By LJ Suzuki, CEO CFOshare.
The CBD industry has been growing for some time, and thanks to the Farm Bill of 2018, passed late last year, the industry is set to continue to expand at a breakneck pace.
This bill changed the classification of the hemp plant, one of two plants from which CBD can be derived, from a controlled substance to federally legal. This means that farmers across all 50 U.S. states can freely grow the crop and it can be transported legally across state lines.
Since the passing of this bill, you have likely seen CBD business’s products pop up all over the place. It’s not uncommon to see beauty products containing CBD being sold in major retailers such as Walgreens and CVS, some grocery stores have started carrying CBD-infused products, and you can even order your latte with CBD oil at some coffee shops.
That is not to say that all of the barriers to entry and roadblocks to success in this industry have entirely disappeared, but it is to say that the CBD industry trends are toward growth, and it is a great time to get on board if you have not already done so. While the CBD industry is competitive, it is not yet saturated.
According to Business News Daily, the CBD industry is projected to hit $20 billion in sales by 2024. While figures vary across predictions, the general consensus is that this industry is about to explode.
So, how should you approach starting a new CBD business or growing your existing venture? What are the things to keep in mind and the key things you should focus on to help take your business to the top of the market?
Understanding The Risks And What Makes The CBD Industry Different
Because of CBD’s close ties with marijuana and the marijuana industry, it should come as no surprise that if you are going to start a CBD business, you are going to have to get pretty comfortable with the laws surrounding CBD and THC.
While CBD, or cannabidiol, is not psychoactive, it comes from the same plant as THC, which is. We won’t get into an in-depth biology lesson here, but just know that as long as your product comes from the hemp plant and contains less than 0.3% THC, you are selling CBD. Even though CBD isn’t psychoactive, because its growth in the hemp plant was just recently legalized federally, there is a lot of regulatory change ahead, and you are going to have to keep on top of all local, state, and federal laws to do business in this industry. In fact, we recommend consulting a lawyer familiar with the law surrounding THC and CBD when first entering the business, and consulting one regarding regulatory changes as they occur.
Your Business Plan
Starting a CBD business is just like starting any other business in many respects. You need to write a detailed business plan, detailing elements such as:
- Marketing and advertising
- Sales forecasting
- Market and risk analysis
Getting Set Up Financially
You’ll also need to get set up financially. That’s where things get trickier as a CBD company. Because of the rocky regulatory territory, many banks prefer not to do business with CBD distributors, so it may take a little while to find one that will. The same goes for insurance, which will end up costing you significantly more than you are accustomed to paying for any other small businesses you run.
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You may also run into some trouble getting credit card companies to work with you. Some CBD websites only allow e-checks, as a result. And, of course, getting loans may also be harder for CBD businesses, as they carry more regulatory risks than do other small businesses. Just know that this is par for the course, and if you can manage to get some mentorship or get someone on your staff who has gone through this process before, it’s not a bad idea.
Marketing And Sales
When it comes to marketing and sales, there are also more regulations on CBD than on most products. For instance, the FDA currently states that marketing CBD as having health benefits is not tolerated, as they have not yet been able to assess such claims. You should be familiar with this sort of stance if you operate or have purchased alternative medicines or homeopathic items, but since CBD is under close scrutiny at the moment, it’s best to take absolutely no chances when it comes to making such claims.
Marketing is also tricky because you cannot market via paid social media ads or on Google (NASDAQ: GOOGL). You will need to focus on organic search strategy and developing a customer base via social media posts and communication. You can also take advantage of influencers. When it comes to CBD, everyone from fitness gurus to organic foodies to mom bloggers can benefit from the product, so influencers can be a great marketing partner.
On the sales side, you cannot sell on Amazon (NASDAQ: AMZN), eBay (NASDAQ: EBAY), or similar online retailers. You will need to establish your own e-commerce store and link it with your social media. You can also drive people to the site via a blog. It is a good idea to work with someone who understands SEO optimization to drive search engine traffic to your site.
Keep Good Records
Lastly, as you are setting up and getting your business started, you should pay careful attention to keeping all of your financial and other records immaculate. As the FDA begins regulating CBD, CBD businesses can expect to face audits and scrutiny of their businesses’ finances. If you have your financial statements ready to go, you are in a great place, while other less organized businesses may risk being shut down.
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All of this to say, starting a CBD business isn’t without hurdles. No one could expect an industry this lucrative with this kind of growth potential to have absolutely no barriers to entry, and the association between CBD and THC unfortunately does make the road somewhat bumpier. But it is very doable. Many people have thriving online CBD businesses, and you can also take advantage of the CBD business opportunities available to you.
Know Who You Are
In an industry growing at the rate of the CBD industry, you need to establish your place in the market by differentiating yourself. While it may be tempting to offer a little bit of everything at a variety of price points in order to capture the widest possible audience, this isn’t an effective branding strategy. You need to decide who you are and who you’re going to sell to, and do it very intentionally.
The two areas with the most earning potential are via efficient and premium product strategies.
An efficient strategy means you are okay with low margins because you will be able to sell a high volume of product. Think of something like Coca Cola. It is a household name, and they make huge profit, but the margin isn’t as high as some other brands. Their business is in volume and widespread brand recognition.
For an efficient CBD business model, you need to make sure you will be able to scale. The business will need a lot of upfront capital to get a system in place with low-margin products and efficient processing of orders.
A premium product strategy, on the other hand, is one with high margins and lower total sales volume. Think of niche products at organic grocery stores. You may end up paying $15 for a small bag of almond flour. The brand isn’t going to be widely recognized, but the product is high quality and the customer is someone who is willing to pay more for a better product.
Branding is extremely important with a premium product, so you will need to budget for high marketing costs. A solid financial plan is essential, and a cost of growth analysis should be performed before undertaking this venture.
CFOshare can analyze your business plan or existing business and help you to determine your position in the market and act strategically. If you fall between the two extremes of efficient and premium, a financial analysis can uncover which element of your business is the strongest, and you can work from there. You can also back into this decision from analyzing your current financial position and determining whether a premium or efficient business strategy makes the most sense for you.
Products To Focus On
When it comes to deciding what sort of CBD products you are going to sell, there are certainly many options out there. You will see everything from tinctures to balms to infused food and drinks. While there is some money to be made in oil, infused products are where you will see the most profit and growth.
You can sell a variety of products, but make sure that your strategy of efficient or premium translates across all products. Work hard on branding and make sure that everything you are doing is in line with your brand. If you have a “health & wellness” brand, you may not want to sell CBD-infused candies, for instance, whereas a more lighthearted and trendy brand might steer away from expensive tinctures.
Establishing A Competitive Advantage
If you have positioned yourself firmly in either the efficient or premium sphere and branded successfully, you are already well on your way to establishing a strong competitive advantage. But remember, the CBD business is global, so you have some heavy-hitting competition.
One important thing to remember is that many people still feel hesitant about CBD products, and so the more trustworthy your products are, the better. Find suppliers with certifications like USDA organic, Good Manufacturing Practices, and FDA facility registrations. You should also get a Certificate of Analysis (COA), which provides a detailed analysis of the components in your products, including the levels of CBD and THC. If your supplier does not provide a COA, you will want to provide third-party testing of the product. Make all of these results and certifications easily accessible.
CBD industry trends are very promising, and now is the time to make the jump into this growing industry. Having your financials in place not only sets you up for success in your CBD business, but also puts you in a secure place when the FDA regulations come into play and businesses are carefully scrutinized.
Photo by Javier Hasse.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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