 11 stores, and, out of that, three delivery depots. So, all of a sudden, you have three very unique channels — delivery, pickup, which is part of the online channel, and in-store. When you have that type of infrastructure, and you're talking about tens of millions of dollars annually in retail sales, we probably peaked somewhere close to 100 million at the time — you get to the basis where you have to have your own product team, which we did, your own pricing team, your own buying team, your own merchandising team. So it evolved from one store having some autonomy, to a workflow where the buyers really controlled third-party products and what we brought in and what that pricing was, our product team would control the pricing and margins for our first-party products, and a retail marketing team would work with the channel owners of online and in-real-life to have their unique pricing — you had to manage channel conflict, inventory management, and everything had to have some autonomy at the local geo level too, because Chula Vista is different than Northern California and San Francisco.

Why Pricing Discipline Is the Most Lacking Skill in Cannabis

Dennis Ali: So the sophistication in terms of footprint matters, but what I'd say overall is, when Hannah and I get engaged with firms today, and we've worked in Michigan, Missouri, Mississippi, Vermont, Arizona, Washington, and most of the states out there, when you ask a question, "who owns pricing," it's a really difficult question for somebody to answer. But, in the end of the day, somebody has to own that, because, when you unpack it, that means who actually owns COGS, how are you pricing COGS, based on just marginal cost, do you have allocations in there, is it tax optimized — when you have those COGS and the marginal cost, who's managing the margins, do you have the infrastructure to look at discounts, and, if yes, can you answer the question about vendor-funded discounts, hard to manage those back-end credits, everybody struggles with that, do you know the difference, and what's your strategy around hard marks versus actual discounts? So, pricing discipline and product management discipline is probably the most lacking discipline I've seen in most cannabis companies across the US.

Jake Litke: Okay, and, talking about discipline — an example might be, let's say you've got a retail location, your pricing set up, and a new dispensary opens half a mile away, maybe even closer, down the block, and they start offering a higher level of discount.

Dennis Ali: I think that's never happened in San Francisco.

Jake Litke: Come on, give me a real example.

Case Study: MedThrive's Cash-Flow-Positive Survival Strategy

Dennis Ali: Yeah, a real example — when we were talking to Headset last week, they said the average discount nationally is 23 percent, with Missouri actually being the lowest, around 15 percent, Washington and Oregon being upwards of 35 percent or something like that, and Michigan, they don't even do discounts, they just make their prices cheap, it seems like it's just flattened out near the bottom. I'm pretty amazed at the cost difference for the same products here in California versus Michigan. How does one have that discipline, how do you not react when someone opens up down the street selling the same product for less, what would you tell someone?

Jake Litke: Well, I think you just answered your own question there — you're selling the same product for less.

Dennis Ali: In the end of the day, pricing is the easiest lever to manage and probably the most misunderstood. If we unpack the reality of who's asking, in the organization, how much a discount costs — number one, that discount has to get promoted, so you're spending money to get that discount out there, there's a promotion cost. Number two, that discount is there to do something — how much of your existing customers, who would still buy from you regardless, are now taking advantage of that discount that wouldn't have happened normally, there's an opportunity cost and cannibalization there. And then maybe your discount is working for customer acquisition, they come through the door, do you also give them loyalty points as well — so, when you look at promotion, discount, and loyalty together, that's a real expensive triad to bet a business on. Most businesses outside cannabis don't rely on that, because they know it's a death spiral for a company. I'll give you an example — Hannah and I have been running and managing a store in San Francisco called MedThrive, for the past three years, amazing staff — that store should have gone bankrupt or into receivership years ago, it's in the worst block in San Francisco by far, more shootings on that block than any other, and yet the store is cash-flow positive, and has been for three years. The way they did it was: it started with merchandising, they knew they couldn't sell the exact same product that high-volume stores had down the street, that wasn't an option — it started with Jose, an amazing merchandiser, who went after the right differentiated brands, in the Mission District, where you'd think the automatic basis would be to go low-end, but we took the exact opposite approach, going for premium brands that could sustain a premium price point. So, some of the bestselling brands at MedThrive are Level, Connected, Kanha, Jeeter — higher-end brands with built brand affinity and loyalty, and we worked with those vendors in a number of ways. The result: one, great merchandising, because Jose is really good at what he does, the inventory turn time at MedThrive is only 14 days — a lot of retailers use discounting because they want to get their inventory turn and ratio higher, and don't know how else to do it, but that's because they didn't merchandise or buy well. And, lastly, Jose does a great job with discounts too — MedThrive's average discount is 15 percent, that's a budget line item, his KPI to follow, all the store discounts and vendor discounts combined equal 15 percent of net sales. So he doesn't have a lot of room to play with, between new customer discounts, veteran discounts, senior discounts, so he relies heavily on vendor-funded discounts to make up for a lot of that. And, lastly, MedThrive does a couple good basic things — it's a clean, well-lit place in a part of the city that's not clean or well-lit, the bud tenders have been there a long time, super knowledgeable, and half their business is delivery, which is profitable, and they make it really easy for the customer to shop online. Those are all things that found success in San Francisco, being cash-flow positive, not just profitable, in a very tough market with a ton of competition. Hannah manages a dispensary right outside St. Louis, Missouri, completely different model — because it's early for that dispensary, we run hot on discount levels, probably a 25 percent discount rate, knowing that dispensary's only been open a couple years, it's the only dispensary in town, and customer acquisition is still a core key metric for us there.

Merchandising in a Newer Market Like Missouri

Jake Litke: Now, when you say merchandising, does that mean cool display cases, the selection of products, what is that?

Dennis Ali: It's kind of the selection of products, which distributors you're betting on, which products, which SKUs you're highlighting that are differentiated based on your competitive set — that happens both in-store and online. The reality is, we at MedThrive would never have the volume discount to compete against the well-known brands, so if we were going to highlight and promote some of those, we'd have to do so in collaboration with them, either newer SKUs people wouldn't have early access to, or some type of bundled promotion unusual for us to have, but those don't happen very often.

Jake Litke: Now, when you talk about merchandising in California, there are pretty well-established brands you mentioned, Connected, Jeeter, etc. — what does that look like in a newer market like Missouri, do you have the same brands as licensees, or what's the brand landscape? I've never been to Missouri, how is it different when you can't necessarily rely on brands consumers know, especially in a newer market where it hasn't been legal as long, from a merchandising perspective?

Dennis Ali: I think Missouri is a very interesting market — I talked about this at the Ignite conference in Anaheim yesterday, Elliot and Patrick Lane did a great job on that — in Missouri, California brands carry a lot of premium power, and California brands have done a really good job of dictating what their MSRP is going to be to stores. So, in Missouri, brands have a lot of power to set prices, whereas in California, I never felt brands had the same power to dictate that to stores, a lot of the time they didn't realize, whether it was a discount or hard-mark change, what that MSRP would be in California, but in Missouri the brands do a really good job of that. So, even if a store wanted to provide a discount, they'd need the brand's permission to do so, and, in Missouri, because of a lot of different things, you're seeing really good margins and prices holding steady even though the market continues to grow.

Hard Marks vs. Discounts

Jake Litke: And you mentioned discount versus hard mark — let's talk about that. Are you lowering your prices, or offering discounts? And, as an adjunct, this was a conversation I was having with Headset, we didn't get to a clear strategy, but we were talking about the habit of people who buy certain products tending to buy another product at the same time — if they buy a vape cartridge, there's some natural bundling that happens — mathematically, does it make more sense to offer the discount on the product you have more margin on, or less margin on, if you think 30 percent of these sales will have another product attached?

Dennis Ali: There's a lot to unpack there, but let's start with the hard-mark difference, and some differences between competitive markets and emerging markets like Missouri. The reality in a competitive market like California is that the AOV, average order value, of a customer basket will dramatically drop over time, not because the retailer is reducing the price, but because the price from the wholesaler or brand is simply dropping on a competitive wholesale price point. At MedThrive, for instance, our basket size today is probably 50 percent of what it was two years ago, and it's not that units are down that much, it's really that the actual cost of those products has been reduced so dramatically by wholesalers that people are still buying an eighth of weed, just for a much lower price point. So that, by nature, is just a hard-mark difference in price that a retailer has a really hard time competing with if a wholesaler or product is competing in that area. Again, MedThrive has done a good job because consumers have an affinity and loyalty to brands when it comes to vape and edibles, so they search for vape and edibles by brand name online, whereas flower, they generally search by strain, and try a lot of different strain types — the general consumer has a lot less affinity or loyalty for flower than for vape or edibles, which tend to keep their price points higher, because flower has a lot of ebbs and flows in terms of inventory and price volatility. So, discounting is a temporary price reduction, and the challenge is that many times a customer believes that, if left up too long, that temporary price reduction is the new hard-mark price. And, two, most retailers build a trap for their customers, where customers simply wait, on their own buying cycle, knowing there's going to be some crazy BOGO or flash sale or deal of the day or bundle, and they just wait to buy on that. One way we got out of that at Kiva — this was a team trifecta of the tech team enabling it, the e-commerce team, the product team with the strategy, and the retail and marketing team executing against it, all best-in-class at what they did — was the RFM model, recency, frequency, and monetary value, in terms of where the customer set was — and we came out with some really good solid principles. One that served us extremely well: when we went after customer acquisition, we knew there was an 80 percent chance we had a customer for life if we could get them in for the fourth time — and, when we say customer for life, they have different frequency of buying, but we saw that was a loyal customer.

The RFM Model and Customer Lifetime Value

Dennis Ali: Again, the difference between hard mark and discounting is, what are you there to do — most of the time, people use discounting to try to get new customers in, versus actually driving volume from existing customers, and that just doesn't always work, because existing customers still have a budget, and can still only smoke so much weed in an hour, a day, or a week. When we tried some price elasticity around flower versus other products, it worked the least on flower, simply because of usage limitations.

Jake Litke: When you say price elasticity around flower not working, what was the actual implementation you tried that didn't move the needle the way you wanted?

Dennis Ali: We A/B tested in different geos on our hero product, in $2 increments online, meritocracy versus bud tender influence, to see what buying patterns would be between existing and new customers, and found there wasn't an increase in amount purchased that correlated to the decrease in price. When we really tested it, and got uncomfortable, going from $40 an eighth down to $32 an eighth — yes, that dates me, in terms of when I was operating those in California, $50 an eighth now, a little different — it actually cannibalized other sales. So that's a California story, call it 2018, 2019. Hannah and I worked with a great company in Michigan, Pleasantrees, in the epicenter of commoditization — if you thought California was bad, Michigan, the bundle deals you'd see are just insane and unbelievable. They did a really good job of merchandising, but what they really did well was formulate a brand around "experience," which became the key word of their company, a strategic pillar at the top, "everything is experiences," and they developed a marketing campaign around that, made their stores an experience, and did a great job trying to be better than the curve in terms of discounts and value products, in a really tough commodity market — that's how they did it, branding their company and store differently, everybody knew Pleasantrees for a great experience.

Getting Out of the Discount Spiral: Leaning on Vendors

Jake Litke: Well, that ties right into the next phase — for someone trying to figure out how to get out of discount wars with their neighbors, you've mentioned experience already. I think, overall, as long as it's not completely dramatic, a lot of human beings will pay slightly more for the same thing if there are reasons to — could be experience, you like going there, the merchandising, the people who work there — or potentially mission-driven things, if something aligns with their personal moral alignment. What are the things you've seen be effective — obviously experience worked for Pleasantrees — what are some other things people could do, instead of just dropping their price $5 every week, to spend time and energy on getting people to want to be their customer and engage with the brand?

Dennis Ali: I'll answer that a couple ways — first, I think, when we talk about discounting and pricing, it's predominantly based on driving to a lower cost, and those pricing levers. I do think, though, pricing goes the other way too — if you don't price it properly, on a hard mark or discount, and run out of the product, that, to me, is a "type two error," you really priced it wrong, and you're out of stock — you don't lose a sale, you lose a customer, if that happens. What I learned early on, we had a new roll-your-own product, early days at Kiva, we experimented to see if we could sell it, and it sold like hotcakes, and we just ran out of material, we weren't sophisticated enough to have other contracts, vertically integrated, etc. — so we said, okay, the next batch, we messed up the pricing, let's increase it. And I completely underestimated how emotional consumers got about that price increase — it wasn't "hey, I'm bummed," it was "how could you do this, why would you lie to me, I feel bait-and-switched, I don't trust you." It was a really hard lesson, you've got to get that price right out of the gate, but balance it against not running out of stock — pricing goes both ways. To your question of how people get out of the discounting cycle — I go back to leaning on vendors. If you look at retailers outside cannabis, they don't really control a lot of the pricing of the goods they get, they don't provide discounts for baseball bats or Clorox wipes, they come in and say, "I'm going to manage my marketing, store experience, you manage the pricing and promotion, it's up to you to sell the things." Cannabis retailers don't lean on vendors enough — I'll tell you a great case study, a company Hannah and I work with, Fuse, out of Washington, a phenomenal multi-state vape company, top three in the nation in my view, in Washington, Arizona, New York, holding the one or two spot in each area. They've really differentiated with retailers through a program of vendor-managed inventory, VMI, the new acronym and buzzword every software application is trying to bake in. What they found is, because their products sold out so often, there was a 30 percent out-of-stock rate, and, in terms of the buying cycle, stores weren't managing the inventory cycle with the buying cycle, they were sitting on inventory before terms were due, it was a mess. So, when these stores turned it over to Fuse, saying, "you're going to take a hands-on approach, manage all the min-maxes, restock on this open PO item," they found the inventory turnover ratio increased by 80 percent, and it fit within their buying cycle. So, that's a retailer saying, "I'll take on storefront-funded inventory and promotions, and turn that over to my vendor, allow them the inventory risk, and let them do the vendor-funded discounts" — to me, those are some of the more successful retailers out there, but you have to pick the right vendors, know what type of store you are, what type of brands you want to work with, what relationships you want. That's a strategy to get around that pricing discount spiral.

Vendor-Managed Inventory

Jake Litke: How prevalent is VMI — obviously some people are doing it, I haven't spent time in that intersection of retailer and brand transactions, but is it growing?

Dennis Ali: The growth can be seen in that every single cannabis technology software vendor is adding VMI, or focusing on VMI, within their stack. Happy Cabbage is one of the leaders in inventory management, and they've been an incredible partner for us at MedThrive, and we credit a lot of our success to the data Andrew Watson and his team provided us, to get our inventory down so low and have such efficient working capital. But, yes, it's going to be more and more prevalent, and the right vendors will understand the challenges retailers have — vendors don't want their products discounted or BOGO'd out all the time either, so I think you'll see a resurgence of that, and it happens today more in limited-license states like Missouri than in states like California, but it's certainly one tactic that's been extremely successful from the vendor standpoint, on the Fuse side of things.

Making Promotions Relevant, Not Generic

Jake Litke: Great, let's talk a bit more about promotions — you mentioned the timing and structure. There's a lot of different ways to offer discounts — one thing we talk about is, when running campaigns in different household income areas with different AOVs, just the same exact discount, presented as a dollar figure versus a percentage, can have a meaningful impact on the advertising — "20% off" versus "$20 off" can change a lot of things. How do you think about promos in terms of mechanics and timing?

Dennis Ali: We learned a lot about what that looked like, but I'd go back to, do you know your customer? It's amazing to me when I ask retailers a simple question, how many unique active customers do you have — a lot of people can't answer that. You'd think, of course they do, they have license IDs, names, numbers, but if you dedupe the five emails at the same address because somebody went to unnatural lengths to get that first-time customer discount, you'd be surprised how often that happens, and how many retailers aren't effective, even though they get somebody's license to put them into an opt-in program for email or SMS. So your question, where and how can promotions be effective, they have to be relevant — you have to know what people did buy, or their preferences, and it has to be unique to them if you have any information. The first thing is, there is no consumer CRM out there, people use things like Klaviyo as a substitute, and people are trying to build this CDP for cannabis and other consumer products, but it doesn't really exist today, so you don't have a full view of the customer. And if you say, "I want to do this for new customer acquisition," it still has to be relevant, have some authenticity, tie into what your brand is or your event is, and know if it's specific to a product, a brand, a store, or a channel. For us at Kiva, credit to the creative team and marketing team at the time, a creative consultant, Rosie Rothrock, was able to have incredibly relevant campaigns — some were branding, just to get in the store, but some were very targeted, based on some type of activity, could have been progression to a fourth sale, or "you've been in-store but haven't done delivery yet, let's go do that," because we knew if you cross-sold somebody omnichannel, their loyalty significantly increased — but it has to have a purpose and relevancy to what that new or existing consumer is, and that's hard, you have to think it through, you can't just slap it on, and you can let your vendors run some of those sales for you, but that doesn't always fit within your ethos or marketing.

Win-Back Campaigns and Purchase Frequency

Jake Litke: We're looking a lot at customer purchase timing right now, because at MediaJel we're really tying into the actual sales data now, and looking at purchase frequency, analyzing new customers, returning customers — a lot of people think about it in two buckets, returning and new, and everyone's heavily focused on new customers. But when we look at analytics when running advertising, we can see the different behavior — on average right now, when we measure what we call win-backs, someone who hasn't shopped in 60 days, that's configurable, you can choose a different time frame, the average is about 102 days, meaning for someone you hadn't seen in a while, they saw some advertising, came in and made a purchase, it's a little over 100 days. And it goes all the way out to 6 months or however far back you're looking, but we can see, in some cases, for that cohort, the AOV goes down a little, sometimes as low as 5 percent, sometimes higher, but let's take that example, AOV went down 5 percent, but purchase frequency went up 34 percent — so the same set of customers, when you expose them to the brand frequently, come in more frequently, and your net value of that customer goes up. I think the AOV decrease is because of two things — one, they probably don't need to buy as many things, but there's also likely some amount of discounting, they see an offer and take advantage. But tying that back into how long you offer a discount for, you probably need to understand your customer purchase cycles, how often they come in, ideally putting them into different cohorts — but it sounds like what you're alluding to is you want to make sure discounts aren't so convenient and frequent that people wait until next Thursday instead of buying now, when they might actually be in a buying state of mind.

Dennis Ali: There's no right or wrong answer on these things, you've got to experiment, know what your experiment's going to do, and be able to track and measure it — we did billboards, unique promo codes on billboards, sometimes those worked, sometimes not, did we have all the right data on it, don't know. But you have to have intent for those promotions or discounts. At MedThrive, we do discounts for delivery to get the AOV up higher than $100, and that works, that's what drives profitability of delivery, your AOV being at or above about $90, and getting two to two-and-a-half deliveries per hour per driver — if you can do that, you're generally in good shape, so our bundling discounts for delivery channels specifically are for that. What still works for MedThrive, and worked for Kiva as well, is, say, Tuesday from 9 to 11, if that's a dead time, and you've seen there are current customers with off-times to come in and buy, offer them a special, VIP, concierge, consultation, or loyal customer discount that's only open from 9 to 11. None of these promotion ideas are rocket science, and I'm sure ChatGPT does a better job than anybody now, if you said, "list the top 100 most commonly used promotions in cannabis retail," it'd kick them all out, everybody's thought of those. It's really the difference in the people who can put them together in a sequence, where customers look at your marketing and promotions and aren't surprised by it, it fits with what you're doing, and is relevant to the customer. But it really goes back to, do you know your customer, and are you investing in any type of customer data platform, a CDP, to get to know your customers better — if you're not focusing on that, online and offline, you're probably missing your most valued resource.

The Strategic Framework: It's Just an Income Statement

Jake Litke: For those of you here on Zoom, there's a Q&A section, you can type in questions for Dennis. Let's see if we can bundle up some of these thoughts into a strategic framework, or go-to-market plan, or action plan, whatever you want to call it, for someone who wants to figure out a way to reposition themselves if they've been relying solely on discounts. How would you — and I know you charge people money for this, so you don't have to give out all the secrets —

Dennis Ali: Sure, I'll give it away, just for you, Jake, since you're here first. On one end it's not that hard, and it's not rocket science, and on the other end it's hard to execute against — it's just an income statement. If you provide to your retail team, or if you own your retail store, and simply have a basis that says, "I am going to do anything I can to be at a 55 to 60 percent gross margin on a retail basis," what does that mean? That means I have to price things at a 2.2 to 2.5x markup on what I buy things for — so, do I have to be a great buyer, yes, I do, I have to negotiate and find that. Can I afford discounts? Because 2.5x means a 60 percent gross margin, so if I'm starting at 60 and trying to get down to 55, I have 5 percent margin to play with in terms of discounting — so I'm going to need a lot of help from my vendors, vendor-funded discounts, if I'm trying to get to that 55 to 60 percent gross margin. Oh, by the way, do I have the working capital I need to keep the inventory, and how long do I want to keep it — if it's 14 days, that buying cycle, I've got to communicate to vendors that they have to show up and deliver on a 14-day basis, and I have to pay them on a 14-day basis, so do I have the working capital workflow, and do I have the right vendors. That all goes into, okay, now I have the COGS I wanted, the inventory spot I wanted, how much am I going to spend on marketing, and am I going to rely on my existing customer base versus new — that's really dependent on the share of market you have and where you're at, in a market like Missouri you'll see a much higher marketing rate and different mix than at MedThrive, which has 10-plus years of customers, but a lot of those are also tourists, a lot have left the Mission and the local area — you've got to know your customers. And then you look at your labor rate — in a growing market where you're overstaffing, you're generally running maybe 15 to 18 percent labor based on net sales, like we had at Kiva, or what MedThrive is doing, you're trying to get that down to 6 to 8 percent. If you look at those controllables, you can't control your rent, there are some things you can do to control delivery or other things, you really can't control your software all the time, your taxes, you're going to pay 13 percent, and 280E if you're paying 280E on your 60 percent gross margin. So those are really the only three variables you can control — gross margin, marketing spend, and employee costs — and if you manage those first, you back into how much discount you can play with, and whatever you put on your vendor, that's your budget to manage discounts. And once you have that budget, go hog wild and do all the crazy things you want, but that budget needs to entail the promotion of promoting that discount, the actual discount, as well as loyalty — because if loyalty is running over 7 percent as an additional discount, that's running really hot, super high end, even 4 to 5 percent is pretty high, we try to always aim for 2 to 3 percent of value to the customer through a loyalty program. So, to me, the strategic framework is the income statement, and knowing the income statement and your variability — that's where Hannah and I have been successful with companies in different states and different matured markets, working through what that looks like, sometimes large omnichannel companies, tens of millions in revenue, sometimes it's the MedThrives of the world, single millions, sometimes it's crazy states like Mississippi, a medical market, trying to figure things out.

Jake Litke: Well, that just sounds like boring business fundamentals, Dennis, nobody wants to hear "look at your income statement," we were hoping for a magic recipe, but I guess this makes total sense — was that my cue to say, "buy MediaJel to drive more people through a program"?

Dennis Ali: Not — no, not that.

Jake Litke: I mean, but I will say it's the same for many businesses — at the end of the day, we run advertising, it's not dissimilar, we buy a bulk product, we're specifically looking for eyeballs, our job is to find the right ones at a cost where we can deliver those to our advertisers where they're making a profit on the dollars they're spending, and driving additional revenue, and they want to reinvest and grow their budgets — but we also have a spread there, that we have to use to build and run our business. We've actually done a similar thing internally, our whole management team has access to our P&L, and we use that as a planning tool, what's the performance we're delivering for advertisers, what's the ROAS right now, where can we find ways to buy media for cheaper to deliver better results. But it is true, by explaining that to at least your management team, you then have the framework to not just say, "let's change this discount from 20% to 30%," because you're coming from the top down — if you give yourself a budget, which is very boring and depressing, but it does, in other ways, free you, because you don't have to guess anymore, you have X amount to work with, and then you have an open palette with that budget of discounts to try to drive incentives.

Dennis Ali: Yeah, I've found, if you start there, people get really creative and figure things out — but discounting is hard, you're talking about how do you stack discounts, what does that look like, and then when you talk about vendor-funded discounts, you have to manage the credits, because they're usually providing that vendor-funded discount through additional product, not cash or credit, and that's hard to account for. But the numbers don't lie, and retailers in emerging states like Missouri, if you're under 50 percent gross margin, you're underperforming, in Michigan or California I'd still say low 40s is running hot, but I've seen retailers run in the mid-60s, high 60s, and if you can do that, you have a pretty good business to continue marketing to new customers and staff appropriately, so people feel like they have a great experience.

Rescheduling and Descheduling

Jake Litke: Yeah, and depending on what you're doing with your taxes — we're almost wrapping up, but, just out of curiosity, a contemporary question, what's your take on descheduling or rescheduling rumors that have been flying about, do you have a time frame?

Dennis Ali: Well, I'd start with, do you think it's going to happen at some point?

Jake Litke: I think it's going to happen at some point, but do you think it's soon, or later?

Dennis Ali: I'd say a similar thing to what I said on stage yesterday, except I won't use adult language — I've been more wrong than anybody in terms of timing, having rosy ears to hear what I wanted to hear on rescheduling. The reality is, any type of regulatory framework change with a tax implication for the industry would take a very long time, and I don't think anybody can bet on it. I think the reality is, when you start looking at competitors discounting products and think, "how are they making money," well, they're not, they're not paying their taxes, and likely not paying their vendors. So the takeaway is, regardless of whether rescheduling or descheduling happens, you have to have a fundamentally good business — this industry specifically has many operators who can't run a profitable business, and don't chase what they're doing on a pricing standpoint, you really have to manage that on your own and know your goals. So that's my advice on rescheduling and descheduling — if it happens, there'll be more investment into the space, it'll be best for retailers, but most people aren't paying their 280E taxes anyway, so there won't be a massive difference, and, frankly, I think people will take any savings and pass it on to customers, because a lot of people do that lazy marketing where they just compete on price.

Lightning Round

Jake Litke: All right, fair enough, okay, a few minutes left, we're going to go through a quick lightning round that Cortney provided for me.

Dennis Ali: Cool, let's do it.

Jake Litke: Number one, best promo you ever ran at Kiva.

Dennis Ali: I can't take credit for it, but it's "Weedum," spelled with a W — and that was January 1st, 2018, when cannabis was adult use in California, incredible signage, incredible branding from the branding team, that was the best promo ever.

Jake Litke: Okay, number two, most overrated discount tactic in cannabis.

Dennis Ali: BOGO.

Jake Litke: Number three, one brand outside cannabis that you admire for how they handle pricing.

Dennis Ali: Patagonia.

Jake Litke: Okay, well, now I have to know why, real quick.

Dennis Ali: They're all about mission-driven items, that they're not discounting, that people buy because they feel good about buying the product, not because of the price point.

Jake Litke: Great, thank you. What's the first metric you look at to know if a promo worked?

Dennis Ali: Unique discount code, the number of unique discount codes used — for instance, I used that billboard example, so we'd put up a unique discount code, and look at how many times that code was used.

Jake Litke: I see, okay — problem is you get too many of those discount codes, there's a different issue, but that's the single metric you look at?

Dennis Ali: Yes.

Jake Litke: Yeah, we've seen some other issues with those. Anyway, okay, number five, one thing retailers should stop doing tomorrow.

Dennis Ali: It's what you led off with, selling the exact same product that your neighbor is selling — stop that.

Jake Litke: All right, biggest myth about cannabis consumers and price sensitivity.

Dennis Ali: You can only smoke so much in a day — if you lower the price, they're going to buy relatively the same amount, if it's flower, maybe a little bit more of edibles or vape, but it's not going to dramatically cause people to increase their consumption habits.

Jake Litke: Okay, what's the boldest pricing move you ever made that paid off?

Dennis Ali: We know it's not increasing the price on the ready-to-roll.

Jake Litke: Yeah.

Dennis Ali: And I take no credit for this, it was a great team led by Steve Winshell, our head of product at the time — a new category, a one-gram vape pen, funcle cruisers at the time, during COVID, he hard-marked the price at $25, did a lot of studying as to what that would look like, and quickly, out of the top 10 best-selling vapes, within two months, it probably had seven out of the top 10 spots — he crushed it in terms of just hard-marking and pricing.

Jake Litke: All right, that's cool, okay, number eight, favorite way to add value for customers without cutting price.

Dennis Ali: Stickers, people love stickers, smiles, people love smiles, stickers and smiles.

Jake Litke: Hey, all right, I mean, any answer is valid.

Dennis Ali: It literally, though, I mean, if you ask somebody about it — the longer story is, we had a board member at Kiva responsible for, over 20 years, rolling out Starbucks stores, and I always asked him, "how do I build a product where there's such ownership of personalization," because when people say Starbucks, they say, "I'm going to get my Starbucks," "my pizza," they personalize ownership of that product, I always thought that was amazing. He always said the store came before the product, and I asked why, and he said it was that trusted place of community feel, where people went and then learned to buy the product. So, while I joke about stickers and a smile, there's a lot to be said for what that experience is, when you have that in-real-life experience, or you surprise and delight online — I really do think that's the baseline of what somebody should do before they can do anything else, and if you're not doing that, you're not going to have a loyal customer.

Jake Litke: Great, all right, number nine, what's harder, raising prices or holding the line on them?

Dennis Ali: Raising prices, raising prices is the hard part.

Jake Litke: Okay, great, harder than anything. Last one, one word of advice for retailers stuck in the discount spiral.

Dennis Ali: Merchandise.

Jake Litke: Merchandise, okay, great, is that a word — it is a word, yeah, you used more words than you were allowed to, but, great, merchandise.

Closing Remarks

Jake Litke: Well, we're right up on the hour, timing worked out perfectly. Dennis, again, thank you so much for your time and expert wisdom — if someone is interested, either here now, or listening later, in reaching out to you, maybe a retailer who wants advice, how can people get a hold of you? And don't say your name, because nobody knows how to spell that.

Dennis Ali: Yeah, we've been under the radar for three years, so it's sometimes hard to get a hold of us — it's just, D-E-N-N-I-S, and it is Oichtreach, so it's oichtreach.ai, or Hannah as well, or you can probably be found on LinkedIn, Dennis Ali.

Jake Litke: LinkedIn, that I can spell.

Dennis Ali: Yeah, exactly, thanks to Cortney, I can be found more than before, she's good at that.

Jake Litke: Great, well, thanks again, have a fantastic day, awesome day, we'll talk soon.

Dennis Ali: Enjoyed it, bye.