As legal marijuana markets continue to expand across the United States, cannabis brands are finding new strategies to break into emerging regions while navigating the challenges of interstate commerce. Licensing, revenue-sharing, and profit-sharing models have emerged as pivotal tools for achieving these goals, offering brands and operators innovative ways to grow and thrive.
Rethinking Licensing Models
Licensing has long been a cornerstone for cannabis brands aiming to expand into new markets. However, the traditional model—where licensees pay upfront fees for the right to use a brand’s intellectual property or products—places the financial burden largely on the licensee.
Avis Bulbulyan, CEO of California-based cannabis consulting firm Siva, noted the flexibility within licensing agreements. “It’s all really licensing, it’s just how you go about it,” he said. With up to 50 different ways to split fees, cannabis companies are tailoring these agreements to fit their operational needs.
Yet, the rigid nature of traditional licensing has led some brands to seek alternatives. Payments under these models are fixed and unaffected by revenue performance, which can stifle collaboration between parties. Some brands, such as Stone Road, are challenging this paradigm with more flexible approaches.
Revenue-Sharing: A Collaborative Shift
California-based Stone Road has transitioned from a traditional licensing structure to a revenue-sharing model for its marijuana flower and pre-roll products. Sabrina Wheeler, the company’s COO, emphasized the mutual benefits of this shift.
Unlike licensing, revenue-sharing agreements distribute both revenue and losses among the involved parties. This shared financial risk fosters a collaborative environment, as success depends on maximizing revenue. “There’s more at stake for both the brand and the manufacturer,” Wheeler explained. “It puts everybody in a more collaborative position.”
Wheeler pointed out that customizing stock-keeping units (SKUs) for specific markets has also been a game-changer. For instance:
- Stone Road introduced a pre-roll multipack tin tailored to California, Massachusetts, and New Mexico.
- The brand launched 1-gram and 2-gram concentrate products in New Mexico, addressing a gap in the market for concentrates.
Such strategic adaptations have enabled the brand to meet local demand while strengthening its presence in new regions.
The Importance of Vetting Partnerships
Expanding into new markets requires not only innovative licensing models but also carefully selected partners. Wheeler shared that Stone Road vets up to 20 groups before finalizing a partnership. “Some are receptive, some are not,” she said, acknowledging that potential partners often weigh the value of licensing a brand against developing their in-house offerings.
Profit-sharing, another alternative to licensing, adds complexity to these arrangements. Unlike revenue-sharing, profit-sharing only distributes profits, requiring a high level of trust and transparency between partners. “You have to open your books, and it creates a lot more accounting situations,” Bulbulyan noted. While this model has its advantages, it remains more suited for close-knit partnerships.
Keeping It Simple: The Case for Licensing
Despite the appeal of newer models, licensing remains a practical choice for many cannabis brands. Old Pal, a California-based flower and edibles brand, has leaned into traditional licensing agreements, valuing their simplicity and scalability.
Rusty Wilenkin, Old Pal’s CEO, explained that licensing partners receive a set percentage of sales, making the model straightforward to manage. “It’s easy to scale and doesn’t require being inside our partners’ businesses,” he said.
While profit-sharing may work in select markets, Wilenkin believes scaling it nationally would be overwhelming. For brands looking to maintain a lean operation, the licensing model continues to offer a manageable path to growth.
Joint Ventures and Strategic Partnerships
For brands looking to enter markets dominated by well-established players, forming joint ventures or strategic partnerships can be a savvy move. Justin Brandt, founding partner of Arizona law firm Bianchi & Brandt, sees licensing as an efficient route for expanding into new regions. “Especially if you can get connected with a solid, well-established brand,” he said.
Laura Bianchi, his law partner, highlighted the value of joint ventures in such situations. Collaborating with existing operators allows newcomers to gain a foothold without starting from scratch.
Looking Ahead: A Fragmented Landscape
As the cannabis industry grows, licensing and partnership models are evolving. Bulbulyan observed that strategies are becoming more flexible and opportunistic. “Before, people had very specific intentions. These days, it’s, ‘What can I get out of it?’” he said.
While the landscape remains fragmented, one thing is clear: cannabis brands are innovating to overcome regulatory challenges and meet the demands of an increasingly competitive market.