“So I promised you some high level questions”, says the Mentor. “This does not mean ‘cursory’. These questions need to be addressed in some detail, and the data is not just sitting there”.
“Ask your consultant these questions. Be ready to pay. These are not easy questions or things you can just look up”.
"Oh-oh", says Herbie. "Quiet", says the Mentor.
Being towards the right-hand side of each bar is good. It means, all things being equal, that the profit potential of the industry is good.
Let’s get started.
Barriers to entry: In general, high barriers are good for profit potential, because they keep others out. Too many people erode profits. Price wars and the like.
Something to consider here is the regulatory landscape. If licenses are limited, as they are in some states, this creates a barrier to entry and may help keep profits high. Caution, though, because this could change with the stroke of a pen.
“That’s kind of confusing”, says Herbie. “Won’t those barriers keep me out?”
“Possibly”, says the Mentor. That’s why getting your license in a restricted environment is a victory. It is not easy, but for those who get in, profits can be high. If everybody can get a license, that is bad for long term profit potential.
Barriers to exit: In general, low barriers to exit are good for potential profitability, because those that want to get out, can. When people are forced to stay in, they may engage in dysfunctional behavior that is bad for the industry.
One example may be multi-year leases or long term contracts that keep people from exiting. Also note, sometimes the exit barrier is emotional, as is sometimes the case for a family business at the small end, or a national industry at the other end of the scale.
“Makes sense”, says Herbie. “Keep going”.
Alternatives: Also referred to as “product substitution”, if people have an alternative to your product, this places a cap on the general price level, and the potential for profit.
Take note, the existence of an alternative is for the consumer to decide, not you. If people consider alcohol an alternative to cannabis, then it is, no matter what you may think.
“Not so bad”, says Herbie.
“No”, says the Mentor, but don’t try this quickly. Put in the time, and get help from experts, unless you have the training and experience yourself.
“No. That’s three of ten. We need to discuss industry concentration and exciting things like that.”
“Concentrates?” asks Herbie, perking up.
“No, I said ‘Industry concentration’. It has to do with how big companies are. Leave me alone now.
See you next week.”
“The last three things you said were ‘NO’”, says Herbie. “That’s bad karma”.
“Shit” mutters the Mentor. “This I need”.